Cliff Waldman, economist from the Manufacturers Alliance/MAPI, and gave a talk about China's Economic Prospects: Short-Term Outlook, Long Term Dynamic. "China has become more than just a country," Waldman said, "it has become a symbol for globalization." We are amazingly not at a "post-reform" peak. It isn't growing as fast as it has in the past. Is there an investment bubble? Total investment has been running at greater than 25%. Can a high investment economy like that be sustained? What happens when things slow and the net investment dollar starts to produce marginal or negative returns? The substantial weakening of new construction growth might be a harbinger. New construction is slowing. "I think there will be a post-Olympic slowdown, circa 2009." A possible stabilizer is taht retail sales growth has accelerated. The retail sales index has accelerated into greater than 17% change year over year. This means that the consumer might play a greater role in Chinese growth sooner than expected. The ballooning trade surplus has created economic and political tension. What does china export? Chemicals seems to be going down. Light industrial and textile products has been flat, but machinery exports are growing. Regionally, these goods are going to Asia. Yes, Europe gets over 20%...but what is really going on is China is exporting the stuff that makes a manufacturing base in Asia. China's over-valued currency subsidizes imports, but they do make changes over long baselines. Other Asian currencies have been appreciating as well. China's revaluation in 2005 appears to have uncorked the plug, and now most Asian currencies are participating in a correct revaluation of the dollar. There is a rapid increase in food prices that has contributed to the recent inflation surge in China, and in India, and even in the US> The central bank should be fundamentally concerend with excessive money supply growth-- 17-18% gear over year is too high. The chinese Dynamic: overheating remains the chief concern inflation pressures will force a tigher monetar policy with uncertain consequience The Yuan's appreciation has been small but persistent and is likely to accelerate There are signs that total investment might slow but this is likely to happen after the olympics The growth of the strength of the chinese consumer is an important trend The labor market in China is evolving. The pre-reform Chinese economy was not favorable to "worker advancement." But you have large migration in the cities from the farm, with lots of unemployment in urban areas. Capital intensive idnstry couped with this migration (the largest in human history!) permitted the growth of non-state sectors. Now we have five types of ownership: state owned, township and village enterprise, joint ventures, foreighn owned firms, and entrepreneurship-- the true private sector. The geographic distribution of average total wages remains skewed in China with a 3:1 difference between the more developed areas (Beijing, Shanghai, etc) and the less developed areas. Wage growth has been limited, and productivity has been very high in China. There has been a high growth of people graduating from universities, and it is not surprising to see a higher percentage of GDP per employee-- making wages go up for educated and skilled workers accelerate over the next decade or so. This is happening right now. Wage growth is on the order of 30% per annum for skilled labor. Demographics, with more than 1.3 billion it is the largest population, but the growth of the population has slowed dramatically. The growth in the working age share of the opulation is slowing and the percentage of "retirement age" population is growing. Labor supply is likely to emerge as a significant issue. China may grow old before it grows rich. In 2040 there might be almost 400 million Chinese in the 60 and older age bracket. The One Child policy has created a demographic time bomb. Declining savings rates as the population ages and rising wages will creaet more of a consumer economy and that will be a negative for capital inflows and investment. China's consumer share is very weak, even compared to Poland and India. The Nominal income growth is getting better, even rurally. The distribution of per capita income is evening out between urban and rural households. The consumer is getting into better shape, not spending 80% of income on food. The bottom line on the Chinese consumer points to a stronger role for the consumer, but the long-term slowdown that will be required to correct excess capacity likely means that the household sector won't reach its full potential for a number of years. The long term path of Chinese growth and competitiveness: China is no longer going to be the low cost competitor in Asia. Declining savings rate and labor supply will likely have a negative impact on capital flows and foreign direct investment. China''s long term growth rate will likely slow. What are the key business opportunites? Environmental technolgoy, medical technology, research and development related to computers, energy, infrastructure management. We will see a growing consumer culture. Risks: environmental and health issues, rising costs, intellectual property concerns, rapid social and prolitical changes.