Why China Keeps Growing

How can China keep growing in the midst of a global recession that's taking everyone else down? The conventional wisdom is that it can't -- even China bulls like Morgan Stanley's Ruchir Sharma have said so in Newsweek. But in recent weeks, Chinese businesses and consumers have started spending again, even as Americans zip up their wallets. This is counter-intuitive, because another economic truism is that Chinese growth depends on selling tons of cheap stuff to Americans (about 80 percent of what's on the shelves at Wal-Mart comes from China).

Andy Rothman, a very smart Shanghai based economist with CLSA, recently gave me his rather radical explanation for China's continued success. He believes China is NOT an export-driven economy. In economic circles, this is like saying the Pope isn't Catholic. But he's got a compelling argument -- Rothman says that about half of the products stamped "Made In China" are merely assembled there, meaning that the Chinese don't see (or miss) much value from them.

One example would be the 30GB video iPod which went on sale in 2005, with a US retail price of $299. The factory value is $150, but only 5 percent of that -- $7.50 -- was actually created in China. The rest was left in other Asian countries that actually manufactured the complex parts that got snapped together in some factory in the Pearl River Delta.

What this means is that while it might look like the Chinese are losing $150 bucks everytime a recently laid off American decides not to walk into the Apple store and buy an iPod, they are actually only missing a fraction of that. Meanwhile, the Chinese government pockets get deeper and deeper -- bank lending was up 1000 percent in December from the same time the previous year. Those Confucian values of thrift and prudence really seem to pay off in a global recession....

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