The Growing Influence of China

October has been a big month for China announcements. Texas Instruments announced the purchase of Cension Semiconductor, a 200mm fab previously operated by SMIC in Chengdu, China. This week Intel announced the grand opening of their first 300mm fab in Dalian.

China is becoming a more powerful force in the world economic and technology arena. In August 2010 it was reported that China’s GDP reached $1.337 trillion surpassing Japan and making China the second largest economy. With China’s economic growth rates in the 10% range and the U.S. growing at only 2-3%, it’s been predicted that China will overtake the U.S. in 5-10 years. China already surpassed the U.S. in the automotive market.

China also made the news last week regarding their control over rare earths, the 17 elements in the periodic table that are vital ingredients to a number of electronic gadgets and components. China is the largest producer of rare earths. The Economist noted that China is trying to control the rare earths market in a similar manner as OPEC controls oil. China is cutting exports of rare earths 5-10% a year. In July, the export quota was cut by 40% and prices soared. The Economist further speculates that China is curbing exports to persuade foreign firms to move manufacturing to China. That’s probably not the only reason but it may be one of the reasons behind Intel and TI’s recent moves into China.

The GDP and rare earth concerns overshadowed another looming statistic. Very soon China is expected to overtake Japan in patent applications. Patents, a measure of innovation, has remained steady in the U.S., Europe and South Korea but has dropped for several years in a row in Japan. In 2006, Japan and the U.S. use to be neck and neck with approximately 400,000 patent applications each. Since then Japan’s applications dropped to approximately 350,000 in 2009 while China’s have increased from just over 200,000 to just over 300,000.

China’s power in both the economic and technology arenas is booming. But as their economy grows so will their labor rates, inflation and all the other challenges that go along with an uncontrollable appetite for more. China’s real estate markets are still on shaky ground. We’re all familiar with risks associated with uncontrolled growth in financial and real estate markets. And of course, the valuation of the Yuan is a whole issue in itself.

The world depends heavily on China’s growth. History never repeats itself in exactly the same way but we should all go back and review the Asian Financial Crisis of 1997 and remember that it’s in our best interest to make sure China’s growth remains stable.

Joanne Itow
Managing Director