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China's economic boom is creating growing pains

Inflation, product quality and other issues cause worry as the nation heads into its Olympics year.

January 03, 2008|Don Lee | Times Staff Writer

dachang, china -- The phones are ringing off the hook at Yang Yuming's office these days. The general manager of Tianpu Meat Processing Co. says he can barely keep up with rising orders from Holiday Inn and other hotels and restaurants in Beijing wanting more ribeye, tenderloin and strip loin steaks.

Orders are up 30% this year, and with more Western and wealthy Chinese visitors expected for the 2008 Summer Olympics, he says, demand for beef is going to grow even faster. But Yang isn't rolling in dough or looking forward to the new year.

Meat prices have jumped nearly 40% in recent months, and the rapid increase has left Yang and dozens of other beef and mutton processors struggling to make ends meet. When asked about his company's profit, Yang drew a big circle with his finger.

His customers won't allow him to pass on the full increase, he says, so with every extra order, Yang struggles to break even. "No, I'm not celebrating the Olympics," the 42-year-old said while wearing a thick parka in his cold, bare office.

Surging inflation, and problems with product quality and China's breakneck economic growth, were dominant themes in China last year -- and they weigh heavily on the minds of policymakers, businesses and consumers as the nation heads into its long-awaited year of the Olympics. Last year also marked China's arrival on the international investing scene.

The August games are the first with China as host, and are being touted as a seminal moment for the rising Asian powerhouse. Undoubtedly, they will be a grand spectacle.

Economically, though, the Olympics will matter little outside Beijing, experts say. Though they will boost consumption a bit and give a lift to tourism, "the Olympics are likely to be irrelevant to the economy," said Andy Rothman, China strategist for brokerage firm CLSA in Shanghai.

Beijing says it is plowing $34 billion into building up for the Olympics -- five times what Sydney spent for the 2000 games -- but Rothman notes that is still just 2.4% of China's investments for land, plants and equipment in 2006.

Rothman and most other economists see China's gross domestic product growth slowing in 2008 from last year's torrid pace of about 11.5%. How much may depend on the extent of the U.S. and global economic retreat after the sub-prime mortgage meltdown and resulting credit crunch.

A softer U.S. economy will constrain American consumption, in turn pinching Chinese exports. But the European Union is now China's biggest market, and trade with other Asian countries has become increasingly important, so those developments could soften the blow.

What's more, China's investment in land and factories -- a key driver of the economy -- shows few signs of letting up. That should keep prices of commodities such as metals high and keep mining operations from Australia to Arizona busy.

Beijing has been trying to curb excessive spending on plants and other projects that are causing an oversupply of goods, harming the environment and soaking up resources. The central government has repeatedly tightened bank credit and raised reserve requirements to discourage lending.

But that hasn't had much effect, and analysts point out that further bank restrictions might not matter because companies are flush with cash and have plenty of informal channels to finance new factories and expansions.

This year also will bring a reshuffling of local Communist Party officials, as happens every five years. If the past is any guide, that will generate a burst of spending on construction and building projects as new leaders seek to make their mark.

"China's economic situation is just like before," said Cao Jianhai, an economics expert at the Chinese Academy of Social Sciences in Beijing. "Growth is largely led by investment in real estate and infrastructure, heavy and chemical industries, as well as exports. The fundamental structure of the economy has not changed." One area in which Beijing seems to be having more success is encouraging Chinese companies to expand globally, and that is likely to continue in 2008.

Investments in U.S.

In October, China's Citic Securities said it would acquire up to a 9.9% stake in Bear Stearns as part of a $1-billion joint-venture deal. The same month, China Minsheng Banking Corp., the nation's seventh-largest bank by market value, agreed to buy a 9.9% stake in United Commercial Bank, a leading Chinese American lender based in San Francisco.

China's new sovereign wealth fund -- China Investment Co., with assets of $200 billion -- last year made significant investments in Blackstone Group and Morgan Stanley.

"2007 is the turning point," said Donald Tang, the Los Angeles-based vice chairman of Bear Stearns and a key player in the Citic deal. For Chinese financial services, he said, "it's the first time outward investment is bigger than inward investment."

Most analysts expect the sovereign wealth fund to become more aggressive in buying stakes in companies worldwide.

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