China's Economic Climate in Focus

New York Times columnist Joe Nocera, just back from Beijing, talks about the economic climate there with John Ydstie.

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JOHN YDSTIE, host:

If you're talking about the global economy, it's likely that the discussion will ultimately get around to China. The needs of its huge population are increasing demand and prices for energy and food around the world.

The value of its currency is now rising against the dollar. Its embrace of capitalism has sent economic ripples across the planet. And our friend from the business world, Joe Nocera, is just back from a two-week trip to China. He joins us from our studios in New York.

Welcome, Joe.

Mr. JOE NOCERA (Columnist, New York Times): Hi. I'm sitting here in the sleepy town of New York.

(Soundbite of laughter)

YDSTIE: I bet it feels like a little town, huh, after Shanghai.

Mr. NOCERA: It really does after Shanghai.

YDSTIE: So from what you're seen and learned in the past couple of weeks as you've been in China, what works in the Chinese economy and what doesn't work?

Mr. NOCERA: Somebody said the crucial difference between China and India, India has a good education system and terrible infrastructure. When you go to a place like China, they have a lousy education system, very rote and so on, but they have fabulous infrastructure.

They have roads everywhere. They have giant, mechanized, computerized ports. They have absolutely conquered distribution and supply chain issues, and that is the reason that we have become - it's one of the most important reasons they've become the world's greatest manufacturing center.

Where they have problems is that just as West fears Chinese manufacturing prowess, Chinese companies fear Western marketing prowess. So one of the things you see in China everywhere are basketball courts with giant Nike signs.

Nike came in out of nowhere, and Adidas just five or six years ago, and they now dominate the market. And the big Chinese brand, Li Ning, has become number three in the marketplace where they once dominated.

You know, where China's trying to go is to get out of low-cost manufacturing and be better at marketing and be better at branding. And the real question, you know, one of the real questions is whether they can fundamentally do that.

YDSTIE: As you said before, costs are rising in China, inflation is up, workers are demanding more money, and new labor laws mean lower profits for manufacturers. How is this affecting both internal Chinese economy and the rest of us, the global economy?

Mr. NOCERA: Well, it's affecting everybody in the same way. It's creating inflation for everybody. I mean, as Chinese workers get more money - which by the way is a good thing - the cost of products rise worldwide. In China, one of the effects it's having is that the profit margins are really, really thin. As bad as they were before, they're worse now in many of the big factory centers. Factories are actually starting to go out of business.

You can see this particularly in the garment industry, where the people who manufacture the low-end garments that would be sold in a JCPenney or a Wal-Mart are absolutely struggling to stay in business. What you're also seeing is - and this is not necessarily a bad thing - as factories close in the east coast -and I don't want to overstate this; it's happening, but happening hugely yet -people moving manufacturing more to the center of China where capitalism is just beginning to take root and where the process that has taken place on the east is just beginning.

So one of the things you're seeing in China is this kind of move of the low-end manufacturing to the middle of the country while the eastern part of the country tries to get kind of more sophisticated and high-end.

YDSTIE: There have been concerns about a bubble in the Chinese economy. What do you think after seeing it?

Mr. NOCERA: Well, I do think there are bubble-ish aspects, you know? I met an Internet entrepreneur who had a golf Web site that was the silliest thing I've seen. I mean, it was just - it was hard to believe she got venture capital for this, and it reminded me of Silicon Valley in the late '90s. You see a lot of stuff like that.

There's a certain craziness there in terms of the business culture right now. Things seem a little out of control. Having said that, there are so many have-nots still in China and a move to capitalism has so far to go that you could sort of see that little tiny piece of the bubble pop and China continue to have the growth rates of 7, 8, 9 percent for the foreseeable future.

YDSTIE: New York Times business columnist Joe Nocera. It's nice to have you back in the country, Joe.

Mr. NOCERA: Nice to be back, John, although I have to tell you, I can't wait to go back to China.

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