October has been a big month for China announcements. Texas Instruments Inc. (NYSE: TXN) announced the purchase of Cension Semiconductor, a 200mm fab previously operated by Semiconductor Manufacturing International Corp. in Chengdu. This week Intel Corp. (Nasdaq: INTC) announced the grand opening of its first 300mm fab in Dalian.
China is becoming a more powerful force in the world economic and technology arena. In August it was reported that China’s GDP reached $1.34 trillion, surpassing Japan and making China the world's second largest economy. With China’s economic growth rates in the 10 percent range and the US growing at only 2 to 3 percent, it’s been predicted that China will overtake the US in 5 to 10 years; China has already surpassed the US in the automotive market.
China also made the news last week regarding its 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. (See The Truth About Rare Earths, Part 1.) The Economist noted that China is trying to control the rare earths market in a manner similar to OPEC's control of oil. China is cutting exports of rare earths 5 percent to 10 percent a year.
In July, China's rare earths export quota was cut by 40 percent 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 overshadow another looming statistic. Very soon China is expected to overtake Japan in patent applications. Patents, a measure of innovation, have remained steady in the US, Europe, and South Korea but have dropped for several years in a row in Japan. In 2006, Japan and the US were neck-and-neck with approximately 400,000 patent applications each. Japan’s patent applications fell 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 the economic and technology arenas is booming. But as its economy grows so will its 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.