KIPLINGER LETTER

 

Vol. 79, No. 11           Washington, March 15, 2002 

Dear Client:
        Big markets, big rivals...the yin & yang of U.S. ties with China.
        An open Chinese economy will mean a gold rush for U.S. companies.
China's entry into the World Trade Organization is unlocking a huge market
for food, automobiles, banking, insurance, retail, technology, telecoms.
        We're partners, but also competitors.  We'll butt heads globally
as Chinese exports broaden to take on leading U.S. earners...machinery,
aircraft, chemicals.  And as U.S. imports from China continue to grow,
stinging U.S. makers.  China's ace:  A large, cheap, skilled labor pool.
        We'll face a more assertive China as its economic profile rises.
Thorny political issues will loom larger:  The future of Taiwan's status,
a bolder Japanese military, weapons proliferation and human rights.
 
        In 25 years, China will be the world's second-largest economy...
approximately 70% the size of America's.  It's now the sixth largest.
Impressive, since China was flat on its back in 1976, the year Mao died.
        China is determined to grow.  Leaders know fast gains are needed
to avoid broad social unrest in the wake of China's WTO participation.
The coming influx of foreign products will cost millions of Chinese jobs
in agriculture and other sectors where major consolidations will occur.
Without steady growth, odds are against the displaced finding other work.
        Look for growth of 6%-7% a year.  New leadership coming in 2003
will tackle the main risk factor...huge bad loans hobbling China's banks.
 
        Foreign investment is fueling expansion.  It'll hit $65 billion
in 2003, up from $56 billion this year.  Only the U.S. attracts more.
The U.S. share of foreign investment in China...at 10% now...will rise,
lured by growth in information technology (IT), Rx drugs, petrochemicals.
        Keep an eye on the tech sector.  China overtook Taiwan last year
as third-biggest maker of IT gear.  China is gaining U.S. market share.
It'll supply 20% of U.S. electronics imports by 2005, versus 8% in 1997.
 
        All types of U.S. companies are checking in:  Wal-Mart has opened
its 19th store there.  McDonald's and KFC together have 700 outlets.
Motorola is spending $1.9 billion on new chip and telecom facilities.
New York Life linked up with a local partner to sell insurance policies.
        U.S. firms are targeting China's 100-million-strong middle class,
who have cash to spend.  The number will zoom to 200 million by 2008.
         They'll need cars.  Though only 7% of the world auto market now,
China will account for one-fourth of global growth in the next decade.
        And food, especially produce, grains and meat.  U.S. farm sales
to China will climb by more than 150% as lower tariffs are phased in.
 
        Even so, China will still sell more to us than we'll sell to it.
Our China trade deficit will hit $90 billion this year, up $7 billion
from 2001...our biggest bilateral trade gap now and for years to come.
        That's sure to spark tensions.  Textile makers, for example,
will protest after quotas end in 2005 and Chinese imports flood the U.S.
 
 
 
        Looking to do business in China?  Help is at your fingertips.
The American Chamber of Commerce in China is at www.amcham-china.org.cn,
and the U.S.-China Business Council, for members, at www.uschina.org.
The Chinese embassy's commercial office can help with import suppliers...
call 202-625-3380.  And the Beijing Trade Exchange, beijingtrade.com,
advises on the complete range of China trade and investment issues.
 
        Don't forget to thoroughly check out foreign business partners.
        Global scams are on the increase as international trade grows.
Sophisticated crooks use the Web to appear legitimate and find victims.
Int'l Chamber of Commerce...www.iccwbo.org...can help check credentials
and authenticate bills of lading.  Private security firms are expensive,
but they may have more expertise in complex international dealings.
        An old African mail scam is back again...senders seeking help
"redeeming" a large investment in a South African or Nigerian "trust."
If you get a letter, fax it to U.S. Secret Service, Financial Crimes Div.,
at 202-406-5031.  People who have lost money can call 202-406-5850.
 
        Congress is waking up to how 9/11 jolted the insurance market.
Many firms, especially builders, can't get coverage for terrorism risks.
        Look for lawmakers to pass a terrorism insurance bill by summer,
creating a temporary government backstop for private insurance firms
in case of future attacks.  Republicans will compromise on liability,
modifying a ban on punitive damages that's part of a House-passed version.
        Congress will OK $35 billion more for homeland defense next year:
Emergency preparedness grants.  Infrastructure upgrades.  Border patrols.
Improved military base security.  Surveillance and computer equipment.
Watch Uncle Sam's Web portal for contract opportunities...firstgov.gov.
Also the Anser Institute for Homeland Security...homelandsecurity.org.
 
        A frequent flier ID system is in the works.  Business travelers
advocate it as a way to speed them through airport security checkpoints.
Fliers will voluntarily undergo background checks and carry ID cards
embedded with digital records of their fingerprints, face and/or eyes.
        The system will be tested soon at selected U.S. airports.
Participants will likely have to pay a small fee.  If the tests go well,
a national system could follow.  But implementation would take years.
        Security-conscious products for business travelers will multiply,
aiming to minimize hassles as fliers negotiate airport checkpoints.
A combination computer case and overnight bag from Tumi and Samsonite.
A plastic manicure set from CONNECTUSA.  Virtual Bellhop handles luggage
from home to destination.  Ritz-Carlton hotels pack meals to go
for airport-bound guests and store clothes and toiletries for regulars.
 
        Instant messaging (IM) is quickly winning over business users
who see advantages to real-time interaction with clients and coworkers.
        Technological advances are helping.  FaceTime Communications,
Jabber, Trillian and PalTalk software all take care of incompatibility
among AOL, Yahoo and MSN messaging services.  Lotus Sametime software
from IBM uses a secure network designed with business clients in mind.
        Coming soon...industry standards for linking corporate networks
with wireless devices.  Means another big boon to spreading IM worldwide.
        A slow recovery for semiconductor sales is on tap for this year,
led by revived PC and server sales.  And by demand for wireless devices,
which use DSPs...digital signal processors...the hottest chip segment.
 
 
 
        Democrats are revising their campaign playbook for this fall.
        The economic uptick denies them an issue, taking away a message
they had hoped to champion...that Republicans are poor economic stewards.
        They'll shift to other top voter concerns:  Retirement security,
Medicare drug coverage, access to health care, environmental protection.
These will be framed as choices between tax cuts for the rich and help
for working families.  Republicans will be tagged as shills for business.
        One goal is to AVOID a referendum on Bush, riding high since 9/11.
Winning control of Congress would set that scenario up for 2004 instead.
        
        Al Gore won't run in 2004, even though he's itching for a rematch
and criticizing Bush on taxes, Social Security, energy and environment.
        Trouble is, he's being eclipsed.  Other White House hopefuls
are setting the party agenda...Sens. Daschle, Lieberman, Kerry, Edwards
plus House Minority Leader Gephardt.  Gore's path would be much harder.
        Dark horses are also lining up, emulating Carter and Clinton
back in 1976 and 1992.  Gov. Barnes of Ga. could break the GOP's lock
on the South.  Calif. Gov. Davis' stock will rise if he wins big in Nov.
And Gov. Dean of Vt., a doctor, could benefit from health care concerns.
 
        Expect IRS to issue guidance soon on filing amended tax returns
for bonus depreciation on new business assets bought after Sept. 10, 2001.
The change by Congress will save firms nearly $100 billion through 2004.
        Pension plan sponsors will see savings.  Congress OK'd their use
of a higher rate to figure plan liabilities, lowering payins and premiums.
 
        States' tax revenues are getting squeezed from many angles.
        New bonus depreciation for business assets costs them $14 billion
because most states base their depreciation schedules on Uncle Sam's.
        The estate tax phaseout will cost states $6.5 billion next year.
        A shrinking sales tax base is the toughest long-term problem,
driven by the shift to a service economy.  Only three states tax services,
and it'll be years before most states can broaden their sales taxes.
 
        The Southeast's economy will rebound at roughly the national pace,
led by increasing travel and tourism and solid auto and housing sectors.
The coming pickup of capital investment in IT will lift Atlanta and Tampa,
offsetting further declines and job losses in textiles and apparel.
        N.C. will post the strongest growth in the region this year...3%.
S.C. and Ala., the weakest...about 1% each.  Ga. will grow around 1.6%.
And Fla., the region's largest state economy, will expand about 2.2%.
        A milder El Nio in months ahead will bring warmer, drier weather
to the North, cooler and wetter to the South.  Lower energy bills, too, 
except in northwestern states, where El Nio will also worsen the drought.
        Farmland values will outpace inflation in the next several years,
despite dismal commodity prices.  Price supports and conservation programs
in the new farm bill will help fuel gains of 1%-2% above inflation.
        
        Bankruptcy reform will pass now that the economy is growing again.
The long-bandied-about bill will force more debtors into repayment plans.
Congress will finally compromise on the last remaining sticking points,
freeing a bill that's a priority for businesses, especially retailers.
        Specialty stores are going great guns, luring customers away
from department stores with tightly focused product lines plus coffee bars
and other comforts.  Examples:  Chico's clothing and Jared jewelry stores.
 
        
 
        Interest rates will edge higher this summer.  No surge, however,
because inflation will be tame.  By year end:  Prime, up a point or so
to 5.75%.  10-year Treasuries, to 6%, now 5.25%.  30-year fixed mortgages,
increasing to about 7.75%, from 7%.  And one-year CDs, to 3.5%, from 2%.
The Fed won't raise short-term rates until it sees the jobless rate ebb.
        Gasoline prices will calm down by summer, though.  Saber rattling
over Iraq is behind the price run-up.  But short of an all-out cutoff
of oil from the Mideast, supply will have no trouble meeting demand.
        Same goes for diesel.  But shippers can count on getting socked
with fuel surcharges until June, when prices will begin to fall again.
 
        Expect big changes in how electricity is made and distributed.
By 2012, megaplants will be supplemented by many small power sources...
microturbines, fuel cells, solar, atomic...located closer to customers.
        Small plants can be built quickly and for far less than big ones.
And because they're small and don't require miles of transmission lines,
they're not as prone to environmental backlash as larger facilities.
So businesses looking to expand can worry less about capacity constraints.
        Power reliability will be greatly enhanced by the new facilities,
a must in an increasingly high-tech economy in which a millisecond dip
in the supply of electricity can ruin a factory's entire production run.
 
        The buying and selling of electricity is changing, too.  By 2005,
most states will give companies more flexibility over power purchases...
let them switch to a low-cost supplier and take other steps to cut costs
when prices soar and to sell back electricity whenever they need less.
        Utilities' roles are morphing from simply supplying electricity
to taking a more active role in selling to and buying from customers.
        Open competition will spread...reach nearly all states by 2010.
Currently, 24 states allow customers to choose their own power supplier.
 
        Mounting Israeli-Palestinian violence has hiked pressure on U.S.
to get more involved in brokering a truce and seeing to its enforcement.
        Bush is edging toward a peacekeeping role...a significant step
beyond where he wanted to go.  U.S. cease-fire monitors could be targeted
by Palestinian extremists, who oppose ANY peace agreement with Israel.
 
        Back to China...challenges that its growing power creates for U.S.
        We'll soon be seeing new leaders there...younger policymakers
whose skills will be tested as they work to craft a less repressive gov't,
weed out corruption and open up the nation to more global competition.
        There are hopeful signs of cooperation on issues such as Taiwan,
North Korea and the war on terrorism.  More vexing will be getting deals
on limiting Beijing's exports of missile technology and calming concerns
the Chinese have about U.S. efforts to build a missile defense system.
 
        Militarily, it will be decades before China rivals the U.S.
But its superpower status is assured if it maintains its economic growth.
That's something the U.S. and Asian countries are already planning for.
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