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BPO Journal

Thursday, February 09, 2006

US growth pegged to the yuan

According to the Bureau of Economic Analysis, U.S.-affiliated companies in China - companies in which U.S. firms have at least a 10% stake - earned $3 billion in 2004. That's up from zero in 1990. The Wall Street Journal reports that Joseph Quinlan, chief market strategist for Bank of America, says that figure is a good reflection of how U.S. companies are making out in the world's fourth-largest economy. He estimates earnings reached a record $3.2 billion in 2005.

Earlier impressions of China as a black hole for investment are fast disappearing. The country is fast becoming an attractive market for U.S. companies, even in most competitive industries. Even as it piled up losses in the U.S., General Motors Corp. reported income from China of $218 million for the first nine months of 2005. China accounts for 12% of Motorola Inc.'s global sales and is by far the biggest market for the company outside the U.S. General Electric Co. said top-line revenue in China hit $5 billion last year, and the company is aiming to double that by 2010.

So, contrary to popular belief, a majority of the U.S. investment in China ($4 billion last year)is aimed at the domestic market. And this seems a fairly natural progression. More so in the case of service economies like India where in addition to costs, skills and expertise are actively considered in the decision to outsource. Companies vie to attract such talent with the promise of lucrative careers and growth paths. This triggers relatively sustainable growth in the economy and when exports are broad-based (such as manufacturing in China), the extent of such growth is higher. Therefore, the U.S. firms have a growing market to cater to and when that market is 1 billion people strong, even garnering a fraction of it is a win strategy. Firms that offshore are the ones which will reap the highest profits in the economy.

However, it's necessary that firms talk more about their profits from these quarters. Legislation proposed by Sen. Charles Schumer, a New York Democrat, would impose a 27.5% tariff on Chinese goods unless Beijing lets its currency rise faster against the dollar. After hearing Friday that the U.S. trade deficit with China ballooned to a record $201.62 billion last year, Sen. Schumer said he may push for a Senate vote on the bill next month. In addition to explaining that the US will lose in this move, Schumer must be convinced that not all firms will lose equally.

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