By  on March 22, 2005

For most of their 2,200-year history, the Chinese have regarded their nation as the center of the universe. To understand this perspective, imagine the modern world without Chinese inventions such as gunpowder, the magnetic compass or silk.

The closing of China to outsiders during the 19th century and China’s embrace of communism under Mao Zedong in the 20th century changed Western attitudes to China, with many foreigners believing China’s greatest days were behind it.

In the last five years, that impression has changed markedly. China has embraced international commerce and since joining the World Trade Organization in 2001 has rapidly grown its manufacturing sector. For the leadership in Beijing, managing the breakneck pace of growth requires a delicate balance.

On one hand, China’s private sector needs to create hundreds of thousands of new jobs a year to absorb the continuing migration of people from rural areas into the major cities, as well as the workers who are laid off as former state-run enterprises transfer to private ownership and restructure themselves in search of profitability. At the same time, authorities fear the pace of growth has become too fast — China’s gross domestic product was up 9.5 percent last year — and could result in economic overheating and a sharp downturn.

In Washington, China’s economic growth has become the subject of intense controversy, since the country’s currency, the yuan, is pegged to the dollar at an exchange rate that economists assert undervalues it by 10 to 40 percent. Officials including Sen. Charles Schumer (D., N.Y.) have argued that the currency peg amounts to an unfair subsidy of Chinese exports and has called on the Bush administration to retaliate through tariffs.

But that complaint overlooks a key aspect of Sino-U.S. economic interdependence. Buying up dollars keeps the yuan low, but it has also helped to finance the U.S.’s chronic deficits.

Apparel makers see a dual opportunity in China. Following the lifting of quotas by the WTO, experts predict that China’s current 25.4 percent share of the U.S. imported textile and apparel market could rise to 50 percent or even as much as 80 percent, comparable to China’s position in unrestricted sectors such as shoes and toys. The opportunity for low-cost production has prompted apparel makers like Gap and Liz Claiborne to shift at least some of their production into China, and has Chinese companies building massive factories that employ tens of thousands of people. They call them “supply-chain cities.”At the same time, as more of China’s 1.3 billion citizens begin to climb into the middle class, Western marketers see the potential for a huge new consumer market. From LVMH Moët Hennessy Louis Vuitton to Wal-Mart, Western brands are setting up shop in China. Right now few Chinese can afford their products, but experts said these companies are positioning themselves to take advantage of huge growth potential.

When adjusted to consider local buying power, China’s $6.45 trillion economy is second only to the U.S. In the next decade, executives in the U.S., China and elsewhere will be closely watching the changing balance of power between these two economic superpowers.

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