Around the horn in China

■"A Tricky Transition in China: Manufacturers Adapt to Lure More-Sophisticated Consumers," by Ginny ParkerWall Street Journal, 23 November 2004, p. A17.

■"A Cash Crop, a Better Life: Farmers Find Profit Niche In China's Industrial Boom," by Peter S. Goodman, Washington Post, 23 November 2004, p. E1.

■"China, India Turn to Ecuador in Search for Oil," by Joel Millman, Wall Street Journal, 23 November 2004, p. A17.

■"Bears (Take Interest) in China's Shop: Hedge Funds Aim to Profit From Stock-Market Rally, But Shorting is Difficult," by Laura Santini, Wall Street Journal, 23 November 2004, p. C3.

China's growing consumer market is changing the way foreign investors look at China. Instead of viewing it simply as a place to make things for other markets, increasingly big corporations are looking at China as a place to design and manufacture consumer goods for domestic markets. To really access that market, you have to customize for local tastes, and that typically means teaming up with local players, but the fear here is the loss of technology to eventual competitors. Is China unique in this danger? Not really. Any emerging market tends to demonstrate this promise/pitfall, but the necessary rule sets do emerge with time, in part because all those foreign companies entering the marketplace eventually demand it.

The demand created by the rising consumer class not only draw in foreign investors but likewise is remaking the rural countryside by creating niche cash crops that are directly linked to the country's industrial boom. The second article describes the reformatting of significant portions of China's rural farms in the direction of growing rubber trees for the country's burgeoning need for tires for all those cars desired by the emerging consumer class.

This demand not only changes crops in the countryside, it changes mind-sets:

"In our tradition, we rely on our land to feed us," said Li [Ziqie, 25], who was a boy when the first meeting about the rubber project was held here. "We were really suspicious at first. My father wanted us to use just a small portion of our land for a pilot project. Some people said, 'Why plant rubber? You cannot eat the trees.' But eventually, he agreed to devote 30 mu. We were really nervous. If we couldn't grow enough food, then what?"

The Li family reached into meager savings and sank nearly $80 into the project. They planted 800 trees.

By 1996 the Li family was generating income in the range of $800 per year, and some families now earn upwards of $4,000/yr, which is a huge income in China.

Here's the real change: now Li's father no longer plants rice, instead buying that in the village. That's connectivity. That's mutually-assured dependence. That's the creation of real wealth where none previously could be generated.

The downside of all that consumer demand, however, is the requirement for far more energy than the country can generate on its own, which is why China, like India, is scouring the planet for oil, often going where Old Core companies fear to tread (like shaky Ecuador) or simply cannot because of political restrictions (Iran).

The other downside to this process of expansive growth is thatótraditionallyówhat goes up must eventually come down somewhat, which is why you're seeing Wall Street beginning to discount, largely through derivatives at this point, the inevitably recession that must someday afflict China.

Here's hoping that, when that fall inevitably occurs, our security relationship with China is one helluva lot more secure than it is today. To me, that would be the U.S. government discounting that danger politically, reflecting what I hope would be our leadership's ability to start seeing China within the context of everything else so that it understands why any military conflict with China would invariably affect that everything else.