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Why you feel so rich and smart

From Thursday's Globe and Mail

Are you feeling house-rich because your crummy little semi in Toronto is worth a fortune? Are you thinking of trading up to a nicer place while money is so cheap? Thank China.

Every month, China buys $40-billion of U.S. treasury bonds. (Its huge exports and its population's high savings rate give China unlimited cash flow.) T-bonds, in turn, set the price for mortgage rates, which are at historic lows. That means house prices keep going up and up, and the housing boom goes on and on. And that's why you feel so rich and smart.

I'm no economist. I owe this insight to my friend Don Coxe, who works for BMO Financial Group and is among the top investment strategists in North America.

"China is the biggest factor in the U.S. housing market," he says. "China and Japan have got together to prop up the U.S. dollar. China is the price setter for all industrial raw materials in the world. They are the price setter for any industrial product they choose to export, and they add new ones to the list each week. So they are the simultaneous price setter for raw materials and finished goods."

In other words, the prices of copper and iron are soaring, but the price of a microwave oven at Wal-Mart is sinking. This stands traditional economics on its head.

Then there's oil. Without China's voracious appetite, oil prices would still be in the mid-$30-a-barrel range. "OPEC has ceased to be the price setter," Mr. Coxe says. "It was a security blanket. Now it's pure supply and demand, and nobody is in charge."

Thanks to China, we're on the verge of a new commodities boom. It has already soaked up most of the world's metal inventories, and is insatiable for more. Its burgeoning middle class wants cars and indoor plumbing, and that means lots and lots of metal.

The China story is a clear rebuke to the anti-globalization crowd. By throwing its doors open to the multinationals, the country is lifting millions of people out of poverty. The multinationals bring their know-how, their equipment and their supply chains, and the Chinese use it to bootstrap themselves into the world economy. The multinationals even sell China's products to the world for them. As Mr. Coxe says, "They use the genius of American distribution against American companies."

Mr. Coxe argues that what's happening in China is the greatest flowering of economic liberty the world has ever known. Indoor plumbing and microwave ovens and cars do not amount to political freedom, but they are liberating forces all the same.

Prosperity brings more privacy, more dignity, and freedom from the bondage of hard labour. It also brings the promise of more political freedom, because it's the middle classes that are typically the engine of reform.

China's greatest problem is that the prosperity is so uneven. Sherry Cooper, the chief economist for BMO Nesbitt Burns and also Mr. Coxe's colleague, is another canny China-watcher. "The imbalances are widening and threatening political stability." In her view, China is walking a tightrope. It needs to grow its economy super fast, to create jobs and wealth, without spinning out of control. "They've got to have growth of at least 7.5 per cent a year or the whole thing will fly apart." The chances for political unrest are great. But the chance that China's leaders will change their economic course is remote. "They're very practical people," she says. "They are not going to shoot themselves in the foot economically any more."

Yes, China is one of the world's leading human-rights abusers. But anyone who roots for global human rights should be rooting for China to get rich. The anti-globalists have it exactly backward. The multinationals aren't the source of human-rights abuses in China. They're the answer to it.

China's challenge, as historian Niall Ferguson puts it, is to commercialize and industrialize its way out of the Malthusian trap. If you believe in human rights, you should be rooting for the Chinese. And if they fail, the end of the real-estate bubble will be the least of your problems.

mwente@globeandmail.ca

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