The arti­cle goes on to say:

The assump­tion has
long been that the U.S. and other indus­tri­al­ized nations will keep
lead­ing in knowledge-intensive indus­tries while devel­op­ing nations
focus on lower-skill sec­tors. That’s now open to debate. “What is
stun­ning about China is that for the first time we have a huge, poor
coun­try that can com­pete both with very low wages and in high tech,“
says Har­vard Uni­ver­sity econ­o­mist Richard B. Free­man. “Com­bine the two,
and Amer­ica has a problem.”

Case in point: IBM’s sale to Lenovo

Today, we learn about China’s Lenovo Group Lim­ited acqui­si­tion of IBM’s Per­sonal Com­put­ing Divi­sion to form the
world’s third-largest PC busi­ness. Accord­ing to the press release, this brings IBM’s “lead­ing
enterprise-class PC tech­nolo­gies to the con­sumer mar­ket” and gives
“Lenovo global mar­ket reach beyond China and Asia.”

More details from the Press Release:

• Cre­ates world’s third-largest PC busi­ness with approx­i­mately US$12 bil­lion annual rev­enue for 2003
• Trans­ac­tion of US$1.25 bil­lion in cash, equity; total trans­ac­tion con­sid­er­a­tion of approx­i­mately US$1.75 billion
• IBM to take 18.9 per­cent equity stake in Lenovo; trans­ac­tion expected to be com­pleted in sec­ond quar­ter 2005

China arti­fi­cially pro­tects its exports

Mean­while, the Chi­nese gov­ern­ment con­tin­ues to peg the yuan to the dol­lar at an under­val­ued rate
of 40% to 50%, by some cur­rency ana­lyst esti­mates. To pro­tect its
exports, the gov­ern­ment has also pur­chased about 500
bil­lion dol­lars in US trea­suries and dollar-denominated assets over the
years to slow
the decline of the dol­lar. Two-thirds of China’s cur­rency reserves are
in dol­lars and the econ­omy depends on the US mar­ket since China’s
own inter­nal mar­ket is too small … most Chi­nese are too poor and the
domes­tic con­sumer mar­ket accounts for only 10% to 30% of the total
market.

On the other hand, China’s high growth econ­omy is highly depen­dent on
oil and the under­val­ued yuan makes oil even more expen­sive at cur­rent
soar­ing prices.

So what should China do? To escape the oil cri­sis it would have to
revalue the yuan and sell its reserves … caus­ing fur­ther dol­lar
declines and the cer­tain loss of the amer­i­can con­sumer mar­ket. In this
case China would increase exports to Euroland … this is already
underway.

Alter­na­tively,
China can con­tinue to keep the yuan low and weather the oil cri­sis by
increas­ing its trade sur­plus with the US. At which point does this
strat­egy become too costly for China, forc­ing it to do a u-turn, unpeg
the dol­lar and sell its dol­lar assets?

Impli­ca­tions

With large cur­rent account deficits, Greenspan will have to get mov­ing
to prop up the dol­lar and lure for­eign investors back (ie., more
inter­est rate hikes in sight). Like­wise, the US gov­ern­ment must
increase investor con­fi­dence by low­er­ing its deficit.

In the mean­time, expect to see new Lenovo lap­tops desk­top PCs at a retailer near you.