Bloomerberg’s David J. Lynch explores the unintended consequences of American schools relying on foreign students to fill rapidly emptying seats.

Barely 26 years old, Zhang Xi has studied at an elite American university, worked for an investment bank in Hong Kong and an oil company in Beijing and now may launch an Internet startup with two friends.

Zhang, a foreign movie buff who quotes lines from “Forrest Gump” in fluent English, symbolizes a transformation of China’s labor force that is minting college graduates in a country better known for its factory workers.

“We just don’t want to sit on the side while all the big things are happening,” she says. “There are tons of choices in front of young people right now.”

Some of those choices may shake the global economy. Close to 7 million Chinese this year will graduate college, up from 1.1 million in 2001. By 2020, China’s college-educated talent pool is expected to number 195 million people — more than the entire U.S. labor force that year.

The Chinese for more than a decade have been potent rivals to American and European manufacturers. China is giving Westerners something new to worry about: a generation of workers able to compete in higher-technology endeavors. The aim is to develop service industries and shift from producing simple exports — often assembled from parts made elsewhere — to making a larger share of more sophisticated products.

Students throw their caps in the air as friends take photos following a graduation… Read More

To be sure, the emergence of tens of millions of additional college-educated workers will challenge China as well as its trading partners. Too many Chinese universities offer sub-par educations and too many students fail to find jobs after graduation, potentially imperiling social stability.

Well-educated workers such as Zhang, who earned a master’s degree in finance at the Massachusetts Institute of Technology, are essential to the government’s plans to reorient the world’s second-largest economy. As Chinese companies grow more capable – – what economists call “moving up the value chain” — they will encroach on markets now dominated by advanced economies.

“We’re going to have to compete with Chinese banks and Chinese insurance companies and Chinese software companies,” said William Overholt, president of the Fung Global Institute in Hong Kong. “We’re not used to thinking of China as a powerhouse in these areas.”

That change is already happening. More than half of China’s $4.2 trillion in trade last year involved significant value added by Chinese workers, while lower-value processing trade fell below one-third of the total, down from almost 39 percent in 2010, according to the Chinese Ministry of Commerce.