5 Reasons We Shouldn't Fear China
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The U.S. has many problems that need to be addressed. The national debt is at 15.8 TRILLION Dollars. That’s equal to over $50,000 for each taxpayer. Our country ranks 28th in math and science, and regulation is crippling the business world. The U.S., which had once occupied the number one spot for economic freedom, now has moved down to only tenth place. There are many problems that America needs to address, but one thing we should not fear is China.
5 Reasons we do not need to fear China
1) One child policy – It has long been known by economists that a key factor contributing to a country’s economic growth is a steady rise in population. After the baby boom of the 1940s and 50s America saw a significant rise in population and economic growth. Countries that have a younger population, specifically those with many citizens in the workforce, almost always have better economies than those with a higher percentage of retired men and women.
China however has limited its population growth by allowing its citizens to have only one child. The country currently has only 17% of its population under the age of 14 while those over the age of 60 represent 13% of the population. As the one child policy progresses the demographics will continue to shift toward an aging, retired workforce, and it will become increasingly more difficult for the younger generations to support the older generations and create a vibrant growing economy.
The U.S. on the other hand has a growing population of young and skilled workers. Each year we let in about a million new immigrants. This allows us to continue to grow our economy as new generations of younger workers allow us to produce more goods and services than before. While China’s population will continue to age, our country will see new generations of younger, hard working Americans that will add to the workforce and economy.
2) The housing bubble – The U.S. isn’t the only country to undergo a housing bubble. Real estate prices in China have been advancing rapidly over the past few years, and are continuing to go up. This has caused an abundance of banks and financial institutions to open up. iShares FTSE China 25 Index Fund (NYSEMKT: FXI), the most heavily traded Chinese ETF, is weighed down by about 40% financial stocks. If (when) the Chinese bubble pops banks will probably be forced to close and the country should see an economic slow down similar to the global one that occurred in 2008.
3) China’s rise doesn’t necessitate our fall – China has been growing by leaps and bounds over the past few decades, and most agree that the country will continue to grow. Many are even expecting China’s GDP to surpass the U.S.’s within the next decade. China’s economic rise however doesn’t necessitate our decline.
People tend to think of an economy as a zero-sum game. If one country rises, the assumption is that another must fall. This belief is not only untrue, but is also the complete opposite of reality. Economies of countries generally expand and contract together. During the tech bubble of the 1990s most countries saw economic growth, and during the 2008 – 2009 economic crisis almost all countries saw economic slowdowns. It is extremely rare for a country’s economy to move in the opposite direction of the broader global market. Rather than fear China’s growth as a threat to the U.S. economy, we should look foreword to a growing global economy that includes both the U.S. and China.
4) We’re going into China anyway – U.S. companies are opening up locations in China at a rapid pace. Starbucks (NASDAQ: SBUX) is currently opening new stores in China at a rate of four per day with the intention to open up more than 1,500 by 2015. Additionally the company has stated that China will be the focal point of their company’s expansion and will be its largest market outside of the U.S. by 2014.
Both Yum Brands (NYSE: YUM), owner of KFC and Pizza Hut, as well as McDonald's (NYSE: MCD) are opening up stores in China at a rapid pace as well. China now accounts for 40% of Yum Brands operating profits, and McDonald's has over 1,400 locations, which it expects to grow by over 250 this year. China’s growth presents an opportunity for U.S. companies to expand.
5) We’re still number one – While China may be winning in the race toward manufacturing, America is still the number one country in the world when it comes to innovation. Most tech companies come from Silicon Valley, and more patents are filed in the U.S. than anywhere else in the world. Facebook, Groupon and Twitter are all prime examples of American innovation. Relatively few well-known tech companies come from outside of the United States. Additionally we have the highest rate of new immigrants and we dominate the world of art, science, medicine and sports. People want to come to America because we provide an opportunity that few other countries provide.
While we do have problems that need to be addressed, we should be optimistic about our future. China’s economy will probably continue to expand, even though their one child policy and housing bubble may slow them down. This growing economy will offer American companies and individuals investment opportunities and may even help our economy grow. Rather than fearing China we should view it as an opportunity.
On a final note: In the late 1980s many feared that Japan was beginning to take over the world (and by extension the U.S.) as an economic super-power. Their economy was growing rapidly and Japanese companies were beginning to buy companies and property in the U.S. However in the early 1990s the Japanese economy hit a snag and began to decline. Japan did not take over the economic world, as many had feared; however they did become an important force in the global economy. Rather than suffer from Japanese economic growth the world benefited from the services and goods that were brought into the global economy. The same thing is happening today in China. We should welcome China’s expansion as a new trade partner and embrace the opportunities that it provides.
Kyle is short the August 34/35 call spread. Kyle has no other positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, McDonald's, and Starbucks. Motley Fool newsletter services recommend McDonald's, Starbucks, and Yum! Brands. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.