Kennon-Green & Co. Fiduciary Financial Advisor, Wealth Management, Global Value Investing

It Is Morning in China, to Borrow a Phrase

It is morning in China, to paraphrase Reagan’s statement about the United States. Although national household income is still at sub-poverty levels, China is awakening, which will result in standard of living increases for 1 out of 5 people alive on the planet. Image © iStockphoto/Thinkstock

In Surprising Facts About America’s Population, I pointed out that the top 25% of people in China – the gifted students who out-test 3 out of 4 of their classmates – exceeds the entire population of the United States. This raised some concerns about my enthusiasm for the rise of China.  I thought it would be important to clarify where I and explain how this issue affects you and your family.

The Economic Rise of China vs. The Political Rise of China

There are two distinct issues that must be addressed:

  1. The economic implications for global poverty of a richer Chinese economy
  2. The political implications for global relationships of a more powerful China.

I will talk about each of them separately.  In this first essay, I’m going to talk about #1 – why the economic rise of China is a fantastic thing for humanity even though I do understand the concerns about China “beating” the United States.  In many ways, those concerns are perfectly valid.

In this article, I’m going to explain why the Chinese economy must at some point dwarf the economy of the United States unless you actively desire to see families in China continue to live on sub-poverty wages and how there is no getting around those figures.

A Look at the Chinese Economy vs. the American Economy

  • The United States economy is estimated at $14,256,300,000,000 per year
  • The Chinese economy is estimated at $4,909,280,000,000 per year
  • The Difference: The United States economy is currently 2.9x larger than the Chinese economy.

Now, let’s drill down into how that breaks down to the population.  If you take the GDP figures and divide them by the average population to calculate GDP per capita, you find that:

  • The United States has GDP per capita of $46,381
  • China has GDP per capita of $3,678 (up from $312.41 in 1990)
  • On a per person basis, the United States is 12.61x more prosperous than China.

(Realize that we are using GDP per capita as an approximate gauge for societal prosperity; in the United States, GDP per capita sits closely to the median household income figure.  It’s a way to adjust for population size in terms of economic output.)

[mainbodyad]If China becomes half as prosperous as we are on a per person basis – literally, they have fifty cents in economic activity for every dollar a comparable situated American does – the size of the Chinese economy would have to expand 6.3x, giving them a GDP of almost $31,000,000,000,000.  That is twice the size of the United States.

If they reached the point where the average Chinese person had the same level of prosperity as a similarly situated person in the United States, the Chinese economy would have to, by definition at current population levels, reach a GDP of just shy of $62,000,000,000,000.  There is no getting around this, they are mathematical realities.  The implications of this are that the Chinese economy would be 4.35x larger than that of the United States.

But since 1990, GDP per capita has gone from $312.41 to $3,678 as of full-year ended 2008  That is an increase of 14.11% compounded for 18 years, lifting rural peasants that were starving to death into a modicum of prosperity with no end in sight.

Several Options for the United States

There are two major ways the United States can mitigate the influence of such a large China.

  • Raise GDP Per Capita: We could accomplish this by becoming a highly educated, highly trained work force, getting GDP per capita to double its current level.  Switzerland, Denmark, Qatar and Luxembourg have GDP per capita ranges of $67,560 to $104,512, considerably outpacing the United States in this measure.  In this regard, we would be helped by a more prosperous China because we would have 1+ billion customers to whom we could sell American products.
  • Increase the American Population: Current birthrates are simply too low to keep pace with the Chinese population.  The only way around it would be to throw open the borders again, just like the Ellis Island days, and take all comers who were willing to work.  A larger work force would make programs such as Social Security instantly balanced again.
Sams Clubs in China

If we manage the business of America well, a rising China could be good. Think of all the Wal-Mart Super Centers now rolling out throughout the Chinese countryside. If Americans maintain their equity ownership of Wal-Mart by holding on to their stock, all of that profit will get shipped back to the United States. You think Wal-Mart is big now? How about in an economy 4x the size of the United States once China matures? The rise of the Chinese economy is not all danger for us in the United States – there is tremendous opportunity if we can figure out how to sell our goods and services to them, just like Japan does to the United States. Image from Wikimedia Commons.

The first option, of course, is what everyone works toward but the education system is a mess.  With problems such as the crisis in graduation rates for black men in America, we are under-utilizing a significant percentage of our national human brainpower assets.

The second option isn’t even remotely politically viable due to the American underclass becoming obsessed over the past ten years with illegal immigrants taking their jobs.  They seem to forget that a bigger population leads to more business start-ups, and thus more jobs, because there are greater needs to fill.

You Have a Choice

As a result, you have a choice resulting from the inescapable mathematical relationships of GDP and GDP per capita for the United States and China:

The only way to stop the Chinese economy becoming larger than the economy of the United States at current population levels is to work toward, hope, and pray that GDP per capita in China never exceeds 23 cents for every $1 in America.

Regardless of all legitimate concerns about what a superpower China means to the world – and there are some real concerns – that is the bottom line.  You cannot mathematically keep the Chinese economy smaller than that of The United States unless you are willing to say a child who is born there and raises a family must never earn more than 23 cents on the $1 than an American family with the same education, work hours and experience does.  At the current GDP levels, that results in a maximum of $10,681 for a Chinese person compared to $46,381 for an American.  A penny more and their economy is bigger.

I’m not willing to set limits on how far out of poverty they can climb.  In fact, once we figure out how to become completely sustainable so we aren’t burning through natural resources without replacing them, I want all of humanity to be as prosperous as America was during the 20th century.

Although we won’t see it in our lifetimes, I can’t wait for a world when Africa is no longer synonymous with 3-year-old kids dying of AIDs, life expectancy of only 35 years old, tribal dictators, and religious superstition.  But the day a young boy born in Kenya has just as great a chance as becoming the next Henry Ford and bringing technology to the masses as a boy born in Kentucky is the same day that America’s relative economic power is smaller.

The United States Needs to Redefine Winning

The problem with the culture in the United States, and I myself have suffered from this in the past, is that we think of “winning” not as being successful and rich, but as being more successful and richer than everybody else.

[mainbodyad]To put it bluntly: If a genie came down and ended poverty tomorrow, giving everyone in the world the same standard of living as the American middle class, which is the richest in human history, the United States would instantly be only 4.51% of the global economy instead of the 50% we are today.  Why?  The world has a population of 6,868,200,000 people and the United States has a population of only 310,225,000.  That means out of every 1,000 people alive on planet Earth today, 45 live in the United States and 955 live somewhere else.

Let me be perfectly clear about something: I don’t believe everyone is entitled to a certain level of income and this extends to countries.  But I do believe everyone should have the same opportunity to be successful if they are willing to work and meet market demand.  There will always be some countries that are above average, and I hope the United States is the one that wins that competition.

In fact, I’d love to see a world where we smash the GDP per capita record so that even when China is larger on a total economy scale, someone living in the United States has a far higher standard of living.  (I call this a “1 Kings 10:21” success – King Solomon’s Israel certainly wasn’t the biggest economy on the planet but the wealth of the nation was so extensive that silver was worthless, even the eating utensils were made of gold, and he refused to use slave labor instead paying market wages for construction.  That is prosperity.)

I Believe in Meritocracy as Long as Access to Opportunity Is Equal

There is no way that you can avoid China’s economy becoming larger than the economy of the United States unless you actively desire for GDP per capita in China to remain at sub-poverty levels.  The inherent truth in such a desire is that you believe the life of a human soul born in China is worth less than one born in Montana. I don’t buy that.

Mostly, it is because I believe in individual meritocracy.  That is, I’d much rather see a hardworking Chinese entrepreneur who put himself through college get rich than a lazy American who flunked out of high school, can’t read beyond a third grade level and complains he doesn’t have a job.  Why would I prefer the American just because he happened to be born in the same country?  How is that any different than our ancestors in Europe giving titles, wealth, land and serfs to certain children because of the bloodline of their parents?  That is what it amounts to if you look at it objectively.  We are demanding a certain lifestyle for our worthless worker because of his bloodline.

I believe behavior and results should be rewarded – honesty, thrift, integrity, hard work, intelligence, competitive spirit, and self-betterment – regardless of nationality, ethnicity, religion, sexual orientation, gender or age.  In fact, if this scenario were true, I would think the world was a better place because the Chinese entrepreneur took the job of the lazy dropout because my underlying economic theory is that the best, hardworking, most qualified candidates should win in life as long as everyone has an equal opportunity to compete.

That doesn’t mean other concerns aren’t valid, such as the role a global China would play in international affairs.  I’ll discuss those in a future essay. It is just important to point out the real-world consequences of hoping the United States remains the biggest economy on the planet.  You cannot be for a billion plus people rising out of poverty but against China becoming larger than the United States in total economic activity.  They are numerically incompatible.

To say otherwise is disingenuous, leaving us to choose one of the two options I discussed earlier – increasing our population so we are a bigger percentage of the total world citizenry or gaining a GDP per capita on par with a nation like Sweden, which would result in substantial total economic gains.  We’d still be smaller, but the difference would be far less dramatic – it would be akin to Japan, Canada, Great Britain and Germany in comparison to the United States.

But the bottom line is, you can look at China as a threat.  Or you can see it as I do … a vast pool of 1.3 billion untapped potential customers for American goods and services that is just now reaching its toddler years.  America can win and shouldn’t be afraid of competition.

Click Hear to Read Part II:
What a Superpower China Means for the United States