In a recent article in USA Today, Jonah Goldberg stated that “only a fool” would trade American problems for China’s — even though corporations such as Caterpillar (CAT, quote), Boeing (BA, quote) and Yum Brands (YUM, quote) see their strategic fate hinging on developments across the Pacific.
The “problems” that China has as an underdeveloped nation are actually its strengths. As an example from Goldberg’s piece: yes, there are 11 times as many airports in America than China. That means that when China catches up to the United States — which it will — its airports and airlines will all be modern and efficient.
Regarding China’s “excessive debt,” this also means that China does not carry the entrenched entitlement costs that threaten the United States. Many contend that the United States has already passed the point where it can turn around, that unsustainable debt has taken hold. That is based on numbers alone. China does not face this problem as it does not have massive entitlement programs.
There is a comparison with the United States that demonstrates the potential of China, and all emerging market nations, for that matter. At present, the central banks of China and the United States each around $3 trillion on their balance sheets. The $3.2 trillion for China is in foreign reserves that were earned by exporting more goods and services than were imported.
That is the largest amount, by far, in the world. That is the reason the European Union has come to China, not the United States, for financial assistance: it is the yuan, not the dollar, that is backing hope this time.
The Federal Reserve Bank of the United States, by comparison, has about $3 trillion on its balance sheet. That emanated from an accounting mechanism as the Federal Reserve simply inflated its balance sheet by debiting its account to buy Treasury bonds and mortgage securities to save the U.S. financial system.
Each day, China’s books about $1-2 billion in foreign exchange from its export earnings. Each day, the United States has to borrow about $3 billion — much of that from the Chinese — to finance the operations of the federal government. Based on that exercise in the trillions, which nation presents the better investment opportunity?