Why China's Economy Surpassing the U.S.'s Is a Good Thing

Last Updated May 3, 2011 9:57 AM EDT

CNN reported last week that China could overtake the U.S. as the world's largest economy in as little as five years. Truthfully, you shouldn't be worried, especially when you consider the alternative.

It's puzzling that investors are worried about the fact that the economic growth rate in China is expected to be greater than that of the U.S. Why they would be concerned that China's GDP will surpass the U.S.? How can this possibly be considered bad news for the U.S.?

In fact, the right way to think about it is that the news is extremely positive. The world is growing wealthier as more and more countries discover the benefits of a market-based economy. We buy more of their clothing and electronics, and they buy more airplanes, financial services and Disney movies. And we're all better off. That's the benefit of a global economy, with trading partners having comparative advantages in different goods and services.

Here's another important point that seems to be lost in the discussion: Since China has a far larger population than the U.S., simple math tells us that China's GDP will be substantially larger than ours even if the income of the average Chinese citizen is still a small percentage of his or her U.S. counterpart.

And finally, here's another way to think about the issue: If the story about the American Age coming to an end worried you, would you be more comforted by a prediction that China's economy is about to collapse or that its more market-oriented economy concept will be scrapped and the Central Planning Committee will issue new Chairman Mao uniforms? Are citizens of Finland or Norway leading a dismal existence because their economies are far smaller than the U.S.?

Unfortunately, the media's goal isn't to enlighten or educate, but to get your attention. And the media knows that bad news typically attracts more attention than good news, so a negative spin is often put on stories. This is another reason why you should treat much of what you read in the financial as investment porn, not information which has any value.

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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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