Why the 21st Century Belongs to China

The 19th century belonged to England, the 20th century belonged to the U.S., and the 21st century belongs to China. Invest accordingly. 

-- Warren Buffett

The 20th century was often called "the American Century." America's technological leadership, free market system, and low tax rates combined to unleash an unbeatable force of economic growth and unprecedented wealth. In the early part of the 21st century, unfortunately, the United States has done virtually everything in its power to destroy the very advantages that have made it such a powerful country.

How the U.S. lost its edge
There are many factors that play a role in America’s declining standing in the world economy, one of which is a corporate tax rate that is among the highest in the world. In 24 states, in fact, combined federal and state taxes are higher than those of any other country on Earth. Companies that feel comfortable with the economic and regulatory environments in another country may decide to relocate their talent and workforce there so they can keep more of what they earn.

Additionally, having failed to learn the lessons of Japan's failed financial bailout, the U.S. is now busy subsidizing its own failures, which is destroying its market economy. To cap off its problems, The Economist recently reported that "while corporate R&D in America and Europe grew by 1%-2% between 2001 and 2006, in China it soared 23%. China is now close to surpassing Japan in total research spending, from almost nothing a decade ago." This matters because R&D is correlated with productivity.

China gains from America's pain
As China continues along the path toward economic freedom and liberalization, its economic growth can very likely continue for quite some time. After all, China still has a lot of catching up to do just for the average citizen to reach parity with much of the developed world. And that doesn't even take into account the future benefits from all that cash being poured into R&D budgets and the lifestyle improvements that may arise from them.

Not only is China waking up to -- and rapidly adopting -- the market system, it is doing a far better job than the U.S. is at letting its successful entrepreneurs keep their cash. China’s new unified corporate tax rate is 25%, and the government grants many high-tech and export-oriented businesses additional exemptions.

With lower taxes, improving economic freedom, and strong Research and Development growth, China is setting itself up to take over the economic leadership position America is abandoning. It's no wonder that China's economy is still projected to grow 7.5% in 2009, even as the rest of the world teeters on the brink of a nasty recession.

An unbelievable opportunity
You might assume that Chinese companies would command a premium in the stock market. Amazingly enough, however, you can buy several Chinese companies more cheaply in terms of forward-looking earnings than you can American ones in similar business lines:

*Data from Capital IQ, a division of Standard & Poor’s.

So not only can you buy growth potential in these rapidly expanding Chinese markets, but you can do so more cheaply than buying larger American companies tethered to slower growth markets. That gives you a tremendous opportunity to buy into the long-term China growth story at an outrageous discount to those future expectations.

Are you ready to invest?
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At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. The Fool owns shares of Stryker and has a disclosure policy.