China has moved into second place in world economic terms, after provisional figures found that it became the second largest economy in the world at some point in June.
This move pushes Japan into third place, and will raise some eyebrows across the pond in the US, where they will now be considering the long-term viability of their position as global economic leaders.
If China is able to sustain its current rate of economic growth, at just over 10% in the second quarter of 2010, then it would overtake the United States some time in the mid-2020s.
Nathan Gibbs, a fund manager at Schroders, has written an interesting article examining this potentially historic moment. He comments that, whilst huge, the Chinese economy remains incredibly inefficient. Wealth in China is unevenly distributed, and with a population ten times the size of Japan, it would be expected to have a much larger economy.
For China to maintain its current pace of growth seems highly unlikely. Even if this were possible, it would still take 25 years to match the level of GDP per person in Japan.
Gibbs also points out that growth in the Chinese economy represents a big opportunity for Japan, in fact for the entire Asian region. As the economic growth in China moves from capital investment to personal consumption, trade partners such as Japan should benefit from continued growth.
The Chinese growth story remains a component of the investment models we recommend to clients, with exposure via Asia Pacific Equity and Emerging Market Equity funds. It is important to remember that economic growth does not always directly translate into investment returns.
