An Historic Moment
19 Aug 2010
At some point in June this year China became the world’s second largest economy.
It makes an interesting headline, but for investors the real question is the impact and opportunity of Chinese growth.
Chinese economic output totalled US$1.337 trillion in the second quarter, compared to US$1.288 trillion in Japan. It is not the first time this has happened, but 2010 is likely to be the first full-year in which China's economy is greater than the Japanese.
China's annualised growth in the second quarter was 10.3%, a rate of growth which - if sustained - would make China the world's largest economy, overtaking the US, at some point in the mid-2020s. However, while China has transformed itself into the world's manufacturing and export powerhouse, wealth is still unevenly distributed and the economy remains highly inefficient in comparison to its peers.
China - the giant finally wakes
The fact is that China is huge, but remains massively inefficient in economic terms. Given the size of China's population (at 1.3 billion, it is almost exactly 10 times that of Japan) we would expect it to have a larger economy. We should remind ourselves that were China to maintain its current growth rate for 25 years - which is highly unlikely - it would still only match Japan's GDP per person. Output per person in China is only US$3,600, less than a tenth Japan's US$40,000.
China's economy is starting from a low base and has been, and in many respects remains, massively inefficient. Japan has the opposite problem. It is a highly efficient economy, but becalmed in mature markets.
Japan has many problems - but having a smaller GDP than China is not one of them
For Japan, 2010 has been a difficult year with the Nikkei 225, down around 13% since January. A weak economy, flagging overseas and domestic demand and a strong yen has stalled export-led Japanese company earnings and led to disappointing Q2 GDP figures. However, optimism can be taken from the robust growth seen in the emerging markets.
China's rapid expansion is an enormous opportunity for Japan, and for the whole of Asia. China is already Japan's most significant economic partner, in terms of imports, exports and investment, and as growth in China moves from capital investment to personal consumption, this relationship should continue to benefit companies across Japan and the rest of the region.
The views expressed in this article are those of Schroders and may not reflect those of TQ Invest
