How soon before China becomes the world’s largest economy?

26th August 2010

As Justin says on The Independent's community board : "It was only a matter of time before China overtook Japan, and the US will be firmly in its sights now. Again, only a matter of time before China becomes the World's largest economy and India the second largest."

A similar discussion on the Orange Finance forum had Old Tory predicting: "China has a population many times that of the US and Japan combined, so the per capita figures would tell us more about the relative state of health of the economies. I suspect that China will overtake the US well before 2030."

We asked Gartmore's Charlies Awdry, manager of the China Opportunities fund for his views. 

Q: China is now second only to the US in terms of the size of its economy. What is the outlook for investors?

A: "The global macroeconomic outlook continues to be mixed.

"Within China, growth is strong but moderating from the heights of the first quarter. Market concerns continue to mount over the impact of China's property tightening policies. These measures are being enacted just as the economy has already begun to witness moderating economic momentum.

"At the same time, macroeconomic concerns have resurfaced globally, particularly in Europe. Nevertheless, economic news has been generally positive and suggests that the Chinese economy continues to expand with a healthy rebalancing.

" Notwithstanding many global macroeconomic uncertainties, we expect any pull-back in the Chinese market to present a good opportunity to top up our most compelling positions. We expect China to continue to benefit as a recovery gathers momentum and we remain confident that Chinese equities represent decent value."

Charlie continues: "There are still many doubters on China which continues to offer the potential for unexpected earnings growth particularly within the consumer sector."

Q: What is propelling China and exactly how much damage could political, currency and environmental issues do?

A: "The economy is being propelled by rapid urbanisation and significant infrastructure developments. China is witnessing a vast influx of workers relocating from rural areas to urban dwellings at the prospect of higher wages.

"Wages have been rising for many years and the rises are a key part of encouraging domestic consumption which is essential for global economic rebalancing. Rising wages are a function of many factors which include a tighter labour market.

"This is a result of the multi-year impact of the one-child policy, an ageing population and the lower availability of migrant workers due to growth inland.

"We are not overtly concerned by political factors since China is a one party state and the situation is currently relatively stable. The move by Chinese authorities to make the Chinese yuan exchange rate more flexible should make Chinese exports less competitive.

"However, the announcement has been welcomed by the rest of the world and should improve China's diplomatic relations with the west and in particular with the US.

"We expect China will benefit as the move allows for more flexibility in policy going forward. We don't expect to see any large currency moves in the short term.

"China's rapidly growing economy is undoubtedly generating unwanted environmental problems. The significant levels of infrastructure development are creating substantial pollution issues which will need to be addressed. The rapid urbanisation of the cities is creating more immediate issues most notably in the form of increasingly scarce water resources."

Q: Some are saying China will soon overtake the US to lead the world's economies; but how likely is this and what affect would it have?

A: "China is a crucially important component for global growth but the country is in need of significantly higher levels of domestic consumption and continuing reforms before it is ready to lead the rest of the world economies. GDP in China is still low.

"We do not expect China to overtake the US as the leading world economy for some time."

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