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Tuesday, September 21, 2010

How is China fairing as an economy?

China becomes the world’s second-largest economy

China achieved another milestone in August when the country skipped ahead of Japan to become the world’s biggest economy after the US. The news came only a few months after China toppled Germany to become the world’s biggest exporter.

With that size goes power. Beijing, which has the world’s largest foreign exchange reserves under its control, has publicly challenged the role of the US dollar as the default global reserve currency and has led a push for more equitable representation in global bodies such as the International Monetary Fund. It is evident in a series of forums, from the Copenhagen climate talks last December to the G20, that you can't reach a genuine global solution without China.

China’s rise to get to this point has been nothing short of spectacular. Just 10 years ago, its economy ranked sixth in the world. If the country can maintain its recent 10% p.a. growth rate, Goldman Sachs expects China to overtake the US to become the world number one by 2027.

While China may have taken great strides in an aggregate sense, on a per capita basis it still lags far behind other economies because of its vast population. GDP per capita in China is still just about a tenth of that in Japan.

The government is encouraging consumption as it realises that relying on the over-leveraged western consumer as the hub of its export-led economic policy may not be the best long-term approach. Investment is also being made to link its hinterlands with the booming coastal regions and the world through new roads, railways and airports.

The significance of this next stage of growth is not lost on rest of the world. Developed world economies are hopeful that China will become a market for their goods and services when the demand of the Chinese consumer is unleashed.

The troubled economies of Europe and the US hope that China will deliver much-needed sales. Likewise, the better-performing Asian Pacific countries – especially Australia – hope that they too can use China to grow their own economies through greater trade.

Any investors who have been put off by weakness in the Chinese equity market this year may be a little short-sighted. A new world order is being established and it makes sense to back the new leaders.

RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This information does not consider your personal circumstances and is general advice only. You should not act on any recommendation without obtaining professional financial advice specific to your circumstances. Past performance is not indicative of future performance.
This article has been produced by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237 865 (“Fidelity Australia”).
Fideli Australia is a member of the FIL Limited group of companies known as Fidelity International. © FIL Investment Management (Australia) Limited

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