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Blog: What China problems? Its economy is bigger than the US

Written by: John Redwood
Despite concerns regarding China following its slowest economic growth in a quarter of a century, John Redwood of Charles Stanley, reveals data that actually places the country as the largest economy, even above the US.

The latest International Monetary Fund (IMF) forecasts contain an interesting set of figures.

In 2015 the Chinese economy was larger than the US, as measured with IMF adjustments to allow for different purchasing powers allowing for price and currency effects on stated national income numbers.

The figures show that the advanced world still has much higher levels of income per head than the rest, but it also shows faster progress in narrowing the gap from some of the leading emerging market economies.

China’s growth may be slowing, but so has the growth of the advanced world since the banking crisis hit in 2007-08.

Global exports of goods and services

USA: 11%, China: 11%.

The advanced economies only account for 14.6% of the world’s population. Both India and China individually are larger than the whole advanced world, with 17.9% and 19% of the world’s population respectively.

The advanced countries produce 42% of the world’s output. That is down from over half a few years ago but still three times their population share.

Global GDP

The Euro area produces 11.9% of the world output, with the US contributing 15.8%.

China has taken first place with 17.1% of the global total. The UK at 2.4%is now considerably larger than Italy with a similar population at 1.9%, and ahead of France at 2.3%.

Germany remains the largest of the European majors, producing 3.4% of world output.

What can investors learn from this?

The concentration of stock market and investment activity on the US, EU and Japan no longer reflects the balance of world economic activity and power.

What made sense when all the emerging countries together were a minority of world output makes less sense as they come to produce the majority share.

China could be seen as a risky or eccentric investment a decade or more ago. Now it is backed by the largest world economy on this adjusted measure maybe it merits serious consideration.

It is still true that the greater liquidity of advanced markets, the bigger proportion of economic activity that is undertaken by quoted companies, and the higher standards (on average)  of economic and political governance all point in the direction of portfolios still having more in traditional markets than in the emerging world.

The last three years have been disappointing for emerging market investors, as investors have been put off by commodity dependence in some of them and by erratic performance in others. The Chinese market had a big bull run until the middle of last year, but then became overextended as credit was withdrawn and rules tightened over stock trading.

There is money to be made out of the long march of the emerging world towards higher living standards and a more dominant role in the world economy. On the way are hiccups in markets as their markets are gradually brought up to world standards of disclosure and regulation, and as investors gain confidence in them.

On a longer view there should be returns to be made out of the superior growth of some emerging economies. Equity investment is primarily about growth.

John Redwood is a global investment strategist at Charles Stanley

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