The two most profound changes our generation has been witness to is the advent of the Internet and the explosive growth of the Chinese economy.
Before the Chinese government introduced economic growth reforms in 1979, the average annual real gross domestic product (GDP) growth rate in China was estimated at 5.3% (from 1960 to 1978). Since then, the Chinese economy has maintained consistent and rapid development, with its annual GDP growth averaging 9.3% between 1978 and 2001. (Source: “China’s Contribution to Global Economy,” China Consulate web site, May 22, 2004.)
According to the World Bank, in terms of stabilized prices, the rate of China’s contribution to global economic growth was 14.0% between 1980 and 2000, versus 20.7% for the United States and seven percent for Japan. During the same period, the rate of China’s contribution to global trade growth reached 4.7%, ranking third in the world, following the United States (14.4%) and Japan (6.9%).
Since 2000, China’s economy has fluctuated in step with the global economy. In 2008, when the recession circled the globe, China’s GDP dropped to 9.6%, versus 14.2% in 2007. (Source: ”China GDP: how it has changed since 1980,” The Guardian, last accessed December 19, 2012.)
In spite of the slow recovery of the global economy, China’s economy has continued in its robust ways, attracting increasing attention from the international community. While the U.S. and nations of the eurozone are worried about slipping into recession, the Chinese economy is expected to grow at a slow, but still healthy, 7.4%.
Today, China’s GDP is equal to about one-half that of the U.S. Only 15 years ago, China’s GDP was only one-tenth that of the U.S. With the rapidly shrinking divide, China’s economy could surpass that of the U.S. sooner than previously thought. If the economic growth gap is six percent per year and real appreciation is 2.5% per year, then that would be sufficient for China’s economy to become bigger by 2020. According to economist Stefan Karlsson, “If the growth gap and/or real appreciation is closer to the average rate for the last decade, it could happen even sooner.” (Source: ”China economy may surpass US before 2020,” The Christian Science Monitor, January 26, 2012.)
What does the future hold for the Chinese economy?
China’s phenomenal economic growth has significantly increased living standards, and helped give rise to a burgeoning middle class. Over the coming decades, economic mobility means more and more Chinese will enter the middle class, creating one of the most important and influential social and economic groups on the planet.
With increased global prosperity come shifts in influence and power. Some estimate that by 2030, Asia will have surpassed North America and Europe combined in terms of global power, based on GDP, population size, military spending, and technological investment. China alone will probably have the largest economy, surpassing that of the United States a few years before 2030.
A powerful Chinese economy means the economic fortunes of the U.S. and European countries will have a diminishing impact on the global economy. As such, the health of the global economy will be linked to, and contingent upon, how well the developing world does.
In Profit Confidential, we regularly comment on the Chinese economy, where we believe it’s headed, and how an average investor in North American can partake in, and even profit on, the unprecedented transfer of economic power from the U.S. to China.