Burgeoning Middle Class

Since opening up its economic system to capitalism, China has turned into one of the world’s most dominant and important economic powers. And unlike the United States or Europe, China has a significant competitive advantage due to a vast supply of extremely cheap labor and a workforce in the hundreds of millions.

 In the second quarter of 2006, China reported superlative GDP growth of 11.3%, well ahead of estimates and supporting the fact that the country needs to reign in its economic growth. The strong GDP growth trend while positive for China must be controlled, otherwise inflation could creep in.

 In terms of GDP, China produces the world’s second largest GDP behind only that of the United States. China’s GDP is now more than twice that of Japan. Its membership on the World Trade Council was a milestone for a country that is striving to join the world economic elite. China will become the next superpower in Asia and could eventually supplant the United States.

 The second quarter GDP growth was the fastest recorded since the mid 1990s. China just announced that it would use more flexible exchange rate in order to slow down the growth. The value of the yuan has long been viewed as vastly undervalued by the United States and Europe, so this suggestion from China’s Central Bank will help ease trading tensions. The issue is how much the central bank will allow the yuan to appreciate in the open market.

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 Make no mistake about it as China is for real. Just the size of the burgeoning middle class in the country is overwhelming and very attractive to companies wanting tap the consumer spending in the country. When you have a real consumer market of several hundred million people, you would have to be pretty close-minded not to want a piece of the action.

 The trend is positive and you want to make sure you have some exposure to the country. I do not favor the Shanghai stock exchange because of its weak governance. My preference is for Chinese stocks trading on the Hang Seng exchange in Hong Kong or American Depository Receipts (ADRs) trading in the United States.