In the last quarter of 2010, China has overtaken Japan to become the world’s second biggest economy. The International Monetary Fund (IMF) reports that China’s Gross National Product was $5.75 trillion in 2010 compared to Japan’s $5.39 trillion. Although the Japanese economy grew by 2% in 2010, the Chinese economy outpaced it with growth of 10%. But China has still some way to go (about another 9 years) before it catches up with The United States which had a GDP in 2010 of $14.2 trillion and an annual growth rate of 2.8%.
Second Biggest Does Not Mean Second Richest
Don’t confuse the size of a country’s economy and the wealth of its citizens. While China may have the second most billionaires, the average GDP per capita income in China is only $6000 a year compared to $46,000 in the USA, $34,000 in Japan and slightly lower than the average income in El Salvador so there is a very long haul ahead to match standards of living in the West.
Growth is Supported By Investment in Infrastructure and a Property Bubble
China has had a sustained period of year-on-year growth of 10% on average since 2003. How long can it continue? There are a couple of factors that should bring the rate down by a few percent in the next 5 years. Firstly, is that the current growth is being sustained, not by exports, but by government spending on infrastructure projects on an enormous scale to the tune of almost $600 billion.
China’s twelfth 5 year plan which was published in October 2010 sets out the strategic goals
- Improve the social welfare and reduce inequality
- Increase domestic consumption to reduce dependence of exports
- Narrow economic differences between the rural west and the industrialized coastal parts of China
- Improve energy efficiency and environmental protection
- Develop strategic key industries: new sources of energy, energy conservation, new materials, biotechnology, new information and communication technologies, high-end equipment manufacturing and new energy vehicles
House Price Rises Continue
While government measures and taxes last year have done something to quell Chinese real estate price rises, there is no suggestion that prices will start to fall. Bejing has a price to income ratio of 27 compared to ‘stable’ averages of around 6-7 for upmarket cities in the United States and the United Kingdom. The recent property bubble and crash in the States saw the price to income ratio rise to 9 in July 2006 before falling back to well below the average. Even if house price growth is single digit in the short then it means that what the crash comes in will be all the more dramatic.
Invest in China But Not In Real Estate
China is still a great place to invest in the medium term if you stay away from the real estate sector. My preference would be to use Exchange Traded Funds as an easy way of accessing the Chinese markets. Something like a index tracker such as the ProShares Ultra FTSE / Xinhua China 25 which is not overexposed to real estate, or something more sector-specific such as the Global X China Energy ETF