Chinese Economy will be twice that of US!

What is the future for investors? This prediction should grab your attention: By the middle of this century, the economy of China will be nearly twice as large as that of the United States and as big as the economies of North America, Europe, and Japan — combined. The developed world, which today provides more than half of world output, will shrink to less than one-quarter by 2050.

How do I know China will be so large? By looking at the population of China and then making a conservative projection about how fast the Chinese economy will grow. For China’s economy to be as large as the entire developed world’s, the typical Chinese worker’s income must only rise to one-half the level of the average American’s income. This feat is easily attainable, even though the average Chinese now earns only about one-eighth the income of the average worker in the U.S.

To reach one-half of the American income level, China’s productivity has to grow 3 percent per year faster than ours. Can this be done? China’s recent track record says it can. Over the last 20 years, Chinese incomes have been growing at 8.4 percent a year — over 6 percent per year faster than Americans’. Sure, Chinese growth will slow at some point, but China’s rapid adoption of Western technology ensures China’s productivity will not drop much below 5 percent for decades to come.

Moreover, China would not be the first country to follow this growth path. There are lots of formerly undeveloped countries that have been able to reach one-half of our income in even shorter periods of time. In 1960, Hong Kong and Japan had about the same income relative to the U.S. that China does today, yet now their standard of living is close to the U.S. In 1960, South Korea and Singapore had relative incomes far lower than China, but over the next 45 years these economies reached 50 percent of the U.S. level.

If you accept the forecast that Chinese incomes will reach one-half ours, my prediction that China’s economy will be as big as the economies of North America, Europe, and Japan combined follows quickly. By the year 2050, China is predicted to have nearly 1.5 billion people — nearly four times the projected U.S. population. If they have one-half the per capita income and nearly four times the population, the simplest arithmetic tells you the Chinese economy — the output of goods and services — must be nearly twice that of the U.S. economy, which itself will be as large as those of Japan, Canada, and Western Europe combined.

But China will not stand alone as an economic giant. India, with a population that is equal to China, is beginning to grow rapidly, although not yet at the Chinese rate. It, too, will become an economic giant whose size will outstrip the U.S. economy at least. And then there are Indonesia, Thailand, Korea, Taiwan, and many others. Is there any doubt that the center of the world’s economy will shift east? And on the horizon are Africa and the Middle East — sleeping giants that have not yet stirred but have vast economic potential.

Investment Implications

What do these developments mean for your investment strategy? If you are convinced, as I am, that Asia will become an economic powerhouse, I’m sure many of you are ready to jump right into the Chinese and Indian stock markets.

Whoa! Here’s where the study of history can stop you from making terrible mistakes.

During the last 12 years, when the Chinese economy has been outpacing any other in the world, its stock markets have been tanking! In fact, the Chinese stock market has been the worst performing market in the whole world, turning a $1,000 investment into a little over $300.

How can this be true? How can the world’s fastest-growing economy produce the world’s worst returns? It is a paradox of growth, a situation I have termed “the growth trap.” In subsequent columns, I’ll describe the growth trap and teach you how to avoid its devastating consequences.

Geopolitical Impact

There are also enormous geopolitical ramifications of the eastward shift of the world economy. Can the U.S. defend itself with its economy shrinking relative to the Asian giants? Will the Chinese leadership, nominally Communist, evolve into a more democratic form of government, or will the government with its newfound economic power embark on an expansionist path, gobbling up Taiwan and other Asian nations?

We can only speculate on the answers to the above questions. But in future columns I’ll tell you why my research on economic trends has convinced me that despite the rise of Asia, the world will not run out of energy, that our trade deficit will get worse before it gets better, and why Chinese and Indian firms will accelerate their purchases of American corporations.

In the last decade, the fundamental basis of the world economy has changed, and changed irreversibly. These changes will dominate the financial markets in the coming century and will fuel global growth. This column will enable you to navigate the changes I foresee and structure your portfolio to obtain the best returns. Leave no doubt: The future for investors will be bright — at least for those who understand the fundamental forces that drive stock and bond markets.

During the last 12 years, when the Chinese economy has been outpacing any other in the world, its stock markets have been tanking! In fact, the Chinese stock market has been the worst performing market in the whole world, turning a $1,000 investment into a little over $300.

How can this be true? How can the world’s fastest-growing economy produce the world’s worst returns? It is a paradox of growth, a situation I have termed “the growth trap.” In subsequent columns, I’ll describe the growth trap and teach you how to avoid its devastating consequences.

Geopolitical Impact

There are also enormous geopolitical ramifications of the eastward shift of the world economy. Can the U.S. defend itself with its economy shrinking relative to the Asian giants? Will the Chinese leadership, nominally Communist, evolve into a more democratic form of government, or will the government with its newfound economic power embark on an expansionist path, gobbling up Taiwan and other Asian nations?

We can only speculate on the answers to the above questions. But in future columns I’ll tell you why my research on economic trends has convinced me that despite the rise of Asia, the world will not run out of energy, that our trade deficit will get worse before it gets better, and why Chinese and Indian firms will accelerate their purchases of American corporations.

In the last decade, the fundamental basis of the world economy has changed, and changed irreversibly. These changes will dominate the financial markets in the coming century and will fuel global growth. This column will enable you to navigate the changes I foresee and structure your portfolio to obtain the best returns. Leave no doubt: The future for investors will be bright — at least for those who understand the fundamental forces that drive stock and bond markets.