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Old 08-27-2009, 08:56 AM   #1 (permalink)
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Post Emerging Economy

China’s stock market capitalization is now larger than that of Japan, the second largest economy in the world. Just three years ago, in 2006, Japan’s market capitalization was 12 times the size of China’s. In retrospect a buy China/sell Japan trade was about as close to a “no brainer” as financial markets offer. Four trillion dollars of profits were available for investors who stuck with this simple theme.

Some readers may perhaps fear that yet another asset bubble is forming, and that the growth in the Chinese market has come too far too fast, which of course is possible. At 25 times forward earnings and 3.8 times price-to-book, the Shanghai Stock Exchange Composite Index is far from cheap by traditional measures, and thus financial markets are likely reflecting more of a “voting machine” aspect of future expectations than a “weighing machine” measure of current value. But the fact is that we are witnessing real time indicators of significant changes in the global economy, with China clearly continuing its meteoric rise in terms of global economic importance. It is not surprising China’s market capitalization is larger than Japan’s, given that the Chinese economy will probably surpass Japan to become the second largest economy in the world next year, measured in current exchange rates.

China is clearly the largest emerging economy, but by no means is the phenomenon limited to China. Indeed in terms of GDP, emerging market (EM) economies account for seven of the top twenty countries, and represent the component that is growing the fastest.

For countries to become and remain dominant in the global economy they must reduce their dependency on others (export demand) and develop their own sources of sustainable demand (particularly domestic consumption). Thus for large systemically important economies, export led growth is a means rather than an end, and the transition to domestic demand is underway. The large (~$580 bn) government stimulus program in China has been a contributing factor, keeping GDP above 6%. But India too has been able to maintain growth around 5%, without such a large program. A recent analysis by Credit Suisse shows that Chinese consumption is already the second largest contributor to global consumption, and that China and India will be the first and fourth largest contributors by 2020.
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Old 08-27-2009, 09:02 AM   #2 (permalink)
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One analogous way to think of an economy is as a company with four major divisions, namely, consumer, business (investment), government, and international (net exports). For a company with limited domestic customers (consumer, business, or government), a winning strategy can be to initially produce goods for the export markets, and look to grow the other divisions over time as demand picks up.

Following this simple construct, economies with large domestic consumer and business (investment) sectors – like in China and India with 30% of the world’s population – may have a key advantage. Take for example the auto industry: Chinese auto sales are poised to exceed U.S. sales.
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Old 11-23-2010, 03:41 AM   #3 (permalink)
 
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