China Leads Japan in Market Cap

China has overtaken Japan to become the world’s second biggest stock market by capitalisation as investors pile into the fast-growing economy. China’s listed companies had a market capitalisation of $3,210bn as of July 15 compared with Japan’s $3,200bn, according to Bloomberg data. It is the first time China has overtaken Japan since January 2008 but keep in mind that much of this is not free float but rather restricted.

Beijing’s (FXI) foreign reserve holdings have come back through the $2,000 billion mark, as hot money jumps back into China to take advantage of faster economic growth and rapidly rising asset prices and liquidity levels.

China has ratcheted up a major plan to internationalize the renminbi and the process is likely to be faster than many expect, according to HSBC. If they pull it off, this could lead to nearly $2,000bn in annual trade flows, or as much as 50 percent of China’s total, being settled in renminbi each year by 2012, compared with less than 10 percent today.

The move follows continuous and loud calls by China for the world to adopt a world reserve currency based on a basket of currencies to replace the US dollar.

China is beginning an audacious plan to raise the role of the renminbi in international trade and finance and to reduce reliance on the US dollar,” said Qu Hongbin, China chief economist at HSBC.

“This will likely be a multi-year and gradual process. Yet, we believe the pace is likely to be faster than many expect.” “More than half of China’s total trade flows, primarily bilateral trade with emerging market countries, are likely to be settled in renminbi in the next three to five years,” said Mr. Qu.

HSBC estimates that Chinese gross domestic product could hit $4,700bn this year. This would mean that it could overtake Japan as the world’s second-largest economy in 2010, while it was likely to overtake Germany as the world’s second-largest trading country by the end of the year.