China: Now the World’s Second-Largest Economy

| About: iShares China (FXI)

On August 22, 2010, Craig Stephen from Marketwatch published: "China becomes world’s second-largest economy."

"As China's economy last week nudged Japan's into second place in the world rankings, it was a reminder, if any was needed, of its growing importance and influence. China may be only 1/10th of Japan's gross domestic product per capita, but there is no disputing when it comes to trade that China is the 800 lb. gorilla."

Mr. Stephen goes on to point out that in emerging as a world economic influence, China’s massive economy will potentially affect the fate of entire industries from the historical "hard commodities" used in industrial production to their current increasing domestic use of soft commodities and food as their middle class lifestyles demand improvements.

"As we look forward, we can expect more changes in how China's growth is felt. Domestically, we should hear less about outsourced factories and more about China's growing consumer class."

John Hawksworth, chief economist at PricewaterhouseCoopers, described the figures as a "symbolic" shift. He said: "Clearly it was inevitable, it was a just a question of when it would happen - just as it is pretty inevitable in the long run that it will be bigger than the U.S. as well, because it has four times the population."

China’s amazing growth since Deng Xiaoping introduced free-market reforms three decades ago has seen it slowly and now more rapidly advancing in the world league of economic powers. Just 10 years ago, it was the sixth-largest in the world. Since time, China outpaced Britain and France in 2005 and Germany in 2007. In the last year, as China’s middle class has ascended in owning vehicles, China even overtook Germany as the largest producer of cars in the world; matching the fact that China is the largest car market in the world.

Nick Parsons, head of research at National Australia Bank, said the global financial crisis, which pitched more developed economies into recession, has underlined the shifting world power. "The Chinese economy has more than doubled in size in the past 10 years and will double in size again in the next 10 and I don't think the financial crisis has accelerated that change as much as it has cemented it," he added.

China's breakneck growth has not come without cost, causing huge social upheaval, including large-scale migration from the countryside to cities, which are growing at an unprecedented rate. Consultancy firm McKinsey reckons that China's urban population will almost double by 2025, when it will have 221 cities with populations of more than 1 million, compared with 35 in Europe. China has continued growing through the recession, in part owing to a $586 billion stimulus package.

The challenge for China will be the management and education of their rising middle class. This summer nearly 10 million students sat for the college entrance exam. One key factor for the Chinese government is the focus on education. Enrollments to University were increased 7 percent over last year providing for 6.57 million places at the country's universities or colleges, according to the Ministry of Education; however, there were more than 9.57 million Chinese students competing against each other for a "University Education" opportunity.

The author maintains a long position in Baidu.com (NASDAQ:BIDU). Other Chinese ADR Internet Stocks are Sina (NASDAQ:SINA), Sohu.com (NASDAQ:SOHU), NetEase (NASDAQ:NTES) and Shanda Interactive Entertainment (NASDAQ:SNDA). Two other Other Chinese ADR stocks with strong performance are New Oriental Education & Technology Group (NYSE:EDU) and Home Inns & Hotels Management Inc. (NASDAQ:HMIN)

As pointed out by Marketwatch, China’s emergence as a world market and the impact of government decisions and actions on China will add volatility to any industry—either up or down—depending on decisions of Chinese government and consumers. It will be up to investors to be aware of the sudden impact of these factors.

Disclosure: Long position in BIDU