China has surpassed the US as the world's largest economy - at least when the figures are adjusted for Purchasing Power Parity (PPP). Data released in October by the International Monetary Fund (IMF) shows that China is worth $17.6 trillion compared to America’s $17.4 trillion. While the IMF method of calculation is controversial1, there can be no doubt that China is big and getting bigger by the year.

China’s growing wealth

China is currently the world’s most populous country with a population of over 1.35 billion2. With its wealth accelerating in recent decades amid rapid industrialisation – the IMF estimates that China will be worth just under $27 trillion in 2019. That would be 20% bigger than the US economy, which is expected to reach $22.3 trillion.

As China moves up the development curve and establishes a bustling middle-class, domestic demand is set to become an increasingly important driver of global growth. This should foster new investment opportunities for emerging market companies and companies in developed economies seeking to win new business in these markets.

Things to note:

China’s evolving size means from an economic standpoint China will continue to expand its influence as a key driver of investor sentiment. This trend is likely to continue, not only in relation to themes in Australia, but for global investors as a whole.

Is it slowing down?

This announcement comes at a time when China’s overall economy is slowing. In 2013, China grew at a rate of 7.7%. In 2014, it is estimated that China will deliver growth of around 7.5%. This may slow further to around 7% next year, according to the IMF outlook. By contrast, the US is accelerating from a slower growth rate; enabling the Federal Reserve to gradually normalise its monetary policy.

China’s slowdown is being driven by policies that aim to slow the growth in credit and shadow banking and work to improve local government debt. These measures will seek to create a more stable growth trajectory. The transition to more sustainable growth could see heightened volatility if it sets off fears about unintended consequences.

Final thoughts

While the US economy is strengthening, Europe and Japan are growing at a much slower rate with more uncertainty regarding their outlook. As a result, the investor mood through September has become somewhat more cautious.

China, like most emerging countries, relies on export growth to the major developed nations of the US, Europe and Japan. While the medium-term outlook for China’s growth and its growing middle-class is positive, there is no promise of an expressway to growth. The pathway could take some twists and turns and in the process markets could experience bouts of volatility. Nevertheless, the uneven and gradual nature of the global economic expansion means that it is a long way from overheating and the problems associated with rising inflation and monetary tightening.

1The IMF figures are calculated on the basis of purchasing power parity; using exchange rates to adjust for price differences of the same goods between nations. Given this method, and some arguments that question how gross domestic product is calculated in China, some commentators have highlighted that China’s IMF ranking as the world’s largest economy is premature.

2World Bank, United States Census Bureau, 2013.

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