China eclipses Japan as world's second largest economy

China eclipsed Japan to claim its place as the world’s second largest economy in the second quarter of the year.

Japan fell to third place in a sluggish three months of growth during which it recorded 0.4% growth – a far cry from 4.4% in the first quarter, as its export-led resurgence faltered.

The shuffling is far from unexpected, but has served to highlight not only how China has continued to rise through the period, but how its economy has matured.

The country is on course for 10% growth this year, despite increasing headwinds as it special liquidity measures and the global economy stumbles.

Consumers shoulder the burden

Anthony Bolton of Fidelity, who moved to Hong Kong to launch Fidelity Special Situations China earlier this year, said local consumers were shouldering the burden.

‘China’s domestic economy will show better growth than most other regions in the world,’ said Bolton.

‘My enthusiasm for China after three months in the region is unstinted. I believe many areas in China will show rapid progress over the next 10 years.’

Goldman Sachs research suggests China will be the world’s biggest economy by 2027, having become the world’s biggest exporter in 2009, producing 9.9% of exports.

The store of potential buying power is formidable, albeit dependent on easing Chinese families off their long-term saving habit and into the country’s growing retail sector.

From a base of US $645 billion in 1998 total household deposits stood at $2.34 billion in 2007.

James Anderson, chief investment officer at Baillie Gifford, said: ‘Personal consumption has been little more than 35% of Chinese GDP, and historically a sum equivalent to almost a third of this level was recycled via the current account surplus.

‘If we are now seeing rising wages (justified by productivity gains), then this warped pattern will gradually erode.’