According to a recent article in The Economist, up until 1890 China was the world's largest economy. However from 1891, it's estimated that the US economy surpassed China's and seized the crown of 'World's Largest Economy'. Fast forward 124 years and the tables look set to turn again, with The Economist utilising data supplied by the United Nations (UN) and International Monetary Fund (IMF) to forecast that by the end of this year China will once again regain the title.
It has really been more a case of when, not if the Chinese economy would surpass the US economy; although the fact that it may occur this year rather than in 2019 as the IMF has previously predicted is bound to get a few economists and investors excited.
For Australian investors it does have a number of consequences. Primarily these will be adjustments to near term price and volume assumptions for company revenues and expenses, in some cases these will be positive, in other cases negative.
On the negative side for example, the GDP growth in China is likely to lead to heightened wage pressure (which is already noticeable). This will affect companies that have offshored – such as apparel manufacturer Pacific Brands Limited (ASX: PBG) – finding that the cost advantage in China is being eroded. Consequently, this could force companies with manufacturing bases in China to look to move to regions with cheaper labour forces. While this may be sensible from a medium term perspective, in the short term this would involve increased costs.
On the positive side, growth in Chinese per capita GDP should lead to demand for more goods and services, with food supply being a particularly big opportunity for Australia. Beef producer Australian Agricultural Company Ltd (ASX: AAC), dairy producer Bega Cheese Ltd (ASX: BGA) and grain marketer Graincorp Ltd (ASX: GNC) are three companies which are well placed to cater to Chinese consumers' demands for more protein and higher quality foods.
Foolish takeaway
The USA has enjoyed the title of World's Largest Economy for 124 years, which is a reminder that China will in turn likely hold the crown for many decades. Given the time frames involved, there is no need for investors to rush out and reposition their portfolio. However being aware of strong tailwinds and investment themes is an important consideration for long-term strategic portfolio management.
