Continued growth in China for the second quarter of 2010 may encourage investors to return to emerging markets as a source of returns.

Nominal Gross Domestic Product (GDP) figures for the second quarter published by the Japanese government put Japanese output at $1.29 trillion compared to higher GDP in China at $1.34 trillion.

The figures have prompted commentators to predict that China, a high-flyer of the emerging markets, will overtake Japan as the world’s second biggest economy when full figures are published for 2010.

Paul Niven, head of asset allocation at F&C Investments, said the USA remained the world’s biggest economy but China was expected to overtake the USA by 2030.

During the past decade China and India have overtaken Germany and the UK as the third and fourth biggest global economies. The signs of continued growth in China may raise confidence about newly established markets as a area for investment.
 
The Organisation for Economic Development and Co-operation also published GDP statistics for the seven developed economies in the OECD, showing record growth of 2.2% in Germany for the second quarter of 2010. The OECD said this was the highest growth – compared to the previous quarter – since reunification in the country.

The German central bank, the Bundesbank has revised its growth forecast for 2010 up to 3%.

The rate of GDP growth in Japan slowed by 0.1% between April and June, and Niven said China’s stock market capitalisation may also surpass that of Japan.

“This has happened before, in both 2008 and 2009 but, at present levels there is about 10% gap between the overall market value of Japanese and Chinese stocks,” he said.

Some of the future risks identified for China include the low level of domestic consumption which has been on a declining trend.

Aruna Karunathilake, fund manager at Fidelity, said he would encourage people to think of China as a very long-term trend.

“The government is starting to actively encourage consumption as it realises that relying on the over-leveraged OECD consumer as the hub of its export led economic policy may not be the best long-term approach,” he said.

Karunathilake said investors can discover emerging trends by looking beyond Beijing to other regions of China.

© Fair Investment Company Ltd