China Overtaking U.S. by 2016? Believe It


The brief downturn in both the U.S. and Chinese markets we witnessed early this month was stymied in last week’s trade, as both domestic and Chinese equities regained their footing and pushed their way back toward the top of the recent trading range. The S&P 500 now sits right at the top of the trading range of 1,350.

The move higher in both the domestic and Chinese equity markets confirms my recent thesis that “cash is trash,” meaning that right now there is a distinct bias in favor of equities as investors move from holding U.S. dollar-denominated cash and cash equivalents and to equities and hard assets of all stripes.

And much of those funds are flooding toward emerging markets as investors increasingly realize that these economies are continually delivering big returns against a strong growth backdrop.

In fact, according to the International Monetary Fund (IMF), the “Age of America” will end and the U.S. economy will be overtaken by China’s economy in real terms by 2016.

That’s just five years away, which is simply incredible when you sit and contemplate it, especially considering that the U.S. economy was three times as large as China’s in real terms just 10 years ago.

Why the big difference compared to other estimates that come up with a 2020 or 2030 date for when China will overtake the U.S. economy? Because those estimates are comparing the gross domestic product of the United States and China at current exchange rates. But when you analyze the two economies in terms of purchasing power parity — comparing what people earn and spend in real terms in both China and here — you find quite a different result.

Considered for purchasing power parity, China’s economy will expand from $11.2 trillion this year to $19 trillion in 2016, while the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take the U.S. share of the world’s economy down to 17.7%, the lowest in modern times, while China’s would reach 18% and climbing.

The time frame here is up for a little bit of debate, since a lot can happen in five years, but the end result will be the same. In terms of numbers and demographics, China will become the world’s largest economy sooner or later — and likely sooner.

Of course, the IMF prognostication is not much of a surprise to me, as the emergence of China as the leading global economic force is, in many ways, already here. But the fact that the IMF now officially thinks the new era will belong to China is a testament to what just about every observer of markets realizes — and that is that the age of American hegemonic dominance is essentially over.

Start Believing It … And Profiting From It

The new paradigm of China being the world’s biggest and most influential economy is something that I’ve been talking about for years in my advisory services and in my Money Show presentations. For some, this new paradigm is hard to imagine, given that we’ve all lived in a world dominated by the United States.

Yet, for someone like me, who has traveled the world and who is familiar with China and how its economy works, the nation’s pending global dominance isn’t at all hard to fathom.

If you are a student of history, as I am, you know that it was Great Britain that dominated the globe in terms of economic prowess for decades, but around the 1890s, the power balance shifted to the United States. And now, after more than a century of economic dominance, it seems like the U.S. run is gradually coming to an end.

China’s demographics and current economic policy are an unstoppable historical force that can not be denied. For Americans, the best way to deal with this inevitable march of history is to profit from it via investing in the strongest stocks in the strongest market. That’s why investing in companies benefiting from the strong growth in Asia, led by China, is so important to your overall wealth picture. By hitching your own financial horse to the unstoppable China wagon train, you can put the odds squarely on the winning side of history.

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