Go East, Young Man and Woman

12/01/2009 12:20 pm EST

Focus: ETFS

Jon Markman

Editor, Trader's Advantage

Jon Markman, contributor to MSN Money, says a recent report by Goldman Sachs shows how far and how fast China has come, and how far it could go.

Jim O'Neill, the Goldman Sachs supereconomist who's credited with coming up with the "BRIC" sobriquet for the key emerging markets of Brazil, Russia, India, and China eight years ago, released a private report to clients [recently] that outlines the stunning pace of transformation in these countries.

Even veteran observers were surprised by his conclusion that China's economy is on track to almost double that of the United States by 2050, at around $70 trillion in gross domestic product (GDP).

O'Neill figures the US economy will have grown to only $40 trillion by then, from $14 trillion today. Trailing after us, not by much, he figures, will be India, at $35 trillion, the European Union at $25 trillion and Brazil at $15 trillion. As a result, two billion people are expected to join the global middle class by 2030, or around 25% of the world's population. Chinese GDP has already grown by $3 trillion since 2001—the equivalent of seven years of India's GDP, three of Italy's and two of France's, and of one-third of the United States' output.

To get to the next level, it needs to grow by 10% annually to around $21 trillion. Because some of that can be accomplished with currency appreciation, China needs only about 6% annual growth to get there.

How is this kind of incredible growth possible? O'Neill says it can happen because the global credit crisis took them off "the drug" of a reliance on exports. In discovering domestic demand for cars, consumer goods, real estate, and the like, China is weaning itself off the need for a robust Western economy to sell into. Since January 2007, US and Chinese retail sales have gone in opposite directions, with the former down $40 billion and the latter up $60 billion, according to Goldman data.

O'Neill's analysis suggests China will grow 7.7% annualized from 2011 through 2020, versus 6.4% for India, 4.5% for Brazil, and 2.1% for the United States. In the subsequent ten years, from 2021 to 2030, he expects China to fall behind India, with a growth rate of 5.5% versus 6.4%.

In the past ten years, these trends were quietly brewing and easy to mock as overly optimistic, but the break in the Western economies has changed all that. Both investors and individuals will now be judged on how well they adapt.

The best way for investors to participate is through judicious use of exchange traded funds, such as Vanguard Emerging Markets Stock (NYSEArca: VWO). Although the most popular exchange traded fund focused on emerging markets is iShares Emerging Markets (NYSEArca: EEM), I prefer the virtually identical Vanguard fund (VWO) because of its lower cost.

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