The Power of Slow Change: The China-Emerging Market Story

We learned yesterday that China has surpassed Japan as the second largest economy in the world.

But this isn’t much news to us since, as an example of the power of slow change, China has been creeping towards economic outperformance in many areas such as banking (see our 2009 post A Tectonic Shift In The Global Banking Industry!) to finally catch up with OECD nations.

Nevertheless this has been a dead giveaway—as manifested in the markets for a long time. All that is needed is to open one’s eyes to see this coming.

China’s stock market performance today isn’t at all sterling. It’s been in consolidation after the boom bust cycle of 2008.

Chart from Bloomberg

Year to date China is way down about 19%.

However over the past years, China’s gains have basically outclassed the OECD economies, even if her stock market has stagnated. Of course, most of the world followed a similar boom bust dynamic, including the Philippines.

Yet, Bespoke Invest has a great presentation of this massive paradigm shift.

Bespoke writes,

Japan's stock market capitalization is currently 7.97% of world market cap. China ranks second at 6.89%. Five years ago, Japan accounted for 10.34% of world market cap, while China accounted for just 1.10%. Back in 2005, China ranked just 17th in terms of market cap, behind countries like Saudi Arabia, Spain, Switzerland, South Korea, Taiwan, India, and the Netherlands. Now with the world's second biggest economy and third biggest stock market, it's hard to classify China as an emerging market, but it is indeed still emerging in terms of growth.

The context has to be seen in the light NOT confined to China, as the gains have been made mostly by Asia and emerging market economies.

Instead, what you are seeing is a paradigm shift of growth mostly away from developed economies to emerging markets.

No, this isn’t about cheap labor.

This is about a menagerie of factors as demographics, savings, debt burdens, urbanization and etc... all founded upon the foundations of deepening of free trade, economic freedom and globalization.

So the China-powered emerging market growth story seen in the stock market and economic performances merely epitomizes this power of slow change.

Unless there would be structural political-economic factors that would reverse engineer globalization, I won’t dare bet against this paradigm shift.