China will become the world’s largest economy (projections range from
2025 to 2030), and in 2050, it will command 23 percent of the world’s out-
put, equal to the combined production of the United States, Western Eu-
rope, and Japan. India will not be far behind with an economic share of
15 percent, and India and China will be producing more than one-third
of the world’s output.
Although the overall economy of China will eclipse that of the
West, this does not mean that the average Chinese worker will be better
off than the average European, Japanese, or American. China’s popula-
tion is projected to be about 3^1 ⁄ 2 times that of the United States, and its per
capita incomeat about one-half that level. If Chinese productivity growth
exceeds expectations and per capita income rises to 60 percent of the U.S.
level, China’s GDP will increase to over 25 percent of the world total.
The astounding rise of China and India will bring the distribution
of output more in line with the distribution of population. It has been
estimated by economic historians that in the seventeenth and eigh-
teenth centuries, the combined economies of India and China were
about one-third that of the entire world.^14 But for political reasons, both
these giants went into eclipse, while the Industrial Revolution began in
Europe and was exported to the United States. Now India and China
may once again become economic leaders of the twenty-first century.
The radical shift in the distribution of output will also bring about
a redistribution of capital. Based on my analysis of the relation between
the size of a country’s equity markets and its GDP, I was able to project
where the world’s equity capital will be headquartered at midcentury.
The developed world, which now comprises over 90 percent of the
world’s total stock market value, will shrink to slightly more than one-
third. Not only will large amounts of capital be created abroad but, as
noted in the last chapter, Western capital will be sold to the emerging na-
tions in exchange for the goods that aging economies will need.
Investors should be warned that the increase in a country’s share of
world capital shown from Figure 10-1c to Figure 10-5c does not neces-
sarily represent capital appreciation of existing shares. Rather, most of
the increases come from the flotation of new capital as well as the acqui-
sition of old capital. As we learned in the last chapter, economic growth
does not guarantee good returns, and in fact, the evidence indicates that
investors pay too high a price for stocks in fast-growing countries.CHAPTER 10 Global Investing and the Rise of China, India, and the Emerging Markets 181
(^14) Angus Maddison, Chinese Economic Performance in the Long Run, Organisation for Economic and
Co-operation Development, Paris: OECD Development Centre, 1998.