China and Russia: 2 Giant BRICs in the Economic Growth Wall

China just overtook Japan as the world’s second largest economy, according to an estimate by Japan’s own government. Japanese GDP shrank at an annualized 1.1% during the last quarter of 2010.

Remember Japan Inc.? How the Japanese were buying up Rockefeller Center and would soon own the world? Funny how things change in a little over 20 years…

China Becomes the World's Second Largest Economy

The curious thing is that according to a Gallup poll out this morning, 52% of Americans mistakenly believe China is already the world’s biggest economy.

Fact is, the International Monetary Fund says China’s $5.75 trillion GDP is still just 40% of the United States’ $14.62 trillion. But perhaps the poll tells us that on a gut level, a majority of Americans realize they’re living on borrowed prosperity…while the Chinese build up an immense reserve of savings.

In another emerging market, the billionaires are back. Finans, one of Russia’s leading business magazines, counts a record 114 Russian billionaires, measured in US dollars, as of year-end 2010.

Steel tycoons dominate the top of the list. No. 1 is Vladimir Lisin, chairman of NLMK Steel.

The new total surpasses the previous record of 101 in 2007. And it’s a remarkable comeback considering how the number collapsed to just 49 in 2008; Russia’s high rollers were insanely leveraged.

“In the wake of Russia’s financial crisis in 2008 and given all that we know about the problems in Russia,” writes Chris Mayer, editor of Mayer’s Special Situations, “I think most investors then would not have given the country much of a chance.

“If we had to pick then which of the BRICS – Brazil, Russia, India and China – would have had the best decade, I don’t think many people would’ve picked Russia. In fact, the casual investor today asked the same question about which one did best in the decade 2000-2010 would probably pick anyone but Russia.

“Yet Russia was the best by far.”

World Stock Market Returns, 2000-2010

True, natural resources performed well during the decade, and Russia has a lot of them – a quarter of the world’s natural gas reserves, 15% of the coal reserves, 15% of the coal, and 20% of the nickel.

But there’s more to the story. “Russia also has the advantage of having less debt relative to the size of its economy than its BRIC peers,” Chris continues. “And it’s a growing consumer market.

“Russia is also General Motor’s No.1 market worldwide in terms of market share and profit. Coca-Cola recently announced sales rose 31% in Russia. Its Russian division makes three times the profit of its Chinese unit on one-third of the sales.

“I’ve driven home this point in many different ways in the past,” Chris concludes, “but it’s worth saying again: The world is shifting. The world’s markets are becoming less and less of a US-centric story.

“Last week, we had news that a German firm may buy the New York Stock Exchange. An iconic American institution could well be in foreign hands soon. It’s the kind of world we live in. We don’t have to like it, but as investors, we should accept it and try to take advantage of it.”

Dave Gonigam
for The Daily Reckoning