The World Bank now estimates that China will grow 8.4% in 2009, up from its June forecast of 7.2% growth. Like the U.S., China embarked on a large fiscal stimulus program, one that relative to the size of its economy is more than three times as large as the American Reinvestment and Recovery Act was.

Well, surprise, surprise — a bigger package has been more effective than a smaller one at lifting economic growth. China, of course, is in a better fiscal position to invest in its economy than the U.S. That is a legacy of the years of fiscal mismanagement in the U.S. going into the crisis, and the fact that China perpetually runs large trade surpluses while the U.S. runs chronic trade deficits.

For 2010, as some of the stimulus in China wears off — but as the private economy there regains its footing — growth of 8.7% is forecast for China by the World Bank. While this is down from the double-digit growth rates that China was running before the world economy went off the rails, relative to the rest of the world, China’s out-performance has stayed about the same.

That means that the financial crisis has not slowed China’s ascendency as a world economic power. It is currently the third largest economy in the world, and it will only be a few more years before it passes Japan to move into second place.

Based on the pace of quarterly improvement so far this year, the 8.7% growth rate for 2010 looks very conservative to me. In the first quarter, China grew at a 6.1% rate, then accelerated to 7.9% in the second quarter and to 8.9% for the third quarter. To reach the 8.4% level for all of 2009 implies a growth rate of over 10.5% in the fourth quarter.

That would imply that on a quarterly basis that growth starts to slow significantly in 2010 for China. That seems unlikely to me as its exports should pick up as the rest of the world starts to recover.

The long-term key for China is to generate more consumer demand at home so it is not forever dependent on exports to fuel its growth. This is the mirror image of what the U.S. needs. We cannot forever run trade deficits, consuming more from the rest of the world than we produce.

It is the trade deficit that drives the expansion of U.S. debt held by China, not our fiscal deficit. Remember that point, it is an important one — and one that the vast majority of talking heads on TV just don’t seem to get. Of course, each country’s exports are another country’s imports, and for every trade surplus, there must be an offsetting trade deficit somewhere else in the world.

So far it has been a pretty sweet deal for the U.S.: we get all the goods that fill the shelves of Wal-Mart (WMT) and Target (TGT), and they get little green pieces of paper. Recently those little green pieces of paper have been going down in value. How much longer does China want to send us real useful stuff in return for those pieces of paper (or, more accurately, little blips inside of computers)?

They have done so thus far because along with the paper, making that stuff they send abroad (actually, they export more to Europe than they do to the U.S.) creates jobs, and China needs jobs for social stability. However, so does the U.S., as our unemployment rate approaches 10%.

The deal is getting progressively less sweet for both sides as the dollars keep on piling up in Beijing. The solution over the long term is for China’s 1.3 billion people, the majority of whom still live in poverty, to start to consume more. If that can be accomplished, then Chinese society will be more stable, it will be able to maintain its employment levels and the U.S. might actually start to add a few jobs.

This would also greatly benefit the millions of smaller non-state-owned firms in China. The best way to play that trend is in the Claymore China Small Cap ETF (HAO), which has by far the largest exposure to the Chinese consumer of any of the China ETF’s. Buying individual stocks that are direct plays on the Chinese consumer is a risky proposition and is probably best left to those who can both read Mandarin and decipher financial statements written in it.

While China’s market has done well so far this year, so have most emerging markets. However, the economies of most emerging markets have not come close to matching the performance of the Chinese economy.

Underpinned by the strength in China, and rapidly growing inter region trade, the World Bank sees all of East Asia growing at a 6.7% rate in 2009, up from 5.3% growth seen back in April. Since Japan’s growth is likely to be rather sluggish (but also improving), that implies solid growth for the rest of the region. As the auto sales numbers yesterday showed, the Korean auto industry is not exactly hurting that much anymore.

In short, there are better places in the world to invest than in the U.S., and most U.S. investors are still far too heavily weighted towards domestic investments. However, you don’t just have to buy ADR’s or ETF’s to have international exposure. U.S. companies that get a high proportion of their sales from Asia will also probably benefit from the growth there. Coca-Cola (KO) would be a good example to take a well-known name. Aflac (AFL) is another, although for them the revenues come from Japan, not China.
Read the full analyst report on “WMT”
Read the full analyst report on “TGT”
Read the full analyst report on “HAO”
Read the full analyst report on “KO”
Read the full analyst report on “AFL”
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