At the end of 2010, the Chinese economy was worth around $5.8 trillion compared to $5.474 trillion for Japan at the same time.

The Chinese economy has enjoyed strong growth recently, particularly in manufacturing. This contrasts with Japan where a drop in exports and consumer demand has hit the economy hard.

Economists are now forecasting that China will move into the top spot ahead of the US in about a decade.

In dollar terms, the US economy is currently around three times to the size of the Chinese economy. Moving into first place in ten years time will require continued strong economic growth from China during this time.

By way of comparison, the UK economy is the world’s sixth largest.

Of course a booming Chinese economy could be good news for Japan. China is the main trading partner for Japan, so a stronger economy in China should result in greater demand for Japanese goods and services.

Photo credit: Flickr/Philip Jägenstedt

This move pushes Japan into third place, and will raise some eyebrows across the pond in the US, where they will now be considering the long-term viability of their position as global economic leaders.

If China is able to sustain its current rate of economic growth, at just over 10% in the second quarter of 2010, then it would overtake the United States some time in the mid-2020s.

Nathan Gibbs, a fund manager at Schroders, has written an interesting article examining this potentially historic moment. He comments that, whilst huge, the Chinese economy remains incredibly inefficient. Wealth in China is unevenly distributed, and with a population ten times the size of Japan, it would be expected to have a much larger economy.

For China to maintain its current pace of growth seems highly unlikely. Even if this were possible, it would still take 25 years to match the level of GDP per person in Japan.

Gibbs also points out that growth in the Chinese economy represents a big opportunity for Japan, in fact for the entire Asian region. As the economic growth in China moves from capital investment to personal consumption, trade partners such as Japan should benefit from continued growth.

The Chinese growth story remains a component of the investment models we recommend to clients, with exposure via Asia Pacific Equity and Emerging Market Equity funds. It is important to remember that economic growth does not always directly translate into investment returns.

With the Chinese New Year approaching, investment managers have lined up to share their views on this investment sector in 2010.

Richard Wong, manager of the HSBC GIF Chinese Equity fund, believes that domestic consumption will remain a key driver for the Chinese economy this year. He beleives that despite the 60% rally, in US dollar terms, in 2009, the Chinese stockmarket has further to grow in 2010.

Wong notes that H shares and red chips (ie China companies listed in Hong Kong) are trading at around 13.5x forecast 2010 price-to-earnings ratio and offering a projected earnings growth of about 20% for this year. Prospects for economic growth also remains strong, with Wong predicting more than 8% GDP growth in 2010.

Gigi Chan, manager of the Threadneedle China Opportunities Fund, thinks that investors need to treat China in much the same way as they would treat a real tiger, with awe and fear.

The awe factor comes from the robust economic growth being generated in China, which has the capacity to drive profits in a range of markets and sectors. At the same time, China is in the vanguard of the coming wave of global policy tightening and, as such, the Chinese authorities currently embody the fear of policy error that looks set to haunt markets this year.

With the launch of Anthony Bolton’s much heralded new Fidelity China Special Situations fund set for later this month, China is likely to remain in the investment spotlight for the foreseeable future.

Should the Year of the Tiger, prospects for economic growth and the return of Anthony Bolton to fund management encourage investors to embrace China within their portfolio?

Investors should always take care to avoid investing purely because of opportunities for economic growth in a region, or the return of a previously winning fund manager. Investment decisions should be made for the longer term and be clearly linked to financial planning objectives.

These shorter term factors might influence small tactical adjustments to overall portfolios, but making significant sector bets is as risky as climbing into the tiger’s cage.

Bolton, arguably one of the most successful investors of his generation, will be relocating to Hong Kong to manage a new China fund for Fidelity. The new fund will invest in China and China-related opportunities. It is likely to be launched at the end of the first quarter next year.

Anthony Bolton has an awesome reputation.

As manager of the Fidelity Special Situations Fund for 28 years, he achieved an annualised return of 19.5% (compared to 13.5% for the FTSE All-Share Index). This means he turned £1,000 invested in 1979 into £148,200 by the end of 2007.

He picked up a reputation as a ‘quiet assassin’ after flexing his muscles as a major shareholder in Carlton and Granada, resulting in the removal of flamboyant chairman Michael Green.

In launching this new fund, we believe that Fidelity could face two challenges.

Firstly, whilst there is undoubtedly a strong growth story relating to the Chinese economy, actually getting access to this by investing in Chinese companies has been difficult. By extending the remit of this fund to include China-related opportunities, Bolton will not be restricted to investing solely in Chinese companies.

Secondly, there is a danger that investors will follow Bolton blindly into any new fund, regardless of their tolerance to investment risk. UK Special Situations is a risky asset class but Chinese equities are even higher risk. Fidelity might consider placing a higher than average minimum investment requirement on this fund for retail investors for this very reason.