You have seven years to learn Mandarin - Apr.

30, 2008

April 30, 2008: 5:41 AM EDT

You have 7 years to learn Mandarin

Forget cheap imports. China's rise will soon be a force on
Wall Street and Main Street and in Silicon Valley.

(Fortune Magazine) -- Back in 2001 when the International Olympic Committee chose Beijing as the site of this summer's games, the
event was meant to mark China's debut as a player on the global economic stage. But a recent study by the economist Angus
Maddison projects that China will become the world's dominant economic superpower much sooner than expected - not in 2050, but in
2015.

While short-term investors are already cashing in on China's growth by playing the global commodities boom, smart long-term
thinkers are contemplating what happens when China matures from an exporter of cheap goods to a competitor in sectors where the
U.S. is dominant - technology, brand building, finance. China has almost wiped U.S. makers of low-value items like toys and socks,
but by 2015 it may threaten Apple (AAPL, Fortune 500), J.P. Morgan Chase (JPM, Fortune 500), and Procter & Gamble (PG, Fortune

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You have seven years to learn Mandarin - Apr. 30, 2008

500). It
will increasingly influence the S&P 500 and the mutual funds in our 401(k)s. So it's worth looking at how that will happen, what it
means, and what anyone can do in the seven years before the baton is passed.

Just using the exchange rate to convert China's GDP into dollars isn't helpful in comparing the two economies, because China controls
its exchange rate; by that method, China's economy might not pass America's for decades. Exchange rates apply only to tradable
products and services; they aren't very useful in valuing nontradable goods in a country like China that is much poorer than the
United States. So we need some way to compare the real value of China's economic output with America's, and economists have
developed one. It is called purchasing power parity.

For example, Chinese construction workers earn a whole lot less than Americans do, yet they can still build top-quality buildings. If we
used the exchange rate, the value of a new skyscraper in Shanghai would count much less toward China's GDP than an identical
building in Chicago would count toward America's, which makes no sense. Purchasing power parity corrects the problem.

Will China take the crown?

Angus Maddison's forecast (which uses purchasing power parity) isn't built on outlandish assumptions. He assumes China's growth
will slow way down year by year, and America's will average about 2.6% annually, which seems reasonable. But because China has
grown so stupendously during the past decade, it should still be able to take the crown in just seven more years.

If that happens, America will close out a 125-year run as the No. 1 economy. We assumed the title in 1890 from - guess who.
Britain? France? No. The world's largest economy until 1890 was China's. That's why Maddison says he expects China to "resume its
natural role as the world's largest economy by 2015." That scenario makes sense.

China was the largest economy for centuries because everyone had the same type of economy - subsistence - and so the country with
the most people would be economically biggest. Then the Industrial Revolution sent the West on a more prosperous path. Now the
world is returning to a common economy, this time technology- and information-based, so once again population triumphs.

So how should we make the most of our seven-year grace period? For companies: Focus on getting better at your highest-value
activities. Just because the Chinese will be fighting you in the same industries doesn't mean you'll lose. (Investors, remember that
China bought $3 billion of Blackstone (BX) at the IPO price of $31 last summer, and the firm is now trading at $19.) It only means
you'll have to work harder to win.

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