Why China Topping the U.S. is Good News for the Dow Jones Industrials

Chinese economic supremacy was inevitable, but the stocks in the Dow will find ways to profit.

Dan Caplinger
Dan Caplinger
Apr 30, 2014 at 11:00AM

The Dow Jones Industrials (DJINDICES:^DJI) continued their upward trajectory in early trading Wednesday, up 15 points as of 12:38 p.m. EDT. Investors were initially uncertain about the impact of U.S. gross domestic product data that was far weaker than expected, with a tough winter contributing to sluggishness in the economy. In addition, a report from the World Bank focused on the upward trend of China's economy growing to surpass the U.S. as the world's biggest economic power. But for long-term investors, the rise of China's economy should come as no surprise. In fact, it should create optimism about the prospects for Caterpillar (NYSE:CAT), Boeing (NYSE:BA), McDonald's (NYSE:MCD), and the many other companies both within the Dow and beyond that stand to profit from Chinese growth.

Photo credit: Flickr/Thomas sauzedde.

What the World Bank said
When you look at GDP figures based on prevailing currency exchange rates, the Chinese economy still has years to go before it will catch up with and surpass the size of the U.S. economy. But the World Bank report argued that when you look at actual currency purchasing power rather than nominal exchange rates, the Chinese economy was within 13% of the U.S. economy three years ago. Based on the faster growth rates that China has posted in the ensuing three years, its economy would be poised to pass the U.S. this year in terms of purchasing power.

Investors have long realized that a country with a population more than four times that of the U.S. would eventually pass it up in terms of raw economic size. But the more important issue is whether Beijing will fully engage with the global economy, or whether it will use protectionist measures and other tactics to benefit its domestic businesses over international companies seeking to enter the lucrative Chinese market.

So far, we've seen mixed results from China. On one hand, Chinese companies in many key industries, such as solar energy and base-metal mining, have ramped up production to the point that some counties have responded with allegations of improper trade practices and retaliatory measures such as tariffs. On the other hand, top U.S. brands such as McDonald's and KFC have had great success in penetrating the Chinese market, and despite short-term scares, prospects for top global brands in the China look strong in the long run.

For companies in the Dow Jones Industrials, the opportunities for further growth in China are extraordinary. Even once it becomes the globe's top economy, China will still have a per-capita GDP less than 25% that of the U.S., and that leaves plenty of room for further growth. The rise in demand for raw materials will bolster mining companies, and the need for greater construction and infrastructure will lead to a turnaround for Caterpillar and its sales of heavy equipment. A rising middle class will have all sorts of positive economic impacts, raising demand for everything from Boeing aircraft to U.S.-supplied entertainment. The huge investments that U.S. companies have made in creating powerful brands worldwide will pay off as Chinese consumers set goals for improving their standard of living and can spend more in order to achieve those goals.

Those with nationalist tendencies will mourn the passing of the U.S.' reign atop the global economy. But the U.S. stocks in the Dow Jones Industrials will have ample opportunity to participate in China's rise in coming decades.