China's market value overtakes Japan as world's No. 2

"We share concerns that the corporate earnings recovery is not going to be very strong," Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas said in an interview with Bloomberg Television today. Some Chinese shares have soared by "1,000 percent from the bottom, so they're pricing in a very strong rebound in earnings," he said.

In Japan, nagging deflation and an aging population have sapped strength from what was once the world's largest market by capitalization. During the 1990s, Japan spent 135 trillion yen on 10 economic stimulus plans and lowered interest rates to zero, none of which succeeded in promoting sustainable growth.

Japan's economy shrank at a 14.2 percent annual rate in the first quarter, the most since data began in 1955. The country's gross domestic output will shrink 3.4 percent in the year ending March 2010, the central bank predicted. The contraction coincided with a drop to a more-than 25-year low by the Topix index.

Japan's Problems

"Japan has two main problems; the enormous public debt handicaps the government's ability to spend additional money to boost the economy and we are too reliant on exports," said Takashi Kamiya, chief economist at T&D Asset Management Co. in Tokyo, which helps oversee some US$16 billion. "There's no way to expect the emergence of a domestic growth driver that can propel us out of this funk."

Chinese companies account for four of the 10 biggest companies when measured by market value, according to Bloomberg data. Toyota Motor Corp. is the top-ranked Japanese company, at 25th, worth about one third the capitalization of PetroChina Co., the world No. 1.

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