As a result, the penetration ratios of items in most goods sectors have exceeded 60% of the global average - note that China's per capita income is about 60% of the global average (see Figure 28). The penetration of many goods sectors, such as fixed-line phones, homes, color TVs and Internet connections, has exceeded 100% of the global average. In contrast, the penetration rates of many services including health care, software, insurance, tourism, IT services, and branded property agencies are significantly below the global average (averaging just 20% of the global penetration).

The S curve theory of consumption tells us that products or services that are of very low penetration are poised to grow at a significantly faster pace than those of higher penetration. In other words, the consumption of services in China will generally outpace the consumption of goods in the coming decade.

In addition, China's service sector is underdeveloped (or underpenetrated) compared with countries with a similar per capita GDP level, and thus it will need to "catch up". We estimate that China's per capita GDP reached US$4,300 in 2010 and will rise to US$5,000 by 2012. Figure 29 shows a non-linear positive relationship between per capita GDP and the ratio of service sector output in GDP, based on data of about 100 countries. This crosscountry analysis shows that when per capita GDP reaches US$4,300 (China's level this year), the service sector as a percentage of GDP should be around 55%, vs. China' actual of 44%.

Eoin Treacy's view Many Western commentators tend to view China as a threat and therefore often ignore the massive evolution in the country's economy that continues at an impressive rate. While the bank, real estate and exporter dominated A-Share market ranged for much of the last year, consumer related sectors kept pace with some of 2010's best global performers.

As per capita income rises, goods and services such as healthcare, tourism, luxury accessories, cosmetics, technology and art among others suddenly come within reach of a substantially larger group of people, spurring demand. I believe it is reasonable to expect that these sectors have a great deal of growth potential in China.

Forward looking analysts focus on where China's growth is going to take it next. They point to the Healthcare sector and the Shenzhen B Shares as an example of China's vibrant growth. Those with a less than optimistic opinion focus on the challenges that remain from overbuilding, excess credit creation and rising inflationary problems. They point to the Shanghai A-Shares as an example of the country's challenges.

As the above charts demonstrate, it has not paid to have an overly simplistic view of China's potential. While the country has significant challenges ahead, they are not more daunting that those facing other economies and are surmountable