Hamish McRae: Renaissance of China and India is the renewal of an old relationship

It is not possible to 'call' which model, China or India, will prove more successful in the next decade

So China did indeed pass the UK and France last year to become the world's fourth-largest economy.

Of itself, that fact is not particularly important. It was inevitable that if China grew at nearly 10 per cent a year and the UK was growing at an average 2.5 per cent, sooner or later China would pass it. On present trends China will pass Germany in about 2008 and Japan around 2015 to become second only to the US in terms of size.

What is astounding is how recent the progress has been, for 20 years ago its GDP was a few hundred dollars a head and was actually lower than that of the other giant, India. That leads into what seems to me to be the more interesting aspect of the debate: which of those two great nations will perform best over the next generation: China or India?

Sometimes it is easiest to look forward by first going back. The first graph shows the global pecking order before the Industrial Revolution had taken off. It was a world dominated by China and India. Britain was the world's fourth-largest economy, the same ranking as it was in 2004. But the economic performance of the two giants was so poor that by the 1970s their GDP per head was below that of Africa. So the renaissance is on the one hand very new but on the other merely a re-establishment of an ancient relationship.

The second graph shows the Goldman Sachs projections for 2025. These come from the famous Brics (Brazil, Russia, India, China) exercise of a couple of years ago and revised last month. The Goldman team created a computer model with inputs including population changes, technology transfer, exchange-rate adjustments and so on and then compared the possible performance of the Brics with that of the G7 over the next half century. Intriguingly the revised data shows the Brics performing even better than they appeared to be likely to do two years earlier.

For most of the past few years the eye of the business world was on China. Most recently, though, the focus has shifted to India.

There are a number of reasons why this should have happened. Most obviously, the Indian rate of growth has picked up. It is now about 8 per cent, a little below that of China but of course very fast by the standards of the developed world. Demographic projections are also more favourable, for while India's workforce will grow for the foreseeable future, China's will start to shrink within the next five years.

Both countries have followed a completely different economic model: China by encouraging inward investment and by piling into infrastructural projects; India by domestic companies exploiting market opportunities at home and abroad. China has certainly attracted much more investment (see next graph) but arguably has over-invested in infrastructure with the result that the state-owned banks have huge unserviced debts.

From the outsider's point of view there has been a shift in perception. That may simply be a reflection of the much better performance of the two countries' stock markets (see graph) but that performance in turn reflects where it is easier to make money.

China is increasingly perceived as a difficult place in which to do business, for intellectual property is not protected, so any Western company manufacturing there is likely to find local imitations reaching the market. There are also sometimes political restrictions which you have to accept if you want to do business there - as Google has determined.

Indian business and foreign businesses operating in India still face huge difficulties, including poor infrastructure, but the domestic business community has recently become vastly more self-confident. It is starting to eye the world for businesses to snap up.

I don't think it is possible to "call" which model will prove more successful in the next decade. In all probability both will, though I would expect the growth crown will gradually pass towards India. Two things we can be pretty sure about: both countries will continue to become vastly more important in economic terms; the other, that each will suffer setbacks - economic, environmental and political.

From the point of view of the West, what matters most is how these two economies will deploy their power. How, as they grow in size, will they use their economic might on the world scene?

Of course any attempt at an answer must be guesswork but there are some clues. In the case of China we have already seen two things. One has been the use of intervention in the foreign exchanges to hold down the exchange rate of the yuan. The currency peg has been loosened but despite that, the yuan remains very undervalued. China has piled up international currency reserves, in effect lending the US much of the money to buy its goods. That is not sustainable for ever but it does show how determined the country will be in following what it thinks of as its national advantage.

The other has been the effort to buy up natural resources, doing deals with oil-rich regimes and attempting to buy Unocal, a Californian independent oil company. It was rebuffed in the latter but expect it to be back.

In the case of India, we are just getting the first signs in the UK of its giant companies buying overseas businesses: last year Premier Foods sold its tea business, including the Typhoo brand, to Apeejay Surrendra. It is early days but I would expect Indian companies not only to become one of the main foreign buyers of US and UK companies but also for Indian funds to become successful portfolio investors in the developed world.

In short, expect China to follow the Japanese model of international investment: hold down the currency and when exports start to meet political resistance, build local plants in the importing countries. Will they make Japan's mistake of overpaying for prestige projects? Not sure, but it is an obvious pitfall.

As for India, I expect its international investment model will be more akin to the British one. It will be driven by the private sector, not the state. And like the UK's portfolio of investments India's will be almost invisible - how many people knew that Hilton Hotels outside the US were British, not American, until the gaming business, Ladbrokes, decided to sell it to the US company? Expect India gradually to build up overseas assets, but these will be driven by corporate profit opportunities, not national strategic aims.

If this is right, India will be the easier partner to deal with in the years ahead. But of course Japan has become an easier partner as the years have gone by, for example, teaching the host nations a lot about factory management, so we should not assume Chinese businesses will be difficult partners. The efforts to get something going again out of the ashes of MG Rover may fail but that is not really a fair test. Were Britain wise, we would aim to get mainstream Chinese car manufacturers to make the UK their primary production centre when they start building in Europe.

The big point is that the UK, just like every other developed nation, will have to accommodate the desires of the two new giants. This is a completely different from anything in the past 200 years. If the symbolic overtaking of the UK economy by the Chinese one persuades us to regard China and India with a new sense of respect, then that is all to the good.