Despite recent slowdowns, the Chinese economy continues to grow at a rate higher than the United States has achieved in many years. If this growth continues, the Chinese economy could soon overtake the United States. But when? And what obstacles remain for China on the path to the top spot?
When will China overtake the United States?
Estimates vary on exactly when China will overtake the U.S. Much of the confusion centres on different ways of computing GDP and differing estimates of growth, not to mention disagreements over how much trust to place in the growth figures put forth by the Chinese government and local administrative regions.
According to the Economist Intelligence Unit, China’s nominal GDP will surpass the U.S. in 2026. For some long-term projecting, by 2050 China is expected to have a GDP of over $105 trillion, while the U.S. will trail in second at roughly $71 trillion, followed closely by India in third at just under $64 trillion.
However, when GDP is calculated by purchasing power parity (PPP) (adjusting for the relative costs of goods within a nation’s borders), the picture is much different. A simplified way of looking at PPP is to consider that most transactions happen within nations. So, while the U.S. dollar may have a higher value than the Chinese Yuan – and thus expand America’s GDP number in comparison – when GDP is adjusted for how much somebody could buy within their own country with their nation’s currency, the numbers change.
WATCH: Purchasing Power Parity Explained
According to an IMF calculation of purchasing power parity, China became the world’s largest economy in 2014. While there is no doubt China is catching up, most analyses still put China behind the U.S. for the time being.
The Economist predicts China will catch up in 2017 based on purchasing power parity
In contrast to their projection of China overtaking the U.S. economy in 2026 – when measuring nominal GDP, the Economist estimates China will be in the top spot by 2017 when looking at PPP, a prediction almost shared by the Conference Board, who predict China will be number one by 2018.
What will happen when China overtakes the U.S.?
There won’t be celebrations – or mourning – since there will still be debate over whether it has really happened. In reality, the transition will be slow and without much fanfare, as over time the number of people who see the U.S. as the top economy will slowly dwindle, while those who believe China is in the top spot will rise.
If the United States can resist giving in to fear of China’s rising economy, there will be economic opportunities that could benefit the citizens of both nations, and the world.
And yet, because of two big problems, China’s continued rise is not inevitable
China has a big debt problem
Debt is China’s first big problem. At the outset, China’s national debt doesn’t seem that bad. Their national debt to GDP ratio is just under 47%, well within the sustainable range.
However, as Christopher Balding wrote in Bloomberg, China’s real debt is much worse. Since over 80% of China’s debt is at the local government level, national statistics vastly understate the true extent of the problem. And many of those local governments push their debts off the books, so it’s even worse. Says Balding, “If China’s credit can’t expand forever, it must stop — either by choice or by force.”
As we saw in the 2008 financial crisis, debt can bring economies down quickly, and the hangover from a debt-binge is rough. If China runs into a serious debt crisis, it will come at a very bad time, because of the second big problem facing their economy and society.
China is aging rapidly
Could China get old before it gets rich? It’s possible. The one child policy – since loosened up – and the lack of immigration to China, has put the nation on a collision course with demographic disaster. A great article by Howard W. French in The Atlantic titled China’s Twilight Years is full of evidence demonstrating the severe challenges facing China:
“By the end of the century, China’s population is projected to dip below 1 billion for the first time since 1980,” Writes French. “At the same time, America’s population is expected to hit 450 million. Which is to say, China’s population will go from roughly four and a half times as large as America’s to scarcely more than twice its size.”
As time goes on, America’s workforce will be growing, while China’s will be shrinking. This comes down to immigration. Even as America ages, they are constantly replenishing their economy with young workers, keeping their worker-senior ratio at a manageable level. China by contrast is closed to immigration, meaning they can’t replace their workers as they get older. They will be left with a smaller and smaller group of workers paying for a larger and larger group of retirees.
America’s saving grace as the world’s economic superpower could very well be immigration. Political candidates, take note.
What does the future hold for the Chinese and American economies?
As Yogi Berra said, it’s “It’s tough to make predictions, especially about the future.” And predicting the future of large global economies is not easy.
While China is on the path to number one, a debt crisis could throw the country into recession and stagnation. Conversely, America could lose its demographic advantages by restricting immigration. India – combining growth, a young population, and relative political diversity, could vault ahead of both the United States and China.
Facing this unpredictability, the best we can do is look at trends. And according to the trends, the answer to whether China will overtake the United States is “yes.” And it should happen sometime between now and 2026. Aside from that, we’ll have to wait and see.
Read more about when – or if – China will overtake the U.S.
Follow Spencer Fernando on Twitter: @SpencerFernando
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