Will China overtake the US?

When Will China Overtake The US As The World’s Top Economy?

US flag via Wikipedia. The Chinese symbols mean “renminbi,” the official name of the country’s currency.

By some measurements, China will overtake the US economy by the end of 2014 – but that number doesn’t tell the whole story.

  • Average Chinese economic growth rate: 10.4% annually since 1980
  • GDP may* overtake the US’ $17 trillion by 2014
  • China’s economy is still developing – but the pace is slowing down

China’s amazing economic growth rate have led many to fear that this nation of 1.3 billion people is about to eclipse the US (pop.: 313 million).

In fact, 49% of US citizens believe that China already has or will replace the US as the world’s leading superpower, according to Pew Research.

When will China actually overtake the US as the world’s top economic power?

*That depends on how you measure it.

A recent estimate from the World Bank seems to put it in clear terms: By the end of 2014, the size of the Chinese Gross Domestic Product (GDP) will exceed the US, based on re-assessed purchasing power parity (PPP) statistics.

GDP measures the value of goods and services a nation produces in a year. When it’s adjusted for PPP, however, it takes into account how much money is required to buy the same goods and services in two different nations, at a theoretical exchange rate.

Many believe that the Chinese yuan is undervalued – which would mean that its purchasing power is actually higher than the official, government-determined exchange rate says.

In other words, when valued at PPP, the GDP is almost as high as the US, the World Bank estimates. And even using official statistics, China is set to overtake the US by around 2019, The Economist estimates.

When measured as the standard nominal GDP, though, China’s output is only about half of the US:

Per capita GDP, meaning that it’s divided by population count, shows an even starker contrast – the US ranks 10th, while China is 72nd, according to the World Bank:

Even these numbers aren’t set in stone.

Li Keqiang, the premier of China, told an American ambassador in 2007 that the country’s GDP figures were “man-made,” in other words, unreliable, according to a leaked cable posted on Wikileaks.

The nation has been frequently accused of “GDP worship,” obsessed with reaching an arbitrary number each year, even if that means fudging statistics.

In addition to that, PPP numbers are based on hypothetical scenarios measuring the price of a “basket of goods.” The World Bank’s 2014 figure for when China will overtake the US comes with a hefty 15% margin of error.

Growth is also slowing.

The Chinese economy is now dealing with a range of issues, including rising labor costs, rampant debt after a binge of cheap credit, and a $6 trillion, unregulated shadow banking industry.

Some think China will benefit from slowing down from the previously breakneck speed, whereas others are warning it to avoid the “middle-income” trap of stagnant growth.

It seems clear that a nation of 1.3 billion people will eventually overtake any smaller states – but it may be too early to declare that yet.

The takeaway:

  • The Chinese economy grew rapidly the last three decades
  • China’s GDP may overtake the US in 2014, but only by certain measurements
  • Growth is slowing down as labor and credit become less cheap
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Ole Skaar