China will become world No 1, it’s a matter of time

PwC says the world’s big three by 2030 will be China, the US and India, in that order.

We have started a new decade, with all the promise it may hold.

The 2010s have come and gone, partly a period of convalescence after the global financial crisis and partly a time of profound political change, which may have further to run. But profound change has been expected for the 2020s, too. Many long-range economic forecasters see this as the decade when China overtakes the US as the world’s biggest economy.

It would be a big moment. Since roughly the 1890s, when it became bigger than any other individual economy, and about 1916, when its economic output exceeded that of the entire British empire, the US has held sway; a century of global economic leadership.

The European Union has come close to rivalling US gross domestic product, but for the moment America reigns supreme — and the EU is about to lose Britain.

The 20th century was thus the American century, implying that this century could easily become China’s.

It is true that on a purchasing power parity, or PPP, basis — adjusting for price variations between countries (lower income countries have lower prices) — China is already ahead of America, by between 10 per cent and 20 per cent, as even the CIA’s World Factbook acknowledges.

Being the world’s biggest economy on a PPP basis is not the same as being top dog. In footballing terms, it is like winning the fair play league; nice, but no silverware.

The passing of the economic baton will properly happen only when China’s GDP, conventionally measured and at market exchange rates, exceeds that of the US.

There is still a way to go for that. According to estimates from the International Monetary Fund, America’s GDP last year was $US21.4 trillion ($31 trillion, while China’s was $US14.1 trillion. America’s economy is more than 50 per cent larger than China’s.

The IMF expects that gap to narrow over the next few years, but to persist. By 2024, the limit of its projections, America’s GDP will be 23 per cent bigger than that of China.

The trend, however, appears inexorable — in 1990, US GDP was 15 times China’s, in 2000, more than eight times, and as recently as 2010, 2½ times.

The question is whether anything can break or slow a trend based on two essential components.

The first is that even a slower-growing China is expanding at least twice as fast as leading western economies, including the US.

The second is its huge population — 1.3 billion — which means that China can be the biggest on a per capita basis without being anything like the richest.

Some are sticking to the view that China will be top dog by the end of the decade.

In a report this week, PwC, the accounting group, highlighted the rise of India, which overtook Britain as the world’s fifth biggest economy last year and is projected to become bigger than Japan and Germany during the 2020s.

The report concludes that the world’s big three by 2030 will be China, the US and India, in that order. Standard Chartered, the London-based international bank, has a similar view.

For others, doubts are starting to creep in.

The Centre for Economics and Business Research, a consultancy, recently released its world league table. It has shifted the point at which China will become the world’s biggest economy to 2033, from an earlier view that it would happen in the 2020s. The trade war with the US — the first serious challenge to China’s rise — has changed the picture.

An even bigger challenge to the inevitability of China’s rise is offered by George Magnus, the China expert and former UBS chief economist.

Magnus, an associate at the University of Oxford’s China Centre and author of Red Flags: Why’s Xi’s China is in Jeopardy, set out his view in a recent London School of Economics paper: China in the 2020s — a more difficult decade?

China, on this view, faces a series of difficult challenges, including demographics — an ageing population means that the question of whether the People’s Republic will grow old before it gets rich is as valid as ever.

Also, since the financial crisis, China has had to “buy” growth with ever-increasing amounts of debt. The “middle-income trap”, where emerging economies fail to develop beyond a certain level of prosperity, may be looming.

As Magnus reminds us, people have got these things wrong before.

In the late 1980s, the question was when Japan would become a bigger economy than America, just before it embarked on its “lost” decades.

“The conventional narrative is that China is, or will, by 2030 be the largest economy in the world,” he writes.

“Based on commonly held expectations historically about Germany, the USSR and Japan, greater humility would not go amiss.

“It is not preordained that past economic trends will continue, especially in view of a much-compromised outlook for both China and the rest of the world in the 2020s.”

Perhaps most telling of all, he argues that if China follows the pattern of other emerging economies, the yuan, its currency, is due for a big fall, of perhaps 20 to 40 per cent, breaking its semi-peg with the dollar.

The effect, he argues, would be to “keep China’s GDP, measured in US dollars, firmly below that of the US ... We should not be surprised, therefore, if China’s GDP relative to the US in five to 10 years is not so different compared with what it is today.”

If China fails to make it as top dog in the 2020s, or even beyond that, there would be a rubbing of hands in satisfaction in America.

Maybe even China would acknowledge that, having failed to fully engage with the world in economic diplomacy and with an economic model in need of reform, it is not ready for global economic leadership.

You would still put money on China being the world’s biggest economy by the middle of the century. It needs that time to prepare.

The Sunday Times