Will China’s GDP Surpass That of the US in This Decade?
The story began at the end of 2011, when the Economist magazine claimed: “The year when the Chinese economy will truly eclipse America’s is in sight.” Their educated guess, at that point, was it could take place as early as 2018.
Then came the bet. Michael Pettis, currently professor of international finance at Peking University’s Guanghua School of Management, found the prediction too optimistic. As documented in a Financial Times story, he challenged the Economist to a bet that China won’t replace the U.S. as the world’s largest economy by 2018.
Here are some details behind the thinking of both sides: The Economist’s calculations assumed that China’s real GDP will grow at 7.75% a year with 4% inflation vs. 2.5% and 1% in the U.S. More importantly, they also assumed that the yuan will appreciate 3% per year vs. the dollar. Pettis found the expectation farfetched that China’s nominal GDP growth in dollar terms would beat the US number by double digits.
How has the bet worked out so far? According to World Bank data for 2012-2014, the Economist’s forecasts were almost right on the dot, other than the fact that inflation turned out to be much better contained in China. Exchange rate is always the wild card; it turned out that the yuan only appreciated about 1.5% since the end of 2011. All in all, China’s lead was in the high single digits and a bit shy of the Economist’s predictions.
With another three and half years in the balance, who will eventually win this particular bet might be a moot point. After all, how many people lose sleep over a slip in China’s nominal GDP growth in dollar terms? The important facts for serious and casual investors to bear in mind are probably the following:
- In terms of per capita GDP, China is far behind the U.S., and closing that gap could take decades if not more
- Even in aggregate terms, China’s economy is only about 60% the size of the U.S. economy (using market exchange rate)
- In purchasing power parity terms, i.e., the quantity of real goods and services produced, the IMF reported that China took over as the largest economy in 2014
The first two points are perhaps the most important, but the attention generated by Pettis’ bet with the Economist implies that most people have accepted the idea of China replacing the U.S. as the No. 1 economic power — it is more a question of when than a question of if. That is a calculation investors may want to build into their decision-making process where relevant.
At the 65th CFA Institute Annual Conference in Chicago, Pettis discussed the trajectory and sustainability of growth in China, including an analysis of domestic consumption capacity. You can watch the recording in our library to hear him discuss China’s role in the world economy.
At the upcoming 69th CFA Institute Annual Conference in Montreal, Pettis will return to discuss the latest economic developments in China.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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