2005-12-30

When will China's GDP overtake the US?

The Economist's View quoted Bloomberg's John Berry that China's Booming Economy Will Never Surpass U.S.. There are a lot of assumption going into how fast the GDP growth in both countries in the next 30-40 years, and other factors such as population and exchange rate.

What I am going to do is look at the historical benchmarking. I feel this is a more accurate measure, as it models the narrowing of gap and increasing difficulty of playing catch up. Below is the chart of OECD nations GDP/cap from 1960 to 2003 (source: demographia), measured in real 2003 PPP converted US$ (PPP so that exchange rate aberration is sort of removed, real so that nominal inflation is adjusted).

China's GDP/cap (in PPP) is about 16% of USA today ($6400 vs $40000), similar to the relative ratio of Korea/US in 1970. It took Korea about 15 years to reach 1/4, and 20 years to reach 1/3 of US level. It is likely to take China the same or longer time given its huge size. Therefore, total GDP of China (in PPP) could be comparable to that of US in 15-20 years, in an optimistic scenario. (There was 9 years of 9-11% growth for Korea from 1960-1990, average CAGR was between 7-8%)

If we assume another big "if", that China will follow Japan's path afterward, i.e. after 15-20 years, China will be at where Japan was at in 1960 relative to US, there will be another 30 years when China joins the developed country pack (70% of US). So the optimistic scenario is that it will around 2055-2065 then. Once China joins the developed country pack, it could follow the path of any of these 14 countries. Whichever path it takes, it will at best reach around 80% of US' GDP/cap. However, no one large/medium country (except small banking havean such as Luxemberg or BVI) has surpassed US at any point of time (*) since 1950 in terms of GDP/cap, and the runners-up are resource rich countries Norway and Canada. It is likely that China will then remain at around 75%-80% of the US level of GDP/cap, like what Japan has been at for the past 20 years.

This is assuming the PPP conversion for Korea/Japan historically and for China today are correct. Alternatively, similar adjustment in exchange rate to converge the PPP gap is assumed during the next 30-50 years.

This is also assuming no major political or economic disruption in the world (not just China, as world recession or war means disruption to China's trading) from now till around 2060. That is why "peaceful development" is the correct, and the only sensible strategy for China. This is also why China cares about a peaceful world environment, and why it has taken great pain in settling border disputes with its neighbors, and is willing to give up its 1.5M sq km claim in dispute with Russian and 90k sq km with India.

Update: (via New Economist) EIU has this forecast, showing China overtake US in PPP terms in total GDP by 2026 already (equality around 2020)


Note (*) Japan did overtake US in the late 1980s briefly in exchange rate GDP per cap, but that was due to a short-lived exchange rate abberation

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30 comments:

Anonymous said...

Not pretending to be even an economist but i have found some huge omision to John Berry's article in that he's taking the same "straight line" approach to analyzing both economies. He takes some liberty pointing out some problems in the Chinese economy but paints a rosy picture for the US economy.

I want to see how exactly he think is the best way to deal with the low savings and huge current account deficit? More importantly what about the huge budget deficit and the national debt that's 60 percent of the economy? Average Americans are just about pawning their own pants and taking out second mortarge against their homes to fuel the economic growth. What happens when the spending spree ends?

Of course people probably won't wait until disaster hits to change policy, but the "straight line" scenerio paints a bleek picture for the US economy as well.

Michael Turton said...

That's pretty much how I had seen it, assuming that the rise is peaceful. One analysis of Japan remarked that had the Japanese never stupidly bombed PH, they might have risen to their present level (relative to US ~1995) around 1960 or so.

Still, I don't see China catching up, though perhaps certain regions of China might. I think an analysis like this actually hides the fact that parts of China may well surpass the US, while others will remain at levels that will not be very pride-inducing.

How do you see energy and materials? At 80% of the US per capita income, China consumes roughly four times its energy and raw materials, minimum, if relative population size doesn't shift much. Where is all that going to come from?

And then there is global warming. Topsoil loss. Etc. Will be an interesting century, I expect.

Michael

Sun Bin said...

anon,

I think Berry's analysis is very simplistic, though he does have some valid points qualitatively. I provide another perspective, but it is incomplete as well. So the reality is probably somewhere in between.

The best way for US? it is probably devaluating the dollar, and adopt a high inflation policy. 60% debt is not that difficult to recover from, considering there was huge surplus in the Clinton years. However, there are of course downside for overspending.

---
Michael,

I made some bold assumption that China could follow Korea and then Japan' paths. There are a lot of uncertainty and challenges, and uneven development between city and rural (vs my simple average approach) as you said. However, if all urban China is able to catch up with US, it would be immense achievement already. But even for the rich areas, I assume it would probably stop after reaching around 80% of the US level.

the per capita consumption for China would probably be similar to that of Korea or Japan, a significant increase like you said. (should be slightly less than US though?). I think we can exploit solar/nuclear energy and the ocean bed (70% earth surface) is still largely unexploited.
So there will be serious challenges, but I guess human being still have some room to grow.
price hike will also regulate the wastage acrosss the world.

PGL said...

At Angrybear, we take on Berry's discussion of absolute GDP comparisons noting your excellent analysis of the more important topic - that of GDP per capita.

Sun Bin said...

Thanks for the link.
I think only when we look at GDP/cap can we see the closing of the gap and the increasing difficulty of playing catch up (i.e. the growth differerential will narrow if GDP/cap are closer).

About Berry, he mislead himself mathemtically.
1.09*1.02=1.1118
1.035*1.02=1.0557
so if you compare 11.18% vs 5.57% growth, the result will be EXACTLY the same as 9% vs 3.5%.
Berry truncated to 11% vs 5.5% and get a slightly different number. so his difference of 35 vs 40 year is purely a result of truncation error.

DOR said...

Japan's GDP briefly surpassed that of the US in the late 1980s?

Better double check that. According to the official data, Japan still hasn't reached the US 1980 level of $2,789.5 billion, and never even got over $1 trillion until 1993.

Sun Bin said...

sorry, i made a confusing statement. i mean to say GDP/cap. i remember it was $35 or $37k (Japan) vs $30k (US) if converted exchange rate, when it was 80Yen to the dollar.

qgr said...

sun bin,
Excellent blog. There are many reasons for the higher US GDP/capita relative to Europe/Japan. Less regulation, lower energy tax, better geo-political position, abundant resources, etc.. I may work on a blog myself.

A succint explanation is that the American economy is the most highly leveraged and with the largest percentage of foreign ownership. Take America, Inc. vs Japan Inc (the other extreme example) and it will be obvious.

Sun Bin said...

thanks.

i would suggest you not use blogspot, which is blocked in China.
also, blogsome/blogneo/etc have much better category/archive/search funtion.

matt said...

hello sun bin, first of all, thanks for the interesting blog.
you stated that the best way for US would be to devaluate the dollar, but won't that, combined with the probable future decrease in foreign capital input from Japan, China, ecc. bring to a weak dollar which in turn will cause a loss of faith by the inverstors, with the final result of exposing the insustainability of the U.S. debt in absence of a strong dollar? i am not at all an expert of economics, so i'd like your opinion on that. Hope you don't find it too stupid. thanks again, read you soon.

victor said...

All things being equal (PPP), China can actually surpass in total size in 5-10 years. There are three different world bodies calculating GDP using PPP, and assuming China and the US continues to avg the same rate of growth for the next 10 years. China will overtake the US at the end of 2009 using IMF stats or 2015 using CIA stats (the one that calculates China's GDP at the lowest of the three).

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)

Therefore, Mr Berry's article is pretty simplistic and I am in a way surprised a person writing for Bloomberg doesn't do a little more due diligence.

Anonymous said...

Don't know where the presumption comes from that every country's GDP per cap growth will stop when it reachs about 80% of US level. US is powerful, just like Great Britain in the 19th century. I think nobody would be dare to predict Great Britain will be surpassed so quickly and easily from the begining of 20th century. I guess it would hold true to US. No one can hold the No. 1 seat for ever. The arrogance and pride to change its system (it's deemed good) in a new era always lead to its downfall. History has proved it again and again.

Sun Bin said...

@anon,

not really stop, but definitely slow down. the assumption is that once you are close (assumed 80%, could be 70 or 90) to that of the richest country (measured by GDP/cap), the speed would slow down, because it is much harder to grow at 10%, or even 5-6%, as demonstrated by Japan,a nd even Taiwan/Korea/HK.

Mika said...

Why do you care about the PPP measure of the GDP, anyhow? From any kind of "let's compare these two countries' GDPs" surely the nominal GDP comparison is much more important, as it is more directly related to things such as the size of trade surpluses or presence in investment markets.

Eric said...

How does the yuan's appreciation plays into China's growth rate? Assuming the yuan appreciates 5% vs the US dollar, and China GDP growth runs at 9%, would that mean that it has a relative growth rate of 14%? And assuming the US growth is at 4%, that means the gap is closing at 10% a year. Right? SOrry, I am not an economist. this may be a basic question.

Sun Bin said...

Mika and Eric,

I will try to answer both of your questions at once.

I use PPP because
1) exchange rate usually changes (increase for the less developed country as it grows), and hence also sort of artificial
2) PPP does not depend on forex market and avoided the question of whether RMB is undervalued or overvalued (and hence Eric's question)

By using PPP, I have a better grip of what the actual situation is. i.e. real productivity measured by physical goods of a country.
However, as Mika said, there is drawback of PPP as well. For example, when World Bank finally admitted it has manipulated China's PPP calculation (overestimated China's GDP by 20% as a result -- perhaps an instruction from US government over 10-15 years ago) my calcualtion here needs to be revised. i.e. the whole schedule for China needs to be postponed by 2-5 years.

FUCK U AMERICAN said...

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Anonymous said...

Are you Chinese Sun Bin? Why you split China into few parts? Hong Kong and Taiwan belongs to China and they are part of China forever! China will takeover the U.S. soon. You will see!

FOARP said...

Weird that someone should criticise Sun Bin's inability to write 'Chinese pinying[sic]'.

As for 'splitting China' - get real. HK/Macau/Taiwan/Mainland DO NOT form a common market, there are significant trade barriers between them, they don't even share a common currency for Pete's sake.

The crazy thing is when people use PP GDP as a measure of national power, when in fact the things that such power depends on (R&D, defence spending etc.) are bought at prices closer to the international market value.

Stephen Chua said...

The debate has raged now especially in the run up to the Olympics and then we shall see...
I must say China did a commendable job despite the rash of deliberate misinformation on just about every front about China. What seemed to occur during the Olympics at ground zero certainly never happened according to some very careless reporting, which included the stock markets and the Chinese economy.

The facts are that right now, both governments are grappling with very opposite sides of the economic problems.

The US is trying to defuse their real estate and banking time bomb with even more deficits.

China on the other hand is deliberately easing the overheating price rises in just about everything.

However, I do see that in the medium term, both sides of the argument will find their respective balances.

I realize this is a very hot topic about whose is bigger. I'm not sure about some of the comments here though - some typos perhaps? But let's take a wider look at the quality of the Chinese economy versus that of the other former risen stars of Japan and Korea and compared to the other big world economies, China has a super economy status and also, it is the only one that is making one large piece of the puzzle that the others do not have. It is that they have huge surpluses and no debt. That Chinese economic engine is not stopping yet, not by a long shot.

To the predictors of the China gloom and doom and the American glories, I find it difficult to ascertain a solid case for a much stronger play for the American economy based on debt financing. Unless is the rest of the world going to pour all their assets into America? What kind of returns can they expect?

But just taking a look at China, the economic engine has started to cruise and growing by leaps and bounds and there are new frontiers opening up all the time. If no believes this, just ask the American companies fighting to gain new footholds in...you gussed it, China.

Catherine said...

"China has taken great pain in settling border disputes with its neighbors, and is willing to give up its 1.5M sq km claim in dispute with Russian and 90k sq km with India."

Since when did China give Russia 1.5M sq km border area?

Could you give us the reference?

How about 90k sq km to India?

Sun Bin said...

the areas in dispute were Outer Manchuria (with) Russia, which was recently settled (and given up).
http://en.wikipedia.org/wiki/Outer_Manchuria#Disputes

with India is the Southern Tibet Area (called NEPA or Arunachal by Indians), which are still in dispute to day and can bee seen in various maps such as google map.
http://en.wikipedia.org/wiki/Sino-Indian_War#The_McMahon_Line

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EniGma said...

USA is a developed country? Hahaha! Look at many areas in USA, true ghetto, is that what you call a develped country is? Last year accordingly to CIA website USA's GDP per capita was about $46,000. This year (2009) CIA has increased it to $48,000 despite all sources stated that USA GDP has shrunk by 3,9%. How come CIA is lying? Also, if to believe CIA liars China must be above $12000 GDP per capita to overtake USA GDP per apita since China's population is 400% of USA population. Got it? So it means if China doubles it's GDP, it will become... never mind, I mixed GDp per capita with GDP. Anyway, today China GDP per capita is 8 times less thanUSA's which makes it only 12% of USA. I believe China can reach USA GDP per capita no sooner than in 45 years. And only if high growth is up.

EniGma said...

Sorry, not in 45 years, but in 65 years.

YLD said...

I agree with the above writers that the Bloomberg article is overly simplistic. I would like to point out that GDP growth also depend on technology. The fact that the US had a substantial surplus in the 1990s was due to the technological advances in Internet, search engines etc. This combined with human investments (education) etc, not to mention the influx of highly skilled labor allowed the US to maintain the lead in GDP/cap (refer to N.G. Mankiw paper on human investments). However, this positive shock to the economy does not happen often.

China has instituted many smart policy changes such as lowering the population growth rates to increase GDP/cap. If one believes the Solow-Swan model, this should translate into a higher GDP/cap over time. It is also increasing educational and healthcare expenditures.

China should be able to come close to the US in the future (not sure how long) but to overtake it would be a challenge but definitely not impossible. It must become the global leader in technological innovation and be able to attract skilled labor and expertise. I don't see that happening any time soon.

Please keep this discussion within the scope of political-economic development and avoid inflammatory and derogatory statements. This is an intellectual discussion, not a place to vent personal anger and make political statements. Please be respectful.

Thank you.

keele said...

Listening to the Language of Change.
Above all else, what the present crisis has done is remind us that we live in a dynamic world where empires and systems come and go according to history’s dictates. If the Bretton Woods systems is in eclipse, and we think it is, and that the world is moving toward a multi-polar political economy, which we argue it will, whose voices will be important in these times of change?

One voice is Chinese, and Zhou Xiaochuan, the Chair of the Monetary Policy Committee of the People's Bank of China, speaks of structural reform of the international monetary system, with his call welcomed by Russia, India, and Brazil, based on their view that that there are "inherent weaknesses” in the current international monetary system. Another is South American, with Brazil’s President, Luiz Inácio Lula da Silva defending the right of national self-determination, noting that
. . . each country establishes the democratic regime that suits its people . . . [and that] The great lesson for everybody is that the state has an important role to play, and has great responsibility. We don't want the state to manage business. But it can be an inducer of growth and can work in harmony with society. In Brazil, thank God, we had a solid financial system and public banks [emphasis added] with an important role in offering credit. And these were the banks that made sure the crisis here was not as bad as it was in other countries.

While Zhou’s call is narrowly structural, and da Silva’s is broadly ideological, both are clearly seeing a world that is beyond the Bretton Woods system. Similar post-Bretton Woods views is now also appearing within the U.S., with Paul Kennedy noting in a recent New York Times Op-Ed column,
If one believes in the economists’ theory of ‘convergence’ — that is, the coming closer together of the product and income of companies, regions and countries — then the conclusion is clear: As China, India, South Korea, Brazil, Mexico and Indonesia all ‘catch up,’ the American share of things will relatively shrink. Sooner or later — and this debate really is about ‘sooner’ or ‘later,’ not about “if” — we are going to witness another major shift in the global balances of power.

The voices that we are now hearing are reflections of how history changes our focus as it changes the world around us. In the long history of global political economy, crises come and go, as do the focal points around which they form. To understand the voices we must also understand the history that gives them volume and reach.

The current crisis is destined to bring about fundamental changes in the world. The world will be different when the carnage stops. The crisis will bring irreversible geopolitical consequences. I’m not saying that it is all over for the USA. It is still one of the strongest countries in the world. But the reality is that the US economy and the rest of the US-centred economies of the West, are fast losing ground. China, India and other large size emerging economies, have been strengthening considerably. What is underlying the current crisis is this historical shift: the ‘unipolar’ phase of US dominance is being replaced by a ‘multipolar’ phase, in which the US will continue to remain one of the most prominent powers, but has to share this position with China and India as new rising global superpowers.
Bulent Gokay, Keele-UK

Social said...

According to August/September data from the Economist Intelligence Unit, China’s economy will be bigger than the U.S.’ in 2016. (The assumptions about GDP growth rates in China and the U.S. are not unreasonable.) But I think there may be a bigger question at hand here (and I’m prepared for the deluge of angry emails): So what?

I have an idea (and this is really the raison d'être of http://FutureofUSChinaTrade.com): instead of blaming China for the U.S.’ economic woes, let’s all sit down at the table and talk about a way to engage with each other that is mutually beneficial. Some have said that trade is not a zero-sum game, but politics can make it one. So let’s agree that a mutually beneficial solution is best for everyone involved and then let’s work toward a trade framework that truly is win-win.

Samuel, India said...

There has been quite alot of talk on when China will surpass the U.S economy in terms of G.D.P size.. all out much of a prediction.. well, it seems Chinese economy is heading its way rapidly.. but at the same time the chinese economy(economies of the developing countries by and large, if i may..)is still much far behind comparing with the western economies in terms of quality in production,and level of technologies... which in a way would even take quite a time to catch up with the U.S.. therefore, sadly i forecast the chinese economy to overtake it's counterpart(the U.S)only around 2030


A.D. at the earliest..

Faisal Khan said...

It Is 2014 china has not taken over USA yet