The Central Date for China's GDP to Overtake the US at Market Exchange Rates is 2019

8/7/2019 The Central Date for China's GDP to Overtake the US at Market Exchange Rates is 2019

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The Central Date for Chinas GDP to Overtake the US Page 1

The Central Date for China's GDP to Overtake the US at Market Exchange Rates

is 2019 - a Study of Growth Assumptions and Analyses

By John Ross, Visiting Professor at Antai College of Economics and Management, Shanghai

Jiao Tong University

15 February 2011

Summary

The question of when Chinas GDP will overtake the US, to become the worlds largest

national economy, is self-evidently significant.1

It has become muchdiscussedamong

Western economic commentators (Rachman, 2011).

WhenGoldman Sachsfirst suggested that Chinas GDP would exceed that of the US by 2041

this caused surprise (Wilson & Purushothaman, 2003). When Goldman Sachsrevisedthis

forward to 2027 this caused greater shock (O'Neill, 2009). But it has since become evident

that, on current trends, Goldman Sachs forecasts projected too long a period for Chinas

GDP to overtake the US and did so before the international financial crisis.

In the last two years, work carried out by the present author in the Research Group China in

the International Financial Crisis, at Antai College, Shanghai Jiao University, arrived at an

estimate of the most central date for Chinas GDP, at market exchange rates, to exceed the

US as being 2019 there is inevitably a degree of variance on either side in such projections.

Interestingly, as noted below, other recent analyses now arrive at essentially the same date

range regarding parity purchasing power (PPP) estimates. A remaining weakness in a

number of these latter studies, however, is that they have in the past underestimated

Chinas growth and still project too long a time scale for Chinas GDP to equal the US at

market exchange rates. The reasons for this are considered in detail below.

Perhaps surprisingly, it turns out that projections on this issue are not highly sensitive to the

ranges of precise growth rates utilised - provided that these are within realistic historical

bounds. The central conclusion is that, unless there is a qualitative change in the economic

situation, Chinas GDP at market prices is likely to exceed the US in the period 2017-2021. It

is also significant that the rate of growth of US current dollar GDP is decreasing while the

rate of growth of Chinas dollar GDP is accelerating purely linear projections therefore

tend to overestimate the period of time before which Chinas GDP equals that of the US.
http://blogs.ft.com/rachmanblog/2011/01/when-will-china-become-the-worlds-largest-economy/http://blogs.ft.com/rachmanblog/2011/01/when-will-china-become-the-worlds-largest-economy/http://blogs.ft.com/rachmanblog/2011/01/when-will-china-become-the-worlds-largest-economy/http://www2.goldmansachs.com/ideas/brics/brics-dream.htmlhttp://www2.goldmansachs.com/ideas/brics/brics-dream.htmlhttp://www2.goldmansachs.com/ideas/brics/brics-dream.htmlhttp://www.ft.com/cms/s/0/dd9b5a1e-2f9f-11de-a8f6-00144feabdc0.html#axzz1BfEyxaV7http://www.ft.com/cms/s/0/dd9b5a1e-2f9f-11de-a8f6-00144feabdc0.html#axzz1BfEyxaV7http://www.ft.com/cms/s/0/dd9b5a1e-2f9f-11de-a8f6-00144feabdc0.html#axzz1BfEyxaV7http://www.ft.com/cms/s/0/dd9b5a1e-2f9f-11de-a8f6-00144feabdc0.html#axzz1BfEyxaV7http://www2.goldmansachs.com/ideas/brics/brics-dream.htmlhttp://blogs.ft.com/rachmanblog/2011/01/when-will-china-become-the-worlds-largest-economy/


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This article surveys literature on this issue, clarifies the reasoning for such time frames, and

analyses their key parameters. A fundamental qualitative characterisation of the relative

position of the US and Chinas GDPs is indicated.

Calculations on the range of reasonable US GDP growth rates to be projected have been

considered in detail in otherarticlesand these are utilised below.2

Concentration in this

article is therefore on reasonable projections of the growth rate of Chinas GDP in dollar

terms.

Backgroundsystematic underestimation of the growth rate of Chinas economy

In any subject, including economics, the ultimate test of analysis and theory is how

accurately it predicts developments. Therefore the two fundamental tests of analysis

regarding former planned economies have been the success of Chinas reform policy and

the failure of shock therapy in Russia and the former USSR. The former produced the most

rapid growth in any major economy, and the latter saw the greatest peacetime decline in

production in any major country in modern history.

In both cases majority conventional wisdom at the time transpired to be incorrect. When in

1992 the present author contrastedfavourablythe success of Chinas economic reform to

the shock therapy then being introduced in Russia, and predicted continued rapid

economic growth in China compared to negative results in Russia, majority opinion

disagreed with such analysis (Ross, 1992). However, at that time, Chinas economy at

market exchange rates was only 6.7 per cent the size of the US and only 67.5 per cent the

size of the former USSR (World Bank, 2010). Therefore understanding of the potential of

Chinas economic policy was primarily based on issues of economic theory, related to the

early progress of its economic reform, and not to the level of realised accomplishment

which now prevails. Study of Chinas economy in 1992 was also a minority interest, with the

fashionable focus of attention at that time being the alleged benefits of shock therapy and

with a prevailing view that China would lag because of its failure to adopt this.

3

Nineteen years later the results are evident. Chinas economy is the worlds second largest.

It has maintained the highest rate of growth of any major economy throughout the almost

two decade intervening period. Attention to Chinas economy is no longer based primarily

on potential or economic theory but on accomplished achievement. For comparison Chinas

economy today is almost three times as large as the economy of the entire former USSR,

more than four times as large as the economy of Russia, and has overtaken Japan to

become the worlds second largest. The relevant discussion now is when its GDP will

overtake the US - hence this article.
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Analysis of Chinas economy has now also become highly fashionable and no longer of

minority interest. Nevertheless, as will be shown below, many of the most widely cited

predictions regarding Chinas economy for example those of Goldman Sachs and PWChave underestimated how fast Chinas economy would develop and have therefore

regularly upgraded their forecasts. This error has still not been fully corrected. Most

forecasters now project that Chinas GDP will exceed that of the US in PPP terms during the

next 10-20 years - with the majority of such projections falling towards the early part of this

range. But, for reasons considered in detail, they continue to underestimate how rapidly

Chinas GDP will equal that of the US at market exchange rates.

The relevant literature will therefore first be surveyed and then a detailed examination will

be made of the assumptions involved in projections of the size of Chinas GDP compared tothe US at market exchange rates.

Recent projections on Chinas economic growth

Goldman Sachs projection for Chinas GDP to overtake the US in 2041, made in the well

knownpaperDreaming with BRICs, was based on the assumption that Chinas GDP in

nominal dollar terms, rather than at constant prices or exchange rates, would increase at

8.1 per cent a year between 2005 and 2040 (Wilson & Purushothaman, 2003).4

This

projection turned out to be less than half the relevant rate of Chinas growth in the last 10years to 2010the actual outturn, in current dollars, was 17.2%. Jim ONeill, former chief

economist of Goldman Sachs, was thereforecorrectto note: What many casual observers

of our BRIC projections never realized is that we used extremely conservative assumptions.

(O'Neill, 2009b) Unsurprisingly, therefore, Goldman Sachs, subsequently brought forward

theirprojectionof the year Chinas GDP will overtake the US - to 2027 (O'Neill & Stupnytska,

2009). A further analysis of Goldman Sachs projections is given below.

More recent projections by others have calculated significantly earlier dates than Goldman

Sachs. In the most extreme estimateArvind Subramanian, of the Peterson Institute ofInternational Economics, argues that in PPP terms, China has already overtaken the US

(Subramanian, 2011). TheConference Board, estimates Chinas GDP, again in PPP terms,

could overtake the US in 2012 (The Conference Board, 2011). The current projection of the

IMFin PPP terms is that Chinas GDP will overtake the US shortly after 2015 (International

Monetary Fund, 2010).The Economistprojects China will overtake the US in 2019 (The

Economist, 2010).PWCconclude Chinas GDP will overtake the US before 2020

(Hawksworth, 2010) (Hawksworth & Tiwari, 2011). Standard Chartered bankpredictsChina

will overtake the US by 2020 and that by 2030 its economy will be twice the size of the US

(Adam, 2010)
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In contrast, Chinasmediahas tended to take a highly cautious approach to this issue -

insisting that comparisons be made only in current exchange rates and utilising relatively

optimistic projections regarding the USs growth and relatively pessimistic ones regardingChinas (China Daily, 2010).

This echoes the Chinese medias similar approach to comparisons of Chinas economy with

Japan. Calculations made in terms of PPPs showed that China overtook Japan to become the

worlds second largest economy in 2001 (International Monetary Fund, 2010). China,

however, only acknowledged that it was the worlds second largest economy in 2010, when

it overtook Japan in current exchange rate terms.

In one sense such caution by Chinas media is well founded. Serious issues need objectiveconsideration. Exaggeration of achievements is unhelpful. Furthermore, as is well known,

even when Chinas GDP is the same as that of the US, China will still be a far poorer country

in terms of income per person - to be precise, as China has approximately four times the

population ofthe US, when Chinas total GDP equals that of the US Chinas GDP per capita

will only be one quarter that of the US.

Nevertheless, while conservatism in assumptions is commendable, distortions in perspective

and policy also occur if underestimates are made. The only really useful calculations are

those which are accurate as regards fundamentals. Given that it is spurious exactitude onsuch a complex issue to give a single precise date it is necessary to analyse the key

parameters involved and therefore the reasonable range of projections.

Official exchange rate and PPP studies

As is well known there exist two fundamental measures for estimating the relative sizes of

the US and Chinas economies those made at market exchange rates and those made in

terms of PPPs. Some studies, notably those carried out for PWC, analyse both.

(Hawksworth, 2006) (Hawksworth & Cookson, 2008) (Hawksworth & Tiwari, 2011).

Both measures and approaches are relevant.5

However because market exchange rates are

more objectively verifiable, because actual transactions are carried out in these terms, and

because the Chinese authorities themselves generally only utilise calculations in market

exchange rates, emphasis in this paper is on this measure. First however, to set parameters,

literature utilising PPPs will be compared to those for the US and Chinas GDP at market

exchange rates.
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Official exchange rate and PPP calculations

Calculations of the relative size of the US and Chinas GDP at market exchange rates aresimple and up to date. China hasreleasedits first official estimate of GDP in 2010 - 39.8

trillion yuan (National Bureau of Statistics of China, 2011). No official exchange rate for

conversion of this annual GDP to dollars was published, but utilising a simple unweighted

daily average for 2010 yields a figure of $5.9 trillion - the final data will not differ greatly

from this.6

Thiscomparesto a US GDP in 2010 of $14.7 trillion.7

(Bureau of Economic

Research, 2010). At official exchange rates, Chinas economy is approximately 40 per cent of

the size of the US.

PPP calculations start from the well known fact that average prices in China, as with mostdeveloping countries, are lower that average prices in the US when converted at market

exchange rates. The real comparative size of Chinas GDP, in terms of real inputs and

outputs, is therefore understated compared to the US,. It is for this reason that analysts

have supplemented, or replaced use of, market exchange rates and attempted to calculate

PPPs for China, the US and other economies.8

Nevertheless a drawback of this approach remains that the calculation made for PPP

exchange rate is crucial for the estimate of the relative size of the two economies compared

to market exchange rates - which in contrast are readily objectively verifiable. As will beseen, estimates based on calculated PPPs therefore may yield very early dates for when

Chinas GDP will exceed the US.

Three PPP estimates of Chinas GDP

Taking an overall review of the range of PPP estimates for the size of Chinas economy three

calculations essentially coincide those of theWorld Bank, theIMF(International Monetary

Fund, 2010) and theCIA(Central Intelligence Agency, 2011). Taking 2009, the latest date

available for PPPs:

the World Bank estimates the size of Chinas GDP at $ 9091bn; the IMF estimates the size of Chinas GDP at $9047bn; the CIA estimates the size of Chinas GDP at $8950bn.

All, for 2009, therefore give a PPP estimate of the size of Chinas GDP at 63-64 per cent of

theUSs $14 256bn.

These figures are essentially calculated from the baseline estimate of the size of Chinas GDP

in PPPs in 2005 published by the World Bank International Comparison Programme (World
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Bank, 2007). This revised downwards the previous estimate of the size of Chinas GDP by 40

per cent. This downward revision has, however, been contested by a number of authors on

various grounds for example that that backward projections of the data yield implausibleresults, or that basing price calculations only on cities yields inaccurate results as prices are

lower in Chinas rural areas (Deaton & Heston, 2008) (Subramanian, 2011).

Higher PPP estimates of Chinas GDP

There therefore exist, for the above and other reasons, higher estimates of Chinas GDP in

PPP terms. The most extreme, as noted, areSubramanians, who argues that in these terms,

Chinas GDP is $14.9 trillion, and has already marginally overtaken the US (Subramanian,

2011). Subramanian, however, is an outlier in such estimates whose conclusions have notreceived any widespread support.

More significant, and more frequently quoted, are estimates byThe Conference Boardand

those in the data ofAngus Maddison- the Conference Boards Total Economy database is

now widely cited and Maddison was not only a leading authority on economic growth in

general but made specific analyses of Chinas GDP (Maddison, 1998) (Maddison & Wu).

Regarding these:

The Conference Board gives an estimate of $12.9 trillion for Chinas GDP in PPPterms in 2010, compared to $14.5 trillion for the US, producing an estimate that

Chinas economy is already 89 per cent of the size of the US.

Maddison died in 2010 and the latest year for which he gave estimates of the GDP ofthe US and Chinese economies was 2008. His calculations were expressed as 1990

Geary-Khamis dollars. Maddisons base year was 1990, for which he calculated

Chinas GDP as $2124bn. Maddisons views were emphatic, for reasons stated in

detail in his Chinese Economic Performance in the Long Run, and his conclusion was

already that: In 2003 its *Chinas+ GDP was about 73 per cent of that in the USA.

(Maddison, 1998) (Maddison & Wu, p. 1) Maddison also concluded that in theseterms in 2008 US GDP was $9.5 trillion and Chinas $8.9 trillion i.e. on this measure

Chinas economy was 94 per cent the size of the US (Maddison, 2010).9

Subramanian reports that the new version of the Penn Tables, to be released in February

2011, will revise its estimate of Chinas PPP up by 27 per cent (Subramanian, 2011).

Utilising such higher PPP estimates of the size of Chinas GDP can give projections for when

Chinas GDP will overtake the US which are very short as already noted that it has already

occurred in the case of Subramanian and that it will occur in 2012 in the case of The

Conference Board. It may be noted, however, that even theIMF, utilising its own lower
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estimates, now projects that Chinas GDP will overtake the US in PPP terms shortly after

2015 (International Monetary Fund, 2010).

Valuable as PPP methodology is, however, due to the high degree to which estimates based

on PPPs depend on the calculated PPP exchange rates, and because actual transactions are

carried out at market prices, primary emphasis here will be on calculations based on market

exchange rates and PPPs are used only for comparison.

Combination of PPP and exchange rate studies

A series of studies which have sought to compare market exchange rate and PPP data for

the relative size of the US and Chinas economies are by Hawksworth and collaborators for

PWC. (Hawksworth, 2006) (Hawksworth & Cookson, 2008) (Hawksworth, 2010)

(Hawksworth & Tiwari, 2011)

These successive studies have progressively brought forward their estimate of the date at

which Chinas GDP will equal that of the US. In the 2008 study China was projected to

overtake the US in PPP terms in 2025 (Hawksworth & Cookson, 2008, p. 2). In the most

recent, 2011, study China: is expected to overtake the US as the worlds largest economy

(measured by GDP at PPPs) sometime before 2020. (Hawksworth & Tiwari, 2011, p. 8).

Even more striking is the degree to which the PWC studies have brought forward the date at

which China is projected to overtake the US in terms of market exchange rates. In its 2006

study PWC projected that Chinas GDP would still be six per cent smaller than the US at

market exchange rates in 2050 (Hawksworth, 2006, p. 22). By the 2011 study China was

projected to overtake the US at market exchange rates in 2032. (Hawksworth & Tiwari,

2011, p. 16)

Goldman Sachs

In similar fashion to PWC, Goldman Sachs, which made the earliest well known projection of

when Chinas GDP will exceed that of the US, has also progressively brought forward its date

for this these estimates have been made as part of Goldman Sachs BRIC studies. In 2003

Goldman Sachspredictedthat Chinas economy would be larger than the US by 2041

(Wilson & Purushothaman, 2003).10

Goldman Sachs however subsequentlynotedthat

China, in particular, was growing substantially faster than its earlier projections.11

Thus, for

example, in December 2009 itanalysed: how the BRIC economies stand today compared

with how we projected them to be back in 2003... All four economies have attained levels of

USD GDP that we had not originally expected until later with China, of course, the main

standout. We now assume a much stronger GDP performance for China by 2050 than we
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originally estimated. (O'Neill & Stupnytska, 2009, p. 5) More succinctly China tops the list of

countries whose growth performance has surpassed our expectations. (O'Neill &

Stupnytska, 2009, p. 4) The date for Chinas economy exceeding the US was broughtforward to 2027 (O'Neill, 2009).

12

Goldman Sachs 2003 prediction was based on projecting that Chinas GDP in nominal dollar

terms would increase at 8.1 percent a year. In fact in 2000-2010, the most recent 10 year

period for which data is available , Chinas annual nominal dollar GDP growth was 17.2

percent.13

Goldman Sachs has not revised its own BRIC forecasts since 2008. Even then, as seen, its

assumptions had tended to underestimate Chinas growth rate - and since 2008 the USeconomy has lost momentum, due to the international financial crisis, while China has not.

When Goldman Sachs next revise their forecast as to the date when Chinas economy will be

as large as the US they will almost certainly bring it forward as they have done in major

previous revisions.

Different variables

For calculations made at market exchange rates, the date at which Chinas GDP will equal

the US primarily rests on the assumptions made regarding the rate of growth in constant

prices of the US and Chinas economies, their respective inflation rates, and the exchange

rate of the RMB relative to the dollar. It is, therefore, possible to make a range of

combinations of assumptions regarding these variables - The Economisthas even produced

aready reckonerwith which to do so! (The Economist, 2010)) The issue is evidently what

range of values it is reasonable to insert and what is the sensitivity of the result for such

different variables?

The Economists central projection was that annually Chinas economy grows at 7.75 per

cent, its inflation is 4.0 per cent and the yuan revalues by 3.0 per cent a year against the

dollar, while the US grows at 2.5 per cent and its inflation is 1.5 per cent. This combination

yields the result that Chinas GDP overtakes the US at market exchange rates in 2019.

Interestingly, as also found when doing research at Antai College, the combination of such

variables yield results which are not highly sensitive to any precise entry of figures which lie

within historically reasonable ranges. For example, leaving all other parameters the same as

in The Economists variant above, and increasing Chinas growth rate to its average since

1978 of 9.9 per cent, only brings forward the date in which Chinas GDP overtakes the US to

2018. The same result is obtained by using the highly favourable assumption to China of 9.9

per cent annual growth and utilising the 10 year annual growth rate of US GDP of 1.7 per
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cent (Ross, 2011a). Even taking the wildly favourable assumptions for China, all other things

remaining equal, of 9.9 per cent GDP growth, 5.0 per cent yuan appreciation, and US growth

at 1.7 per cent, only brings the date forward to 2017. Similarly taking a highly favourableconclusion for the US that its growth rate over the next decade accelerates to its historical

3.4 per cent, which is above its average growth rate for last 20 years, and assuming Chinas

growth decelerates to 7.75 per cent, and taking the Economist's assumptions as above for

inflation and exchange rates, only pushes out the date Chinas GDP overtakes the US to

2020.

These variants therefore confirm the authors own studies that, provided any historically

reasonable range of variables is used, the results target a relatively narrow range of 2017-

2021, centred on approximately 2019.

A sense check

There is, however, another way to carry out such estimates. This is to do a quick and dirty

sense check calculation ofthe relative rates of growth of the US and Chinas nominal dollar

GDPs. As robust projections normally rely on having a small number of assumptions, and

this is preferable to excessive numbers of variables, such estimates are of interest.

Such quick and dirty methods consists of simply analysing the trends in nominal GDP, at

official exchange rates, of China and the US without attempting to decompose these into

movements in real GDP growth, inflation and exchange rate movements - such overall

trends in nominal GDP in dollars may be taken as summarising the GDP growth, inflation

and exchange rate movements.14

Making such an analysis strikingly reveals clear long term

trends illustrated in Figure 1 and Table 1. These show:

the rate of growth of US nominal GDP is decelerating with time i.e. the morerecent the period of time the lower the growth rate of nominal US GDP.

Chinas GDP growth rate in current dollar terms is accelerating i.e. more recentperiods show higher growth rates than older ones.

Continuation of such trends, of course, implies that linear projection of past growth rates,

i.e. those not taking into account the deceleration of US nominal GDP growth and the

acceleration of Chinas, will tend to overstate the period until Chinas GDP exceeds the US.


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Figure 1

Table 1

Taking precise figures, if the overall period from the beginning of Chinas economic reforms,

in 1978, to the latest available data for 2010 is considered then the annual rate of increase

of US nominal GDP is 6.0 per cent. However if the most recent two decade period 1990-

2010 is taken annual US nominal GDP growth is 4.8 per cent. If the most recent 10 year

period 2000-2010 is taken then annual US GDP growth is 4.1 per cent. If the most recent 5

year period is taken, 2004 to 2009, then the annual average increase in US nominal dollar

GDP is 3.1 per cent.

The deceleration of US GDP growth in terms of current prices and current exchange rates is

therefore evident. An element in this, as analysed elsewhere, is not only the deceleration of

US inflation rates in the recent period but also the gradual slowing of the US economy in

real constant price terms (Ross, 2011c).
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China shows the reverse trend. If the overall period since the start of economic reform, i.e.

1978-2010, is taken then Chinas annual nominal dollar GDP growth is 12.2 per cent.15

If the

most recent 20 year period 1990-2010 is taken then annual nominal GDP growth is 15.0 percent. If the most recent 10 year period 2000-2010 is taken then annual nominal dollar GDP

growth is 17.2 per cent (calculated from World Bank, 2010). If the most recent 5 year period

is taken, 2005 to 2010, then the annual average increase in nominal dollar GDP is 21.1 per

cent. The rate of growth of Chinas GDP in nominal dollar terms has therefore clearly shown

an accelerating trend.

To take a central illustrative case of such trends, if a linear projection of the last 10 year

period is taken then the answer as to when Chinas GDP will overtake the US at market

exchange rates is 2019. As, however, the trend is for acceleration of Chinas growth rate innominal dollar terms, and for deceleration of the US, then 2019 might be taken, using this

method, as an indication of an outer bound of when Chinas GDP overtakes the US.

Sensitivity of the results

Fortunately, and interestingly, it again turns out that provided projections made using such

estimates are within the realm of reasonable results based on past performance, then

results are not extremely sensitive to precise figures used.

As shown in Table 2, if the ultra-favourable assumption for China were made that its annual

growth rate in nominal dollar GDP remained that of the last five years, i.e. 21.1 per cent,

and the growth rate of the US also remained at that of the last five years, i.e. 3.1 per cent,

then Chinas GDP still does not overtake the US until 2016 however this five year period is

too short to be used for serious projections, particularly as it includes the impact of the

international financial crisis, and is therefore not taken here as part of the central results

but treated as an outlier used for illustrative purposes. If Chinas and the USs 10 year

average growth of nominal dollar GDP are taken, i.e. respectively 17.2% and 4.1%, then

Chinas GDP exceeds the US in 2019. If a 20 year average growth of nominal dollar GDPincrease for China and the US is taken, respectively 15.0% and 4.8%, then Chinas GDP

exceeds the US in 2020.

In short, unless a drastic change in the relative behaviour of China and the USs GDP is

assumed, of a type not experienced in the last 20 years, then Chinas GDP will exceed that of

the US sometime in the period 2016-2021 with 2019 a central point of such a range. A graph

for the latter projection, using 10 year averages, is shown in Figure 2.

A quick and dirty sense check therefore coincides with analysis based on the wider series

of values for real constant price growth rates, inflation rates and exchange rates.


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Table 2

Figure 2

The qualitative features

What conclusions may be drawn from the above data?

It is not particularly valuable to attempt to refine the figures further to arrive at a moreprecise date too many elements, with too high a degree of uncertainty, exist to try to
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determine whether Chinas GDP will exceed that of the US in, for example, 2018 or 2020.

What is significant, however, is that on any input of the range of actual comparative

performance during the last twenty years Chinas economy, in current exchange rate terms,will exceed the US at some point during the period 2017-2021. Furthermore such a date

range is not greatly sensitive to changes in reasonable, in light of past performance, inputs.

Such a finding has a precise economic meaning. It means that some fundamental change

must take place in existing trends within approximately a ten year time frame for Chinas

GDP at market prices not to overtake the US in the period 2017-2021.

If, as pointed out above, PPP calculations lead to excessively early projections for when

Chinas GDP will exceed the US, it is equally the case that projections that Chinas GDP willnot overtake the US at market exchange rates within the range 2017-2021 have to rely on

asserting that an absolutely fundamental change will take place during the next decade. The

status quo scenario is that Chinas GDP at market exchange rates will exceed the US in this

period.

While, of course, a sharp change in relative inflation or exchange rates could produce a

significant change in the above trends most frequently those who assert that Chinas GDP

will not overtake the US during the coming decade postulate a major change in relative US

and China constant price growth rates. For these to prevent Chinas GDP overtaking the USat market exchange rates during the next ten years it must be postulated either that a

fundamental acceleration of the US economy will occur or, as few analysts predict such a

development, more usually it must be asserted that for some reason a severe slowing of

Chinas economy during the next decade will occur.16

It is perhaps due to a difficulty in accepting the reality of China overtaking the US as the

world's largest economy that there exists a large catastrophist/drastic slowdown literature

on China.17

Detailed examination of these various perspectives is beyond the scope of this

paper. For present purposes it is sufficient to note that short of such a drastic slowdown inthe near future, that is on the basis of continuation of the trends that have prevailed over

the last decades, Chinas GDP at market exchange rates will overtake the US approximately

in 2017-2021.

For purposes of qualitative analysis, the simplest way to cut through the Gordian knot of

detailed calculations is that Chinas GDP in approximately ten years time will be

approximately the same size as the GDP of the US. This will, of course, constitute a new

period in world economic history.18


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Conclusions

The following fundamental conclusions follow from the above data and review:

The majority of international analysis of Chinas underestimated its growth andconsidered as likely to produce more favourable results shock therapy pursued in

the former USSR. It is no longer possible to sustain such analysis in the light of the

test of economic development over almost three decades. Chinas economic

approach has been overwhelmingly more successful than shock therapy.

Even studies which have emphasised the shifting balance of economic weighttowards emerging markets, such as those of Goldman Sachs and PWC, have

nevertheless systematically underprojected Chinas growth. They have thereforesuccessively revised upwards their estimates for the development of Chinas GDP.

The majority of such projections now estimate that Chinas GDP in PPP terms willexceed that of the US in the period prior to 2020.

Such projections continue to lag behind trends as they do not grasp that Chinas GDPat market prices will also equal the US in the period to 2017-2021.

Addendum 10 March 2011

Reviewing Martin Wolfs various articles on China shows that he is one of the authorsoutlining an essentially correct analysis of when Chinas GDP at market exchange rates is

likely to exceed the US. He noted: By 2014, at current rates of relative growth, Chinas

economy will pass the US, in absolute size, to be the biggest in the world, at PPP. Its GDP

also seems almost certain to surpass that of the US at market prices before the end of this

decade, partly because of its rapid growth and partly because of the inevitable appreciation

of the renminbi. (Wolf, 2010)

Notes

1. The world national is necessary to avoid ambiguity regarding the European Union (EU),

which taken as a whole is larger than the US. However the EU is not a state integrated

economy and its role in determining world economic policy is therefore significantly less

than the US.

2. These show a gradual but clear long term slowing trend of annual US GDP growth, at

constant prices, from its level of 3.4% over the last century, to a current 2.6% 20 year

moving average and a 1.7% 10 year moving average (Ross, 2011a) (Ross, 2011d).

3. For a typical survey see (Aslund, 1995).


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4. The term BRIC was first introduced in the paper Building Better Global BRICs (O'Neill,

2001) (O'Neill, Wilson, Purushothaman, & Stupnytska, 2005)

5. As Hawksworth and Tiwari note: GDP at PPPs is a better indicator of average living

standards or volumes of outputs or inputs, because it corrects for price differences across

countries at different levels of development. However, GDP at MERs [Market Exchange

Rates] is a better short term measure of the relative size of the economies from a business

perspective, at least in the short term. (Hawksworth & Tiwari, 2011, p. 6).

6. The unweighted average daily dollar RMB exchange rate for 2010 is 6.7709 and on this

basis Chinas 2010 GDP was $5878.1. These figures are used for all calculations below.

7. The precise figure for US in 2010 was $14 660.2bn.

8. For a survey of methodologies and difficulties see (Deaton & Heston, 2008). Maddison

stressed: Exchange rates are a misleading indicator of comparative real values. (Maddison,

1998, p. 154)

9. For further details of this method of calculation see (Deaton & Heston, 2008).

10. It may seem surprising, in light of subsequent developments, that in 2001 Goldman

Sachs was onlypredicting: Ifthe 2001/2002 outlook were to be repeated for the next 10

years, then by 2011 China will actually be as big as Germany on a current PPP basis. (O'Neill,

2001) By 2011 Chinas GDP is in fact larger than every country in the world except the US.

11. In 2009 the Goldman Sachs studies concluded: Since we first estimated the long-term

growth potential of the BRIC... economies up to 2050, we have updated the original

estimates four times... the size of all of the BRIC economies at the end of 2008 in current

USD is much bigger than we originally estimated in 2003. In fact, each of them has grown to

a size we didnt expect to see until much later... China, which is about to overtake Japan

(about six years earlier than we first thought) may become as big as the US within 20 years.

(O'Neill & Stupnytska, 2009, p. 21)

12. Jim ONeill noted in March 2009: While I predicted a few years back that the BRIC

economies would together be larger in dollar terms than the G7 by 2035, I now believe that

this shift could happen much fasterby 2027. (O'Neill, 2009b)

13. Making this point is not intended as a criticism of Goldman Sachs BRIC view. On the

contrary Jim ONeills was a brilliant case of how to get it right regarding fundamental

trends. ONeill has consistently made qualitative the right calls regarding China forexample in correctly estimating that Chinas stimulus package to deal with the international
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financial crisis would be successful. As he noted in 2009, against critics who believed China

would not be able to maintain a rapid growth rate confronted with a crisis in the US and

other developed economies: Who said decoupling was dead? The decoupling idea is that,because the BRICs rely increasingly on domestic demand, they can continue to boom even if

their most important export market, the United States, slows dramatically... While many

now say decoupling was a crazy idea... evidence suggests very strongly that it was working

in a big way... At the heart of this shift in consumer power is China. Its total economy

already equals that of the other three BRICs put together, and what happens to China is

critical for the BRICs, and the world. With the authorities announcing plans to introduce

medical insurance to 90 per cent of the rural community by 2011, a huge infrastructure-

spending program and a massive easing of monetary and financial conditions, the only

debate in my mind is exactly when China will restore its growth rate back above 8 percent.(O'Neill, 2009b)

Goldman Sachs, in short, placed itself on the right playing field. It was those who criticised

Goldman Sachs views on BRIC who were shown to be quite wrong. If, in 2001, Goldman

Sachs had projected Chinas economy would be larger than the US by 2027 few would have

taken such views seriously. The above points are made therefore simply made to clarify that

far from Goldman Sachs BRIC views being too optimistic regarding the potential growth of

Chinas economy they underestimated its growth.

14. Evidently current price GDP calculations are of no use if real growth rates are being

examined, but in this issue what is being examined is the relative size of the US and Chinas

economies for which current prices growth rates are valid.

15. These calculations assume Chinas GDP at current exchange rates in 2010 to be $5 878.1

the eventual official figure will produce an entirely marginal difference to the calculation.

16. This issue is different to the one of whether there is a tendency for economies to

decelerate as they become more developed and therefore what will be Chinas growth rateover a period say to 2030-2050. For Chinas GDP not to overtake the US due to it

decelerating such a slow down must, for reasons indicated above, take place during the next

decade.

17.Dale Jorgenson, one of the world's leading experts on productivity and growth, was

noted by Reuters as stating that the, 'United States will need to come to terms with the fact

that its prevalence in the world is fated to come to an end,... This will be difficult for many

Americans to swallow and the United States should brace for social unrest amid blame over

who was responsible for squandering global primacy.' Reuter's also noted strongerpredictions regarding China's growth by some US economists: 'MIT's Simon Johnson put it


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more bluntly, saying the damage from the financial crisis and its aftermath have dealt U.S.

prominence a permanent blow."The age of American predominance is over," he told a

panel. "The (Chinese) Yuan will be the world's reserve currency within two decades."'(Felsenthal, 2011)

Authors of perspectives of drastic slow down of China's economy continue for some reason

to receive regular publicity for their views in sections of the media despite the fact that

similar predictions have been falsified over several decades.A few examples may therefore

be given:

- Gordon Changs The Coming Collapse of China asserted in 2002: A half-decade ago the

leaders of the Peoples Republic had real choices. Today they do not. They have no exit.They have run out of time. (Chang, 2002, p. xxiii) This prediction they have run out of time

was followed by eight years of extremely rapid Chinese GDP growth.

- Michael Pettisprojectsa deceleration of Chinas growth to 3-5 per cent over the rest of the

decade - due to difficulties in developing consumption and other issues (Pettis, 2010).

- James Mackintosh, investment editor of the Financial Times, asserts: There are plenty of

potential triggers for a slowdown [in China]. Policy measures to control runaway food price

inflation could work too well. The housing bubble in large cities could burst, rather than

deflating slowly, and could hit over-indebted local authorities. Finally, the state-controlled

banks may need another big injection of cash to make up for their wild lending over the pasttwo years, taking resources away from the rest of the economy. (Mackintosh, 2011)

- James Rickards, former general counsel of hedge fund Long-Term Capital Management,

and now the senior managing director for market intelligence at consulting firm Omnis,

claims China is in the midst of the greatest bubble in history stating that the Chinese

central banks balance sheet resembles that of a hedge fund buying dollars and short-selling

the yuan. (The Economic Times, 2010)

18. In terms used by Hawksworth, such a development would mean ending over a century

of US economic hegemony (Hawksworth, 2010).

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The Central Date for China's GDP to Overtake the US at Market Exchange Rates is 2019

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