China was once, centuries ago, the world’s biggest economy. Many analysts expect it to regain that distinction in due course. But a host of difficulties besetting the Asian giant, some of which are self-inflicted, will delay the day it overtakes America to return to pole position. A growing number of economists now think that day may never arrive.
China’s population is over four times bigger than America’s. Its economy could therefore surpass America’s in scale long before it matches it in sophistication. Its GDP per person needs to reach only a quarter of America’s for its total GDP to become the biggest in the world. By one measure, China has already achieved that modest feat. Its GDP overtook America’s in 2016 when translated into dollars at “purchasing-power parity”, a method that tries to tally up the goods and services in each country using the same international prices.
But China’s GDP still lags far behind America’s when converted into dollars using the more familiar exchange rates that prevail in the currency markets. It reached $17.7trn in 2021 compared with America’s $23trn. And China’s growth has been hampered by its zero-covid policy (which responds to every outbreak of the virus with severe lockdowns) as well as a property slump, unreformed state-owned enterprises and a continuing tech war with America.
The government’s aggressive regulation of previously booming sectors, such as tech and education, has also depressed the mood. China’s economy expanded by an impressive 8.1 per cent in 2021, but it will be lucky to grow by even 3 per cent this year.
In the longer term, China’s ageing population will mean further difficulties. The workforce could shrink by 15 per cent over the next 15 years, according to some estimates. Capital Economics, a consultancy, thinks China’s GDP might draw close to America’s or even surpass it by the mid-2030s only to fall behind again as its demographic decline asserts itself.
One of the hardest and most neglected questions in this debate is what will happen to the exchange rate between the two countries and to prices within them. Goods and services in China are still substantially cheaper than in America on average.
If China does continue to narrow the productivity gap with America, its prices should also converge, either through a stronger currency or faster inflation. These movements can make a big difference. Goldman Sachs, for example, predicts that China’s GDP will exceed $38trn in 2031, at the prices and exchange rates prevailing in that year. That would be more than double its present total and enough to make it the world’s biggest economy.
But not all of that elevation will come from economic growth. Much of it will also come from higher prices and currency appreciation. According to the forecast, China’s GDP will be about 47 per cent bigger in real terms in 2031 than it was ten years earlier (an average growth rate of less than 4 per cent a year). Its prices will be roughly 30 per cent higher, and its exchange rate will be almost 13 per cent stronger.
It is the combination of these three factors, rather than growth alone, that will determine whether China ever becomes the world’s undisputed economic heavyweight champion.