China Will Overtake America Within a Decade. Want to Bet? You're on

The Economist ^ | Mar 30th 2012

[nickcarraway]

Michael Pettis has challenged us to a bet.

For those of you who don’t know him, Mr Pettis is a finance professor at Peking University’s Guanghua School of Management and a frequent blogger. He would like to bet that China’s dollar GDP (calculated at market exchange rates) will NOT surpass America’s in 2018. That is the year that China's economy will overtake America's if you stick with the default assumptions in our most recent* interactive chart, which allows you to plug in your own guesstimates** of future growth and inflation in the two countries, as well as the exchange rate between them.***

When he is not fretting about China’s economy, Mr Pettis runs his own record label in Beijing (Maybe Mars). If we lose the bet, he’d like us to invite one of his indie-rock bands to perform at an Economist conference. If we win, he has to give us a record deal (not really).

Free Exchange is happy to accept the bet, one blog with another. We would also love to see a band like Ourself Beside Me, Birdstriking or The Offset: Spectacles playing at an Economist conference. But we’re reluctant to commit our hard-working colleagues in the conferences division to the logistical challenges that might entail, so we were hoping we could keep it simple: how about a bottle of scotch (or baijiu) to the winner—and we’ll see what we can do about the band closer to the time?

We’d also like to propose a counter bet. Mr Pettis reckons China’s “average growth in this decade will barely break 3%.” He is definitely smarter than your average bear, but that prediction looks aggressively pessimistic to us. We’d like to bet that growth will break 3%. (Let’s say we win if it exceeds 3.5% on average in constant yuan over the decade.)

Some footnotes:

*The chart and the accompanying article were published before the full-year 2011 GDP figures were released. Using the official 2011 figures with the same assumptions suggests China will overtake America in 2019 not 2018.

**Our interactive chart is meant to be interactive. We’d be happier if people played around with it and came up with their own projections, rather than making too much fuss about ours. We wanted to keep the chart as simple as possible. As a consequence, it asks for average rates of growth, inflation, and exchange rate appreciation—but you cannot vary the rates over time. Obviously, in reality we would expect both the rate of growth and the rate of real exchange-rate appreciation to slow as China catches up with America. Our sister company, The Economist Intelligence Unit, which uses a more sophisticated model, foresees China overtaking America in 2021.

***People often forget about the importance of inflation and exchange-rate appreciation in these calculations. China’s real GDP grew by 10.6% a year over the last decade, but its nominal dollar GDP grew by 18%, thanks partly to the appreciation of the yuan against the dollar and partly to faster inflation in China than in America. One of the nice things about the interactive chart is that it helps people appreciate the significance of these two factors. Our default assumptions look perfectly reasonable by today's standards (growth of 7.75% in China, 2.5% in America; yuan appreciation of 3% and inflation--as measured by the GDP deflator--of 4% in China and 1.5% in America). But in combination these assumptions deliver a very striking result.

[ponder life]

but a funny thin happened along the way. They fell on hard times - and things went up in smoke

Well....Japan is still the 3rd largest economy in the world. And was second for a long time. And while they fell on hard times, and still are in it, they are expected to be the 3rd largest economy up til 2020.

Japan's limitation is that they are a nation of only 125 million people vs. the US which has about 310 million people. And China, of course, is about 1.35 billion people. Those factors need to be kept in mind.

[entropy12]

Some historical perspective
From a long-term perspective, the prospect of China becoming the world’s largest economy, and India the third largest, within the next 10-15 years, represents a return to the order which has prevailed throughout most of human history. According to calculations by Angus Maddison5, from at least the beginning of the common era until the early 19th century, China and India accounted for around half of global GDP (see Chart 1). For much of this period China and India were intact polities, had the world’s largest populations and were technological leaders. Sources: Angus Maddison, The World Economy: A Millennial Perspective, OECD Development Centre, 2001; IMF, World Economic Outlook Database, 2005. As Jared Diamond notes, “until around AD 1450, China was technologically much more innovative and advanced than Europe”6. Chinese inventions before or during this period included the wheelbarrow, gunpowder, matches, cast iron, porcelain, magnetic compasses, sternpost rudders, paper, printing, paper money and a meritocratic civil service.7 Indian inventions from this period include the decimal system (and the concept of zero), the water-wheel, cotton-ginning, cloth dyes, brass and the extraction of crystalline sugar from cane8. The decline in the relative importance of China and India between the early 18th and late 20th centuries resulted from, inter alia, the industrial revolution in Western Europe; the formation and rapid expansion of the United States; China’s retreat from engagement with the global economy beginning during the Ming Dynasty9 and subsequent decay under the Qing dynasty; the impact of colonial rule on India, and ‘gunboat diplomacy’ and ‘unequal treaties’ on China; nearly fifty years of warfare and social disorder in China in the first half of the 20th century followed by another quarter-century of chaos and misrule under Mao Zedong; and forty years of growth-stultifying Nehruvian socialism in India from independence until the financial crisis of 1991.

[Cringing Negativism Network]

Welcome to FR.

Sounds almost like “China as Middle Kingdom” narrative.

[JRandomFreeper]

Not too big on Jared Diamond. I've watched several of his shows, and don't have much respect for him as a man, or as a scientist. He's personally clueless on basic survival skills, and inept. And he cherry picks his facts to fit his thesis.

Only thing I ever saw that I respected was when he cried at the tragic death of a child in Africa from a disease that DDT could have prevented. And anyone would have that is human.

He's not much of an authority on anything, except his theories.

/johnny

[Captain Beyond]

If BO is re-elected it will be within the next 4 years not 10.

[KoRn]

Our politicians and big corporations have already sold out the American citizen to the Chinese, and other countries for big $$$$. By the time it becomes a huge problem, they will be retired and living on their ill gotten riches while we and our families suffer the consequences.

[tobyhill]

They officially did just the other day when a Chinese Oil Producer overtook Exxon.

Now China just said it will still buy Iranian oil despite Obama’s begging that they stop.

[alexander_busek]

China is distant third to US in defense but she has $ 2600 trillion in foreign exchange reserves while the US can only muster $ 150 trillion and [...]

Excuse me, but did you say TRILLIONS there?

Regards,

[sphinx]

Why is this an issue? China has four times as many people as the U.S. China will have the world's largest economy when its per capita GDP reaches one-quarter of the U.S. level. That will happen sooner or later. And it is a good thing, not a bad thing.

We have no national interest in 1.3 billion poor, frustrated, and angry Chinese. We have a big national interest in 1.3 billion increasingly prosperous, optimistic Chinese. China has finally figured out that it doesn't have to be poor. That's good.

China still has huge problems. Despite the growth in the cities, it still has 600 million people in the countryside living at subsistence levels. It has terrific infrastructure and environmental problems and a rudimentary social safety net. It has to figure out a new role in the international economy as it matures as an economic giant, and therefore a leader; it has to begin taking responsibility for systemic order. (It may take a severe recession or two to drive the point home, but China is too big to be a freeloader any longer. That's a hard lesson to learn.) It has to shift from export-led growth to a greater reliance on domestic consumption, and it has to become a better customer for its major trade partners to maintain open markets.

Probably most difficult, it has an enormous political and human rights hill to climb. I wouldn't want to trade places with them. But the emergence of China as a market oriented economy with a mass middle class is one of the most positive developments of the past generation, the growing pains notwithstanding.

So ... one of these days, China will have the world's biggest economy. For awhile. Then India may overtake it. Or we will, once enough Mexicans move north and we get to a billion people ourselves. But that's a story for another day.

[upcountryhorseman]

China has geographic limits as well as the world’s largest population that make it impossible to overtake the U.S.

[entropy12]

I am only superficially familiar with history of China but am intimately familiar with history of India having finished my undergraduate degree there. I can vouch for accuracy on Jared Diamond’s words in context of India.

Here is a youtube clip on India, it’s historical background and purported future.
http://www.youtube.com/watch?v=xjB_Tf7Cy3A&feature=related

[Cringing Negativism Network]

I get it.

So we should just be unconcerned about what’s good for America, because China is bigger.

China is paying very close attention to what is good for China.

How about we start looking out for America, for a change.

[JerseyanExile]

Well, they won’t have 1.3 billion people for long, not with a fertility rate of 1.6. Trying to project populations decades into the future is pretty dubious, that I know, but some of the more credible estimates put China as having crashed to under 1 billion by 2100, and the American population at more then 500, 600 million.

[kenmcg]

If we get another four years of Obama they will!!! All the more reason to win the presidency and get a conservative majority in the house and senate.

[Jakarta ex-pat]

There is one thing that China will NEVER beat America in....

Happiness.

[Fee]

Yes. Foreign exchange reserves are what other nations invest in your nation, assets, cash reserves, investments and etc. That is why the numbers are so huge. Look up China trade surpluses for the last 20 years, she invests part of her money in overseas mines, oil fields, etc. Since the price of oil, metals and food has gone up in terms of US dollars, these resources reserves increase in value and are added to China’s assets. Recently China has the largest oil company in the world and US Exxon is second.

[sphinx]

Agreed. I was just reacting to all the pants-on-fire alarmism about China becoming the world’s largest economy. I’m all in favor of China getting affluent. We need to stop worrying about the yellow peril and get our own house in order.

[Cringing Negativism Network]

Actually, I don’t think we agree. :D

But it’s a FRee country.

So we disagree.

I’m for starting the trade war tomorrow.

[ponder life]

I believe I've something similar to what you described, US population of 600 million by 2100 and China's under a billion also by 2100.

But a broad range of assumptions would have to be true in order for the two countries to reach those predictions. Alot can happen in 88 years.

One assumption, is that the one child policy in China will stay in effect for the remainder of the century. And US immigration will remain robust for the rest of this century.

But these population multiples, i.e., as in the case of the US doubling by the end of the century, would have to happen over the course of 3-4 generations. China's economic multiples, i.e., doubling her economy, can happen in less than one generation, and during some periods, triple in less than one generation.

[ponder life]

Bill Lear never graduated from high school, yet he was a lifelong inventor. And the fellow from Princeton? I can never remember his name!

There are many examples of inspiring stories like this. But I tend to think these are the exceptions rather than the rule. And I'm willing to bet most of the people doing the design and engineering at Learjet have college degrees in Engineering.

And the same is true at Bill Gate's Microsoft. While Bill Gates never finished college, his company is full of the best and brightest who came from the best institutions in America and across the world.

And while there are the Bill Lear's, there are also many like Andy Groves, who got his Ph.D in Engineering and co-founded Intel Corp.

People who haven't gone to college can be innovative, but I think its stretch to say they are MORE innovative. Most marketable patents are developed in corporations and college institutions. And they are produced by people with advanced college degrees.

I do agree, that some innovations are best done outside of a college setting. Bill Ruger, for example, did something innovative by building gun parts out of cast steel instead of forged steel. But I hardly think that is comparable, in the grand scheme of things, to tens of thousands of engineers developing a smaller and smaller CPU at Intel.