US media predict: China may overtake the US by 2020

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I have long argued that it is more or less inevitable that China’s economy will in a not too distant future become the biggest in the world. I am more convinced than ever of the truth of this prediction. Each year it seems, China passes at least one new milestone. In 2008, it surpassed Germany to become the third biggest economy. In 2009, it surpassed Germany as the biggest exporter and America as the biggest car market. In 2010, it will (barring a really dramatic yen appreciation) surpass Japan as the second biggest economy. But exactly when will China surpass America as the world’s biggest economy? Obviously, we can’t for sure pinpoint the exact year it will definitely happen. But we can pinpoint using basic arithmetic just when it is likely to happen. And the numbers clearly suggest that old estimates that the shift won’t happen until 2040 or 2050 are far off the mark. In 2009, nominal GDP in America was according to preliminary estimates, $14.26 trillion. In China, nominal GDP was 34.05 trillion yuan, or $4.98 trillion using the average 2009 exchange rate. That means that America’s GDP was 2.86 times bigger. With average annual growth in America being some 7.5 percentage points lower during the 2000s, then assuming that this will continue and that the real exchange rate of the yuan will appreciate by on average 3 percent per year (quite reasonable), then it will only take 11 years before the Chinese economy becomes bigger, meaning that by 2020, China’s economy will be the biggest in the world. If we assume that the growth differential falls to just 5 percent, while the estimated real appreciation is assumed to be just 2.5 percent per year, then China’s economy will become bigger by 2024. Given the falling returns from the “catch-up effect” that naturally follows when a nation becomes richer, it is unreasonable to assume that the growth differential of the last decade will last forever, or even for several more decades. But since per capita income would still be much lower in China when its economy is as big as America given its much larger population, it is quite reasonable to expect a similar growth differential for a while, and to expect a significant real appreciation of the yuan, making it likely that the year when China will become the biggest economy will fall somewhere between 2020 and 2025. For a long time now, I have believed that it is almost inevitable that China’s economy will become the world’s largest economy in the not-too-distant future. Now I believe more than ever that this prediction is correct. Every year, China seems to surpass at least one new milestone. In 2008, it surpassed Germany to become the world’s third-largest economy. In 2009, it surpassed Germany to become the world’s top exporter, and also overtook the United States to become the largest automobile market. By 2010, it will surpass Japan to become the world’s second-largest economy. But when exactly will China surpass the United States to become the world’s largest economy? Obviously, we cannot determine the exact year it will occur, but we can use basic mathematical operations to estimate when it is most likely to happen. Various data show that the original estimate that such a transformation would not occur until 2040 or 2050 was wildly off. In 2009, the nominal GDP of the United States was 14.26 trillion dollars, while that of China was 34.05 trillion yuan, which is equivalent to 4.98 trillion dollars when converted using the average exchange rate of 2009. This means that the U.S. GDP is only 2.86 times that of China. Given that during the first 10 years of the 21st century, the average annual growth rate of the U.S. economy was about 7.5 percentage points lower than that of China, and assuming this trend continues with the RMB appreciating by 3% per year (which is quite reasonable), it will take only 11 years for the Chinese economy to become stronger than the U.S. economy, meaning that by 2020 China will be the largest economy in the world. If we assume that the growth gap narrows to just 5%, with the RMB appreciating by only 2.5% per year, then by 2024 China’s economy will surpass that of the United States. Given that the \"catch-up effect\" is diminishing as countries become increasingly wealthy, it is unreasonable to assume that the growth gap observed over the past 10 years will persist forever—or for decades. However, when China’s economy reaches the same size as that of the United States, and considering China’s larger population, its per capita income will still be much lower. It is quite reasonable to expect that a similar gap in growth will persist for some time; it is also reasonable to expect that the RMB will appreciate significantly, which would very likely enable China to become the world’s largest economy at some point between 2020 and 2025. Reposted from Hai Ci, for sharing among Hai enthusiasts