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China GDP Could Pass US In Two Decades

chinaThe IMF expects China’s GDP growth to be nearly 9% next year and the growth in the US to be less than 2%. In 2008, US GDP was $14.2 trillion. China was in the No.3 spot in the world with a GDP of $4.4 trillion. Japan is now a weak second with a total economy of just under $5 trillion.

The New York Times is speculating that, based on current trends, China could pass Japan in GDP in 2010. Japan’s economy is no longer the juggernaut it was in the late part of the last century. The prediction that it will fall behind China is almost certainly correct.

That means that China only has to catch the US to become the world’s largest economy. C. H. Kwan, a senior fellow at the Nomura Institute of Capital Market Research, is now forecasting that China could take first place as early as 2026. Most analysts have assumed that it would be mid-century before America’s place in the world economy would be challenged.

The predictions of the death of the US may be exaggerated. It was only three decades ago that rapid growth in Japan caused many economists to say that it would overtake American as the largest economy. Japan’s problems in the 1990s crushed its hopes a rapid prolonged GDP improvement.

China has a number of obstacles to keeping its GDP moving up at nearly 10% and there are some threats that it could even go into a deep recession of its own.

China’s $585 billion stimulus package is credited with offsetting the economic effects of a large drop in exports due to the global recession which has sapped demand for China’s goods. The world’s most populous nation needed to deal with its manufacturing oversupply. If consumption patterns in the US and EU do not improve, China’s unemployment could move up sharply. The stimulus package to offset those trends will end next year and the Chinese government may not replace it.

A great deal of the expansion of China’s economy is based on the theory that its own middle class will become major consumers of goods made in the country. But, the savings rate in China is high, and potential unemployment could undermine any big increase in consumer spending, another threat  to the nation’s manufacturing capacity.

China also faces the risk of extremely high inflation. Its stimulus has already caused real estate and stock market bubbles and a rapidly growing GDP could lead to increases in the costs of oil and gas, commodities including food, and metals. If the China pattern matches Japan, success could be followed by a collapse in economic growth and a huge devaluation of assets particularly equities and real estate. That chain of events pushed Japan into a decade-long period of stagnation from which it never fully recovered.

China has a chance to pass the US in GDP in the next twenty or thirty years, but it is far from a sure thing.

Douglas A. McIntyre