In ranking a country’s weight in the world, two attributes stand out: manpower and money; or, more precisely, population and production. Until the 19th century, the two went together. The country that could sustain the largest population—China—also had the largest economy, almost by definition. America eventually broke that link, becoming the biggest economy in the world by 1890 despite having less than a fifth of China’s population, according to estimates by Angus Maddison, an economic historian, and his successors. But the ancient pattern is slowly reasserting itself. Is China now destined to reclaim both crowns, becoming the world’s biggest economy as well as its most populous country?
By some measures, it already has. The IMF reckons China’s GDP overtook America’s in 2014 and that it will be almost a quarter larger in 2018. These calculations convert China’s GDP into dollars at purchasing-power parity (PPP), the exchange rate that would equalise the dollar price of similar goods in both countries. This ranking also lines up with some other crude proxies for economic bulk. China emits more than twice as much carbon dioxide as America and produces almost 50% more electricity. Even allowing for China’s dirtier economy, that is a big gap.
Despite the commonsense appeal of the PPP approach, it fails to impress many arbiters of economic status. The results, after all, have limited application in the global marketplace. In order to buy internationally traded goods, services and assets, China must convert its yuan not at PPP but at the market exchange rate of roughly 6.6 to the dollar.
So when will China’s economy overtake America’s at market exchange rates? Five or six years ago it was possible to believe the moment was fast approaching. Back then, China’s GDP was growing at a double-digit pace. Its exchange rate was appreciating against the dollar. And its low prices were rising rapidly towards American levels. Thanks to the combination of these three forces, China’s dollar GDP grew by a remarkable 24% in 2011 alone.
Not so fast
At the end of that year The Economist updated an interactive chart which invited readers to predict the date of America’s economic eclipse. The chart’s creator included some default assumptions for growth, inflation and the exchange rate, to help readers get started. No one thought China’s dollar GDP could continue growing at 24% for long. But it seemed possible that the yuan would continue to strengthen, perhaps at the gentler pace of 3% a year; that China’s prices would rise much as they had in the ten years before; and that China’s GDP growth would slow from double digits to 7.75% on average. Plugging those assumptions into the chart showed that China would catch America by 2018.
That prediction, we can safely predict, will not come true. Although China’s growth has remained robust, averaging over 7% since 2011, the yuan is now weaker, not stronger, against the dollar. And China’s prices rose less quickly than America’s in 2014-16, as the world’s workshop succumbed to industrial deflation. So China’s dollar GDP is still far short of America’s (see chart).
One person who foresaw this failure is Michael Pettis of the Guanghua School of Management at Peking University. He challenged The Economist to a bet in early 2012, wagering that China would not catch America by 2018. (Not liking our chances, we challenged him to a counter-bet: that China’s growth would exceed 3.5% this decade, contrary to Mr Pettis’s pessimistic projections. Given China’s strong growth since then, it now seems safe to assume that the wager will end in a score draw: one own-goal apiece.)
Because of the delay in China’s economic ascent, the game of national greatness has taken on a new twist. China’s GDP will eventually overtake America’s. But will it do so before India’s population overtakes China’s? Perhaps China will grab the economic crown only after losing its demographic one. Some think the game is already up. Yi Fuxian of the University of Wisconsin-Madison believes China’s government has overestimated the country’s population by about 90m, because it has failed to recognise a catastrophic decline in the national fertility rate. If he’s right, India is already the most populous country in the world.
Even on official numbers, India is getting close. The UN thinks India’s population will overtake China’s as early as 2024. That would give China just six years to catch America economically, before India surpasses it demographically. To close the gap with America in time, China’s dollar GDP will probably have to grow by 11-12% a year: say, 6% growth, 3% inflation and a strengthening of the yuan to 5.96 to the dollar. That would be a remarkable rebound from the disinflation and depreciation of recent years. It is not impossible. But we wouldn’t want to bet on it.
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