Will China’s GDP Surpass That of the US in This Decade?

By

Cargo containers as a graphThe story began at the end of 2011, when the Economist magazine claimed: “The year when the Chinese economy will truly eclipse America’s is in sight.” Their educated guess, at that point, was it could take place as early as 2018.

Then came the bet. Michael Pettis, currently professor of international finance at Peking University’s Guanghua School of Management, found the prediction too optimistic. As documented in a Financial Times story, he challenged the Economist to a bet that China won’t replace the U.S. as the world’s largest economy by 2018.

Here are some details behind the thinking of both sides: The Economist’s calculations assumed that China’s real GDP will grow at 7.75% a year with 4% inflation vs. 2.5% and 1% in the U.S. More importantly, they also assumed that the yuan will appreciate 3% per year vs. the dollar. Pettis found the expectation farfetched that China’s nominal GDP growth in dollar terms would beat the US number by double digits.

How has the bet worked out so far? According to World Bank data for 2012-2014, the Economist’s forecasts were almost right on the dot, other than the fact that inflation turned out to be much better contained in China. Exchange rate is always the wild card; it turned out that the yuan only appreciated about 1.5% since the end of 2011. All in all, China’s lead was in the high single digits and a bit shy of the Economist’s predictions.

With another three and half years in the balance, who will eventually win this particular bet might be a moot point. After all, how many people lose sleep over a slip in China’s nominal GDP growth in dollar terms? The important facts for serious and casual investors to bear in mind are probably the following:

The first two points are perhaps the most important, but the attention generated by Pettis’ bet with the Economist implies that most people have accepted the idea of China replacing the U.S. as the No. 1 economic power — it is more a question of when than a question of if. That is a calculation investors may want to build into their decision-making process where relevant.

At the 65th CFA Institute Annual Conference in Chicago, Pettis discussed the trajectory and sustainability of growth in China, including an analysis of domestic consumption capacity. You can watch the recording in our library to hear him discuss China’s role in the world economy.

At the upcoming 69th CFA Institute Annual Conference in Montreal, Pettis will return to discuss the latest economic developments in China.

To receive more updates as speakers and agenda details are announced, subscribe to the CFA Institute Annual Conference blog.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Photo credit: ©iStockphoto.com/narvikk

This entry was posted in Economics, Investment Topics, News, Speakers and tagged , , , , . Bookmark the permalink.

5 Responses to Will China’s GDP Surpass That of the US in This Decade?

  1. L J Jia says:

    A very interesting topic. On paper and by their official statistics, China is on the way to achieve its aspiration of becoming the dominant global economic power. I am not ready to call it the right path as it is still searching for the best way to tackle all the challenges it is facing. Sometimes it will be a bit off, as shown in the recent stock market roller coaster ride. But I believe the direction of restructuring from manufacture/FDI focused and GDP driven model to service, technology/innovation and domestic consumption focused new economy is the right one. I also believe that it will take a couple of decades for China to match the average living standard of the more developed economy. We can measure it by PPP, but the real benchmark lies with the poverty alleviation of its grassroots population. There is tremendous challenge for China on this journey.

  2. Pingback: Articles for Your Coffee (08/07/15) | Financial Breakfast

  3. Charles Appeadu says:

    China’s GDP will become equal to that of the U.S. In the year 2022. I made this prediction as far back as 2006 and still stand by it.

  4. Yes, their reported GDP will pass that of the US, but the true value of their GDP may never do so. So long as they have ghost cities, bad quality, and an economy that relies on promoting exports, their GDP will be overstated.

    I am not worried about China — see if they survive the next 25 years as their demographics go into eclipse.

  5. Micael Winkler says:

    China’s GDP surpassed the US GDP in 1775(rhetoric) 1875, 1975 and 2015. Mathematics, economics and politics, makes a great western fruit cake… As did the most of the world in the 1930’s..

Leave a Reply

Your email address will not be published. Required fields are marked *