May 24, 2007

China's economy could pass USA in 2020 on exchange basis

Goldman Sachs and Merrill Lynch say the yuan will gain 9.6 per cent to about 7 per US dollar within 13 months. China's economy in 2008 would then be US$3.7 trillion. This does not include Hong Kong and Macau which would increase the size of the economy to $3.9 trillion.

Various economists say that the Yuan is undervalued by 40%

The big mac index (Purchasing power parity) indicates that the Yuan should be 3.42. The World Bank had calculated 1.8.

A steady 7.5% strengthening of the Yuan versus the dollar seems likely as China would gradually shift its currency to allow time for its companies to adjust Heading to 3 Yuan (RMB) exchange to the US dollar also seems reasonable for 2020.

In trillions of dollars:

YearGDP(yuan)Yuan per USDChina GDPUS GDP

Following that trajectory for another decade would have the Chinese economy at about twice the size of the US economy in 2030. In the projection above China's growth slows to 6% per year and US growth is steady at 3% throughout. China's economic size passes Japan's economy in 2010 or 2011.

This is also a recognition of the weakness of the US dollar which has fallen 65% against the Euro over the last seven years.

China has indicated that they will stop accumulating US dollars

This means that the Yuan will grow as a reserve currency, because China with the largest reserves will be investing a significant chunk of reserves in Yuan assets.

Others such as the Center for Economic and Policy Research have noted the imminent passing of China's economy over the USA on a purchasing power parity (PPP) basis The PPP parity passing of China past the USA is in 2010.

The passing of the US economy on both those basis and the squandering of political capital and financial strength by the US is accelerating the shift to a truly multipolar world.

China's Anti-satellite capabilities and credible nuclear deterrent means that military conflict between the major powers is off the table.

I believe that the Taiwan situation will be resolved peacefully.

Former KMT Chairman and Taipei Mayor Ma Ying-jeou has stated that Taiwan should form a common market with China and establish direct transportation links. A 5/10/2007 poll released by the United Daily News shows Ma's lead over Hsieh (DPP) at 43% to 28%. I believe that Ma will win and establish that common market by 2012. Taiwan is a $355 billion economy (2006).

The DPP candidate (current ruling party) is Frank Hsieh As premier, Hsieh sought engagement with China and a gradual opening of economic links. So even if Hsieh wins, Taiwan and China seem on a path to EU style union.

An interesting scenario is if China and Taiwan go beyond that to a NATO style military cooperation. China would get access to 160 F16s and Patriot missiles among other assets. In the longer term this is not really relevant because China's larger economy and advancing technology means that they will be perfectly capable of developing technologically competitive systems on their own.

A 2003 report by Goldman Sachs has been used as the basis of many future scenarios. They projected China overtaking the US economy in 2040. They projected a lower growth rate for China for 2005-2010 of 7.2%. China grew 10.2% in 2005, 10.7% in 2006 and is on track for 10.9% in 2007. Projections vary for 2008 but 9-11% seems likely. The 17% underassessment of China's economy before the 2004 census was not available. Goldman projected 268% currency appreciation over 47 years. The Goldman projections looks like it will be underestimating China's GDP by 50% in 2010.

The Economist Intelligence Unit predicted China surpassing the US on an exchange rate basis in 2026 Changing the currency appreciation to 7.5% instead of 5% accelerates the date of overtaking from 2026 to 2020. They must also predict a slower growth rate of about 6-7% per year.

Higher growth rates combined with currency appreciation would mean a pass as early as 2019. The growth rate would have to be 9.5% (combined with 7.5% currency appreciation) to move it to 2018.

The 2.9 RMB to 1 USD combined with relatively strong growth would have the Chinese economy passing the US (assuming about 3% growth for the US in the 2018-2025 timeframe.)

If the growth rate is between 7.5-9.5% and the currency appreciation between 5.5%-7.5% per year and the US grows at 3% per year then China passes the USA beteen 2019 and 2022.

A 2005 internet discussion on possibilities and timeframes for China overtaking the US economy


MR. Train said...

Really surprised no one else has commented on this great post. This is going to be the first blog I subscribe to. What are the biggest risks to your projections? Is there anything you would modify? Sorry to bring you back to such an old post.

bw said...

Thanks for the subscription. I refer back to this post fairly often in my writing on China.

If you like my writing please use the stumbleupon it link to give it a positive review. Thanks

I have updated this article

Where it seems if anything the processes are accelerating. (2018-2019)

The biggest risks to the projection
1. China's leaders screw things up big time
2. Corruption and pollution in China get out of hand. They are problems now and they are trying to improve things but if water and agriculture got messed up to the point that the system got messed up, then it tough to be productive when you are starving or thirsty
3. The US fixes its budgets and goes back to a strong currency policy. US backsliding with a weak currency is accelerating this trend. The US dollar has dropped in half against the Euro over the past 6 years.
4. Big World wide problems (wars, oil shortages etc...)
5. Big pandemic that hits China
6. US economic growth accelerates. The US is tougher to pass if the US economy starts growing at 6%+. This would involve US leaders getting policy right and for some of technology that I talk about having major impact. China is catching up so quick that this has to happen right away and for China to be slow on adopting whatever the new thing is.
7. China's economy has trouble adapting to a strong currency and with moving up market and with generating its own innovations.
China seems to be doing ok with those adaptations

Passing Japan in 2009-2010 will also start the discussion in a bigger way (China #2 then). When the yuan goes lower than 4.5:1 against the US dollar and if growth is still above 8% per year in 2011-2013 then a lot more people will recognize that an economic pass will be imminent.

solpao said...

I wrote a paper in a Taiwanese journal in 2008 and the point is baisc the same with you. Amazing.

The vise-president of World Bank, Lin Yifu, has also made a comment that Chinese GDP may be 2.5 times larger than the US in 2030, and that means the size of US and EU (even plus Japan) combined.

China could surpass Japan this year. As you said, prople may start to think the scenario more seriously.

Sol Pao in Taiwan