China's gross domestic product(GDP) totalled 13.0619 trillion yuan (1.9062 trillion U.S.dollars) in the first half of 2008, a 10.4 percent increase year on year. 3.8 trillion pace for the year. Assuming another 5% increase in the second half of the year and the currency strengthening from 6.85 to 6.65 then China's GDP would be at just over 4 trillion at the end of 2008.
The case was made by JXie at Fool's mountain that China's economic statistics are still being underestimated.
The main reasons [for believing that China's GDP is underestimated] are:
#1 China’s GDP deflator is larger and likely overstated compared to the US’. For instance, the 2Q08 China GDP deflator was at implicit 10.6%; and the 2Q08 US GDP deflator was at supposed 1.1%. The difference is breathtakingly extraordinary if you consider CNY was quite a bit stronger than USD between 3Q07 and 2Q08.
#2 China had a one-time 16.8% upward GDP revision in 2005, mostly readjusted for its understated service economy. Was the revision a one-time event, or likely repeated down the road? In 2007, the service economy of China was 39% of the total economy. For instance, Egypt, which has a roughly 30% lower per capita GDP, has its service economy at 54% of the total economy. Is China’s service economy less developed than Egypt’s, or is it simply understated by the Chinese statisticians — that will require further upward revisions down the road? I tend to believe it’s the latter. For anyone who has traveled to Egypt, judged by the available restaurants, shopping malls, and the number of domestic leisure travelers, it’s very hard to fathom China’s service economy isn’t anything but far more developed that Egypt’s.
How fast can CNY rise?
Black Swan: the yuan replaces the US dollar as the world reserve and trade currency.
Assume the Chinese yuan followed what the Brazilian Real did between 2003 and 2008. Brazil benefited from rising commodity prices and sounder monetary and fiscal policies, has seen its currency compared to USD per Big Mac Index rising from 48% undervalued, to 34% overvalued. Big Mac currency fair value is 3.5 yuan to one US dollar. 33% overvalued would be 2.6 yuan to one US dollar. (the Euro also swung from undervalued to overvalued over an 7-8 year timeframe). If the yuan had a move to that level then China’s GDP would overtake the US economy in 2013.
This sites analysis has been that China would overtake the USA in 2016. China's GDP deflator and service economy evidence of an underestimated economy are interesting observations and could suggest another 12-20% of the Chinese economy is under reported. However, a move to that strong a currency seems unlikely. China's economic leaders would try to fight it. It also assumes US and probably european currency weakness for another 5-8 years. If the economy were underestimated by 12-20% than a 2015 passing of the US economy could be possible.