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April 22, 2010

China Economics Quarterly Predicts China to Be Largest Economy Around 2025

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Arthur Kroeber, the Beijing-based managing director of GaveKal Dragonomics, an economic research firm, and editor of the China Economic Quarterly says that China will be the world's largest economy by 2025

If we assume that China's economy continues to grow at 12 per cent a year in nominal US dollar terms (8 per cent average real growth plus 4 per cent combination of inflation and currency appreciation), and the US grows at 5 per cent nominal (3 per cent real plus 2 per cent inflation), then China's economy will surpass the United States in 2025 to become the world's biggest economy, with a GDP of around $31 trillion. It might happen a bit earlier or a bit later

I think the currency appreciation or inflation will be faster and the China's GDP growth will be stronger. Therefore my prediction of China becoming number one around 2017.

China's growth mainly derives from the following factors:

* Very favorable demographics (large and growing labor force and high savings rate) since the mid-1970s. Note that after 2020 China's demographics will become very unfavorable while India's continue to improve.
* Effective mechanisms for mobilising national saving for investments in basic industry and essential infrastructure.
* Pragmatic, investment-friendly economic policies. These include the decentralisation of much economic decision making to local governments, and the creation of incentives for local governments to compete for investment and economic growth.
* Social welfare has improved dramatically in China. The vast majority of Chinese citizens have a much higher standard of living than 5, 10 or 20 years ago.
* Inequality has increased, but that is mainly because of structural reasons: people get wealthier by moving into the cities, but the cities can only absorb so many people each year (approximately 12-15 million).

India can Sustain 8-10% Growth for a couple of Decades

Arthur Kroeber recommends India:
Deregulate labour markets and dismantle barriers to investment. Also improve and make universal basic education (6-9 years) to enable more people to participate in the modern economy

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