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March 26, 2012

I am willing to Bet Michael Pettis

Michael Pettis wants to bet the Economist Magazine that by the end of 2018 China will not be the largest economy in the world (on a nominal GDP basis).

I am willing to make that bet.

For some minor factors in my favor I would want Hong Kong and Macau's GDP to be included in China's total. Those territories belong to China. I would also want the most favorable exchange rate in any particular year to be used for the conversion.

A Guardian an article by enthusiastic orientalist Martin Jacques in which he says that The Economist has just predicted that China’s GDP, measured in nominal dollars, will will be the world’s largest by 2018. Earlier estimates, he says had China becoming the largest economy in the world by 2027.

This 2018 prediction deserves I think more than a little questioning — it requires that nominal Chinese GDP growth in dollars outpace nominal US GDP growth by 13% a year. I know that in the past The Economist has tended to be a little less skeptical than some others have been about the sources and components of the Chinese growth miracle (not always — different writers at The Economist seem to have very divergent opinions on the subject), but this is a pretty aggressive prediction, more in line with what I would expect from an investment bank, or from a consulting company that helps foreigners access the Chinese consumer market.




It will be a close prediction. China's inflation being 2-3% more per year than the US will help. There is also the question about what happens to the exchange rate.

I looked recently at forecasts for China's provinces and updated the GDP projections.


Year GDP(yuan) GDP growth USD/CNY China GDP China+HK US GDP   


2011     47.2   9.2        6.3     7.5        7.8       15.1
2012     53     8.2        6.1     8.7        9.0       15.8
2013     59     8.5        5.8    10.2       10.5       16.5
2014     66     8.5        5.5    11.9       12.2       17.2
2015     73     8.5        5.2    14         14.3       18
2016     80     8          4.9    16.3       16.7       18.8
2017     88     8          4.6    19.1       19.5       19.6
2018     97     8          4.3    22.6       23         20.5
2019    107     8          4.1    26         26.5       21.5
2020    115     7.5        3.9    29.6       30         22.4
2021    125     7.5        3.7    33.7       34.2       23.4
2022    135     7.5        3.5    38.5       39         24.5
2023    145     7          3.3    44         44.5       25.6
2024    157     7          3.1    50.6       51         26.7
2025    170     7          3      56.5       57         27.9
2026    183     7          3      61         61.5       29.2
2027    198     7          3      66         66.4       30.5
2028    214     7          3      71.2       72         31.9
2029    235     7          3      78.4       79         33.3
2030    259     7          3      86.4       87         34.8

If China has more inflation that the United States then the currency conversion will not need to increase as much as in the above chart.

Another factor is what happens with US economic growth.

The US Bureau of Economic analysis has the US 2011 annual GDP at 15.094 trillion. This was a 3.9% increase over 2010 annual GDP. 2.8% GDP growth and 1.1% GDP price index.

The Federal reserve has forecasts for US GDP Growth and inflation


The US is likely to end up in the range of 20.0 trillion to 21.0 trillion. (2.1% GDP to 2.8% GDP average for 2012-2018, with 2.0% GDP price index.

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