China’s Economy Overtaking the U.S. Will Be Harder Than It Looks
Estimates that China will soon overtake the U.S. in total economic heft depend on it maintaining current growth trends, and poor demographics will make it difficult to hold the lead
By Mike Bird
China’s relatively rapid recovery from the pandemic has prompted some accelerated predictions of when its economy will surpass that of the U.S. in size. That may be asking the wrong question—if China takes the top spot at all, it may struggle to keep it for long.
Researchers at investment bank Nomura recently suggested that if the yuan were to strengthen further and to hold at around 6 to the dollar, the U.S. economy would be eclipsed by the Chinese economy by 2026.
The estimate is based on extrapolating International Monetary Fund estimates of 7.9% nominal GDP growth in 2025 further out into the future, and depends on the assumption that the U.S. economy will remain permanently below its pre-pandemic path.
Neither fact, nor continued currency appreciation, is certain. But even leaving the path of the U.S. aside, demographics and productivity trends will make sustaining China’s pre-pandemic growth rates increasingly difficult.
Even if fertility trends improved overnight, China’s 20-65 year old cohort will have shrunk in size by a 10th by the late 2030s. Sometime between 2035 and 2040, China’s old-age dependency ratio—the proportion of people older than 65 compared with the working-age population—will surpass the U.S. equivalent, according to United Nations projections.
The components of growth are labor, capital, and the elusive total factor productivity.
The domestic working-age population, as discussed, will be contracting.
That means that unless China manages to attract many more immigrants or dramatically boost labor-force participation, it will ultimately need to maintain growth with sustained productivity improvements. And that is precisely the element that will be most difficult.
The marginal benefit of new investment in China has been shrinking as debt has boomed. And TFP growth overall has slowed considerably, to just 0.7% a year between 2009 and 2018, from 2.8% on average in the decade before the global financial crisis, according to a June 2020 World Bank paper on the country’s productivity potential.
Convergence isn’t an economic law.
At the end of 2019, the GDP per capita levels of Brazil, Mexico and Turkey were very moderately below their average for the period since 1980.
There are other measures of income, which adjust for different purchasing power in different countries.
But when measuring pure international heft, the fact that haircuts are cheaper in Chengdu than Cleveland means very little.
China’s surpassing of the U.S. looks likely from extrapolating recent trend lines, but entails some big assumptions—especially on productivity and currencies.
Keeping ahead without a growing population might prove even harder.
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