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. 

Snap Turning Virtual Reality Into Real Money

Company is putting users in stores, and businesses on maps, virtually; investors are giving it real credit

By Laura Forman

If you still think of Snapchat as a niche platform for the world’s youth to send one another fleeting selfies of their nether regions, think again. Snap Inc. SNAP -1.53% is expanding in promising new directions.

Social-media stocks have all soared over the past year as the Covid-19 pandemic has forced the world to communicate virtually, but Snap’s performance stands out. 

Its shares have more than doubled over the past four months, besting both Twitter and Facebook during the news-heavy election season and even outshining Pinterest, which has blossomed into an e-commerce destination with nearly perfect timing.

Snap’s extraordinary run suggests that investors are valuing future potential over current performance. 

Wall Street expects Snap to have boosted revenue at roughly the same rate as Pinterest in 2020 and its monthly users at roughly half the rate. 

Snap is now trading at a sizable premium to Pinterest at 22 times forward sales—a level it hasn’t seen since its initial public offering back in 2017.

Snap has been working to enhance its appeal to businesses beyond traditional social-media advertising. 

That potential seems to be coming into focus now with analysts increasingly eyeing the company’s innovation pipeline, which MKM Partners’ Rohit Kulkarni calls the best in social media.

Snap said it has launched 15 different products and functionalities using augmented reality for businesses in just the first nine months of last year. 

A new marketing video released by Snap in December shows how Snapchatters can now virtually try on products such as shoes or nail polish. 

It also shows how users can physically scan a product’s logo to view information about it, including a tutorial on how to use it.

Deutsche Bank’s Lloyd Walmsley pegs the revenue opportunity for AR lens and filter ads at $4 billion over the next few years—more than double the company’s total revenue in 2019. 

These virtual try-before-you-buy products are particularly timely right now with many physical stores closed, but they could continue to be valuable for consumers who live far away from their favorite shops.

Outside of AR, Snap is working to put businesses on the map—literally. The company launched Snap Map in 2017, an attempt to personalize maps by showing Snapchatters where they are relative to their friends and to businesses. 

Roughly a third of Snapchat users are now using Map, according to a Jefferies estimate. That should increase following Snap’s January acquisition of StreetCred, which crowdsources business data by compensating users who contribute.

Jefferies analyst Brent Thill estimates that Snap’s Map could add $1.5 billion in incremental annual ad revenue by 2023, adding that it might be the company’s most undervalued asset. 

In a recent note, Mr. Thill described a patent published by Snap in January that, he said, could enable businesses to leverage event invites within the Snap Map both organically and through paid advertising.

Snap is also investing heavily in user-generated content, a lucrative but crowded field pitting it against TikTok, YouTube and Instagram Reels. 

As of mid-November, Snap has been offering more than $1 million a day to creators who submit the best videos for its new user-generated content offering, Spotlight. For now, the incentives are intended to boost user engagement, luring users away from other platforms to make Snap more attractive to advertisers. 

Goldman Sachs’s Heath Terry has said Spotlight itself could open up unique ad opportunities over time.

Snap is set to report fourth-quarter results Feb. 4, but investors might have to wait for the company’s annual investor day later that month for an unfiltered update on its pipeline. 

Wall Street is expecting a stellar performance from the company to close out the year, including fourth-quarter sales growth nearly on par with the impressive 52% the company put up in the third quarter.

Snap is ready for its close-up.

Leaderless Liberalism

Today, the US is hardly the hegemon it was a generation ago, with its democratic institutions under attack by a sitting president and millions of his unhinged supporters. As a result, global liberalism has lost its compass, with the EU demonstrating little appetite to uphold core values.

Ana Palacio

MADRID – The United States’ presidential transition, culminating in Joe Biden’s inauguration, has been a roller-coaster ride. 

It has brought moments of horror and flashes of hope, dismay at how fragile democracy seems to be, and a sense of relief that it has survived thus far. 

But, for Europeans, this tumultuous transition should also bring something else: honest reflection about the state of liberalism in today’s world.

The liberal tradition’s vitality has always relied on universality: the belief that liberal values apply to all of humanity. This conviction has sustained a sort of zeal, which propelled efforts to build, deepen, and sustain the liberal international order.

Consider the Universal Declaration of Human Rights – a quintessential exemplar of liberal values. When it was being forged in the years following World War II, the Soviet Union opposed the inclusion of individual rights, insisting that human rights could be exercised only through the government. 

Saudi Arabia, for its part, took issue with the inclusion of freedom of religion, arguing that the country’s Islamic-based law must come first. Neither caveat was included.

Although neither government (or South Africa) voted for the UDHR, including individual rights was clearly the right decision. The Declaration was not about codification; it was not meant to be binding (though it has since been incorporated in innumerable binding instruments). 

Instead, it represented hope for a better world. The UDHR’s precursor, the Atlantic Charter, stated the hope that “all the men in all the lands may live out their lives in freedom from fear and want.” It had to be universal.

This belief in universal liberal values provided a center of gravity around which to orient the West through the Cold War. It persisted after the fall of the Berlin Wall, outlasting a new round of calls for relativism – such as to take into account “Asian values” – in the 1990s. 

The hegemonic US – the seemingly incontestable arbiter of liberalism worldwide in the years after the collapse of the Soviet bloc – was central to this belief’s endurance.

Today, the US is hardly the hegemon it was a generation ago, with its democratic institutions under attack by a sitting president and millions of his unhinged supporters. 

As a result, liberalism has lost its engine and compass. China, for its part, is eager to fill the void with its own universal, Sino-centric model.

With the recently concluded European Union-China Comprehensive Agreement on Investment (CAI), Europe seems to be acquiescing. Though the deal was seven years in the making, both sides were eager to conclude it by the end of 2020, before Biden’s administration, which is committed to creating a united front of democracies to counter China, took office.

On the European side, Germany wanted to count the deal among the achievements of its Council of the EU presidency. So, even as it touted its impending new global partnership with the US, it rushed to complete the deal with China – the central foreign-policy challenge of our time – over the objections of Biden’s team. 

There are much smarter ways for Europe to demonstrate its oft-proclaimed desire for “strategic autonomy.”

And yet that is not the most disappointing part of the story. Rather than taking a stand on human rights, as Europeans did in 1948, the EU gave the issue little more than a wink: the deal merely says that both sides will “work toward” implementing international labor conventions. 

Given China’s obvious lack of interest in observing the international prohibition on forced labor, the promise is worth little more than the paper on which it is written.

And for what has Europe sold its soul? The CAI promises European companies greater access to the Chinese market, though as Australia’s bitter experience has shown, the deal’s investment provisions may mean little. 

Yet, even if the deal brought massive economic benefits, they would not offset its moral cost.

Former German Chancellor Helmut Kohl once said, “If one has no compass, when one doesn’t know where one stands and where one wants to go, one can deduce that one has no leadership or interest in shaping events.” He was talking about German foreign policy under Chancellor Angela Merkel, but his words apply to the EU today.

Liberal values are our compass. Without it, we cannot navigate the uncharted terrain of an international order in flux. Nor can we afford to ignore its readings just because a powerful leader tells us to alter course. 

Regardless of who occupies the White House, if the EU succumbs to complacency (reflecting a lack of appreciation for our values) and resignation (arising from a lack of confidence), it will end up soulless, lost, and without agency or influence.

Ana Palacio, a former minister of foreign affairs of Spain and former senior vice president and general counsel of the World Bank Group, is a visiting lecturer at Georgetown University.