The speed and enormity of China’s economic growth has led many to form the view that its growth will eventually outstrip that of the USA. Some analysts have predicted that China will overtake the US as the world’s top economy in 2020.
This article will look at the factors driving growth in both the US and Chinese economies and will consider whether China is likely to overtake the US in terms of growth by 2020.
Background – Chinese Economy
Major economic reforms were implemented in China in 1978. The economy changed from a state-run system to one that was more market-based. Since these changes took effect, Gross Domestic Product (GDP) growth within China has grown at exponential rates – some estimate by as much as 10 % per year since between the 1980s and 2012.
2012 saw Chinese growth level off slightly, but even then in 2012, GDP growth in China was still burgeoning compared to economic growth seen by other global players like the US and Japan. Further, as of 2019 China has a population of 1.3 billion and some experts regard it as the world’s second largest economy.
However, despite this impressive economic growth, China remains a developing country with per capita income a small fraction of what this is in more developed countries like the US and Japan. Current estimates of poverty within China estimate that more than 55 million disadvantaged people live in China’s rural regions.
Reforms to China’s social and economic fabric continue, and in China’s 13th Five Year Plan – a plan to deliver economic growth measurable over five year periods, China committed to address social and environmental problems, reduce pollution, increase energy efficiency, improve access to education and healthcare and bolster social protections.
In 2019, President Xi Jinping has announced the “Made in China 2025” policy, which aims to advance technology, specifically focusing on big data, aircraft parts and eco-friendly cars.
Additionally, major changes have been applied within the farming industry within China, and this has led to increased plans for and increased urbanisation, designed to fuel demand for apartments and services and to create more jobs. These changes are likely to increase the spending power of Chinese citizens and these changes are set to affect between 300 million to 400 million people (the same as the entire population of the EU).
In China, there is a slow but sure transition from state ownership of companies to privately owned companies. In 2019, 25 percent of companies remain state-owned, which has reduced from 75 per cent in 1970. This change is set to impact growth prospects within China, as new, innovative companies begin to grow and develop on the world stage.
Will The US Overtake China As The World’s Largest Economy In 2020?
Chinese, Indian And US Economic Statuses Explained
In research published in 2019, Standard Chartered has predicted that China will overtake the US as the world’s largest economy at some point during 2020. This prediction is based on a combined analysis of Purchasing Power Parity (PPP) exchange rates and nominal gross domestic product.
In their research, Standard Chartered points out that using the measure of PPP, China has already overtaken the US as the world’s leading economy. However, when a multiple context approach to measuring is conducted, for example combining the PPP measure with nominal gross domestic product, the US remains in the lead. However, according to Standard Chartered, this “lead” is fleeting as Standard Chartered point out that even on the multiple measuring approach, China is set to overtake the US in 2020.
Standard Chartered have also forecast that by the year 2030, the US will have been overtaken by India in terms of the size of its economy, due to the acceleration in GDP growth from 6% to almost 8% in the coming decade. This economic boom, taking place in respect of the Indian economy is attributable, according to Standard Chartered to a series of reforms of the Indian economy, most notably the creation of a national goods and services tax, and an Indian Bankruptcy Code. India’s economic buoyancy is also likely to impact the surrounding region, as Standard Chartered predict that Asia will become the dominant economic region in the world, by the year 2030.
Specifically, Standard Chartered has pointed out that by 2030 Asian GDP will account for approximately 35% of global GDP, which is an increase of 28 per cent from last year, and 20% in 2010. At 35% of global GDP, Asian GDP will dwarf the combined GDP of the Eurozone and the US.
How Has The US Economy Fared Under Trump?
The general consensus among economists has been that Trump has exceeded expectations in how the economy would fare under his leadership. Despite reporting delays caused by the government shutdown, data collected on US domestic growth has recently been released.
The data released by the US Commerce Department has shot down rumours of an impending US recession, by confirming that GDP growth in the last quarter of 2018 was 2.6 per cent, which far exceeded the predictions of the Federal Reserve, which forecast growth at 2.5 per cent.
This data release by the US Commerce Department has been even more significant because it allows for analysis of a full calendar year of economic performance under Trump’s economic policies. Despite promising a 3% GDP growth forecast on the campaign trail, Trump has actually exceeded his own forecasting, by achieving a 3.1% growth rate in GDP between the fourth quarter of 2017, and the fourth quarter of 2018.
Other analysts agree with these measures of GDP growth. As can be seen in the chart, shown below, the US economy has been performing at better than expected levels since the election of US President Donald Trump. Some experts predicted a 2.4 per cent growth in GDP by the end of 2018, however a growth of 2.6 per cent was actually realised.
This higher than expected level of GDP growth has been attributed in part to exports, private inventory investment, federal government spending and personal consumption expenditures.
It seems that Trump’s experience of business has brought huge benefits to the US economy, though many doubted his experience and dismissed his forecasting as arrogance.
Despite dismal expectation of what Trump may have achieved for the economy, there has been a surge in consumer spending, and this accounts for more than half of US economic growth. This is complemented by what experts are describing as the strongest job markets in decades and lower energy prices. Additionally, analysts have confirmed that US take-home pay has increased on the back of the 2017 tax cuts implemented by the Trump leadership.
The Trump administration had also promised to reduce regulation, and with this policy implemented, many economic rewards are being reaped by businesses all across the USA. This has in turn led to higher levels of business investment, which many see as setting the stage for healthy economic growth into 2019 and beyond.
However, experts forecasting domestic growth within the US have shown concerns based on possible future trade wars and tensions between the US and China, which have the power to stall GDP growth and stymy economic progress for both nations.
China – US Trade War
Since the election of Donald Trump, the relationship between China and the US has been placed under close scrutiny, because Trump’s election manifesto promised to recalibrate the economic relationship between China and the US, sparking fears of a trade tensions between the two countries.
Slogans like “Make America great again” gave stark warnings of a shift US domestic policy that could impose more onerous trade tariffs on goods being sold in the US by foreign traders. This has been referred to in the media as a possible “trade war”, between China and the US.
As of 2019, fears of a full-scale trade war have been partially allayed, with President Xi Jinping agreeing to increase purchases of US goods. However, it is necessary to take account of the average purchasing power of an average Chinese citizen when assessing the likely impact of this policy change. Even after taking account of price differences, the average Chinese citizen has only one third the purchasing power of a US citizen, so increasing purchases of US goods is of limited value as a concession.
Furthermore, China has promised to reform its finance sector, and reduce barriers imposed by the current operation of the automotive sector – all of which promises a trade boost with the US.
How Will Trade Tensions Impact The Prediction Made By Standard Chartered?
Simmering trade tensions between China and the US have been the subject of much debate recently, and nobody knows how these will play out in 2019, however assuming there is little major change to the status quo and looking at the whole picture of economic growth in China compared to the US, it does look as though the prediction made by Standard Chartered that China will overtake the US as the world’s largest economy will be realised.
There are signs of a slowing of Chinese economic growth in some sectors and some signs of US economic resurgence, for example according to the Chinese National Bureau of Statistics the non-manufacturing purchasing managers index fell to 54 in July 2018, from 55 in June, dropping to an all time low of 50 as of Jan. 2019. This index measures economic performance of the retail, aviation, software, real estate and construction industries. Moreover, the Chinese manufacturing purchasing managers’ index was at 51.2 in July 2018, its weakest position since Feb. 2018.
The downward trends are being attributed to bad weather, and the trade tensions between the US and China causing exports to decline, but analysts suggest this is unlikely to prevent China overtaking the US as the world’s largest economy in 2020.
Overall, however, trade tensions between the US and China have simmered down, largely due to diplomatic interventions and ongoing talks between China and the US, but this was never something that was ever going to benefit the US as a trade war between China and the US would only even have been damaging to both sides.
Will China Overtake The US As The World’s Top Economy In 2020?
In the article we have looked at the background to economic reform in China. GDP growth has powered forward as a result of these reforms, and experts are forecasting further growth based on planned reforms within the already burgeoning Chinese economy. There is a huge emphasis on job creation, urbanisation and transitions from state-owned to privately owned enterprise. There are challenges that remain, like the purchasing power of the average Chinese citizen and the high number of state-owned companies by comparison to more economically developed countries. However, taken as a whole, a picture of an economy set to topple the US from its position as the largest economy in the world by 2020 is what is overwhelmingly emerging.
The US has enjoyed much better than expected economic growth since the election of US President Donald Trump, how has far exceeded the prediction he made on the campaign trail as to how his proposed economic reforms would boost the US economy.
However, despite the US experiencing something of an economic resurgence, the overarching analysis seems to be that while the US has enjoyed better than expected levels of GDP growth on the back of the Trump administration’s tax cuts, regulation reforms and energy policies, the levels of growth being enjoyed by China are still too significant to interrupt the prediction made by Standard Chartered which is that China will become the world’s largest economy by 2020.
