When the news of China surpassing the U.S. as the world's largest trading nation came out in 2013, the inevitable woes of U.S. decline and Chinese economic dominance followed. Likewise, when the topic of China overtaking the United States as the world's economic leader comes up, competing views arise. Some suggest China will surpass the U.S by 2018, others by 2028, while some go so far as saying it won't occur in this century. Although the days of double-digit annual GDP growth are a thing of the past, estimates published in The Economist suggest China's expansion will top out at seven percent in 2014, we believe that China's growth will continue.
This poses the question: Does China surpassing the U.S. as the world's largest trading nation, and eventually surpassing the GDP of the U.S., mean that China will be the world economic superpower? I believe that while China's rise will continue, and that it will overtake the U.S. in GDP terms, it will be a bumpy road, and it will not result in China overtaking the U.S. as the world leading economic superpower.
To start, let's dig a bit deeper into the GDP numbers and evaluate it on a per capita level (using purchasing power parity). Regardless of whether you source IMF, World Bank or CIA data, the U.S. is within the top 10 on any of the lists, with each person accounting for, on average, approximately $50,000 of national GDP. China, on the other hand, comes in at no higher than 92 on any of the lists, with each citizen, on average, representing about $9,000 worth of national GDP. Per capita GDP is often considered a decent measure of a country's standard of living, but let's also look at personal income to paint a clearer picture. According to the Bureau of Economic Affairs, U.S. disposable personal income per capita stood at $23,000 in 2008. According to the World Salaries Group, as of 2004, this same figure for the Chinese was slightly above $3,000. With numbers like these an asterisk would be necessary in order to claim Chinese dominance.
Despite these statistics, whether it's 2018 or 2028, China will supplant the U.S. as the leading contributor to the world's GDP, crowning China an economic poster child. However, as long as the Chinese possess the paltry level of disposable income that they do, relative to other developed nations, it would be misleading to consider China the world's economic superpower.
On top of that, China continues to be heavily reliant on exports to generate their GDP (notably to the U.S.), which provides little comfort should their customers find an economically feasible method to produce the goods and services they are currently importing from China. This puts China in a vulnerable position (especially considering the U.S. is entrenched in a bit of a manufacturing renaissance). They will also have to avoid the "middle-income trap." Where rising wages (in China about 12.6 percent per year the last five years) make them unable to compete with lower cost options like Vietnam, Indonesia and Bangladesh, yet they haven't moved far enough up the value chain with regards to the product quality to compete with higher end manufacturing countries.
Furthermore China has to deal with pollution, corruption and a work force that shrank last year for the first time. According to the World Bank environmental degradation costs, China is 5.8 percent of GDP, and corruption costs China approximately 13.3 percent to 16.9 percent of GDP, according to a study by Hu Angang. However, the biggest reason that I don't believe China will overtake the U.S. as the global economic leader is the demographic time bomb called the one-child policy. Because of this policy, 34 percent of China's population will be over the age of 65 by 2050, which means higher health care costs and pensions. It has already resulted in the Chinese labor force shrinking for the first time last year and according to the IMF China will have a labor shortage of 140 million by 2030 causing slowed growth and economic strain.
I do believe that China has a very bright future. However, until these structural flaws are addressed by the Chinese government, China will not overtake the U.S. as the global economic leader. In 35 years China went from a country unwilling to adopt modern economic practices to one that stakes claim to the fastest computer and fastest train in the world. Not more than 60 years ago China was a completely agrarian society, now they are the world's largest trading nation. The question people should be asking is: How will China avoid the pitfalls that Japan encountered in the 80s, and how long will it be before the government makes the difficult changes necessary to become the global economic leader?
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