It’s interesting that no one official in China talks about when the Chinese economy will be bigger than that of the US. Their immediate objective is that China becomes a high income economy (defined by the World Bank’s metrics) by 2025. Having been remarkably successful at reducing (on their own figures they claim to have eliminated it) poverty, most of their growth objectives reflect ambitions to make the economy more inclusive rather than simply expanding GDP.
Because Cebr presents our end year international forecast in the convenient form of a league table, we obviously do look at comparative sizes in some detail. The chart below shows when each edition of our World Economic League Table (WELT) for the past 10 years has predicted that China’s economy, measured in dollars, would overtake the US’s. The horizontal axis gives the year for which the WELT was published (it is generally released on 26th December of the previous year, for example WELT 23 was published on 26th December 2022). We should note that at purchasing power parity China’s economy overtook that of the US a decade ago in 2013.
Figure 1: Cebr’s expectations on when the Chinese economy will overtake that of the US
Source: Cebr analysis
Our last forecasts had stretched out the date for this particular ‘il sorpasso’ to 2036. And recent reports in the media are starting to suggest that the Chinese economy, far from powering on, may have peaked. Weak economic data has catalysed this assessment but also the increasingly evident travails of the property sector.
The most commonly accepted view of China’s property sector is based on Rogoff and Yiang’s 2020 NBER Working Paper, which claimed that the property sector was 30% of GDP compared to the next largest (the UK and France) at 20%.[1] On this basis China has to reorientate a tenth of its GDP.
On the other hand, more recent research by Caixa Bank[2] suggests that the excess size of the sector is far less than the NBER analysis – using detailed GDP data to conclude that in fact the sector is only 24% of GDP and much more in line with many other economies, though above the 16-17% of GDP that it might be in maturity. So a rather smaller proportion of GDP has to be reorientated to other activities.
In some ways the Chinese property sector resembles that of Spain’s 15 years ago. The developers are over leveraged and in practice bankrupt. Eventually the lenders to such developers will have to ‘take a haircut’. Most of the property owners, however, even if they have lost money, are likely to stay invested because much of the money invested in property has probably never been declared for tax or other purposes – a sale would crystallise tax liabilities and possibly criminal prosecution. So fire sales are unlikely.
Eventually the Spanish problem worked itself out, helped by banks that had been allowed to accumulate hidden reserves. China’s additional problem is that with a population forecast to decline, its housing demand will eventually diminish. But on the other hand, China is still developing and floor space per capita remains low at about 640 square feet compared with 2,500 square feet in the US.
Western analysis of China veers between worrying that China will grow so fast as to take over the world, and claims that the economy will collapse.
Our view is that in the short term, growth will be held back especially by an inventory cycle in the US and in Western Europe which will disproportionately impinge on leading manufacturing countries like China and Germany.
But we still see sources of growth – the Australian Strategic Policy Institute claims China leads in 37 out of 44 key advanced technologies. In particular, it dominates the electric car market. China now accounts for more than half the world’s market for electric cars and the latest data for sales in June showed plug in and hybrid cars accounting for 35% of new sales in China.
And the Beijing still has some options for stimulating growth as the mainland adjusts to its new reality – a weaker currency and possibly a temporary sales tax cut for example.
Overall, our take is that China is still on track to overtake the US during the 2030s but that for most of the second half of the 21st century there will be three giant economies – China, India and the US, of very approximately equal size. For the rest of us, how we manage and cope with this will be critical to our own success.
[1] K.S. Rogoff and Y. Yiang’s (2020)
For more information, please contact:
Douglas McWilliams, Deputy Chairman
Email: dmcwilliams@cebr.com, Phone: 07710 083652
Cebr is an independent London-based economic consultancy specialising in economic impact assessment, macroeconomic forecasting and thought leadership. For more information on this report, or if you are interested in commissioning research with Cebr, please contact us using our enquiries page.