2007 October 18 Thursday
Chinese Economic Output Growth To Surpass US In 2008

While the United States will still have a much larger economy than China in 2008 the absolute size of the Chinese economy's growth is expected to surpass the absolute size of the US economy's growth.

For the first time in modern history, China will next year contribute more to global economic growth than the United States.

The landmark moment was predicted yesterday by the International Monetary Fund and is the latest illustration of the fast-growing Asian country's importance to the world economy.

While China's economy is still far smaller than America's, it has overtaken the UK as the world's fourth biggest economy.

This portends an even bigger shift in store. When will the absolute size of China's economy surpass that of the United States? Also, how expensive will oil become as Chinese demand bids up the price?

China's rate of economic expansion is phenomenal.

China's gross domestic product expanded 11.5 percent in the first half, after recording a blistering 11.9 percent in the second quarter and 11.1 percent for all of 2006.

If they could maintain 11% annual growth their economic would double in just 7 years. If they can only maintain 8% annual growth they'll double in 9 years.

The dollar's decline against the Euro is shifting Chinese exports toward Europe.

Europe's trade deficit with China jumped 25 percent to a record in the seven months through July, increasing tensions on foreign-exchange policy ahead of a meeting of the Group of Seven nations tomorrow.

The EU, unlike the US, still runs a net trade surplus with the rest of the world. But the dollar's decline has made European goods more expensive relative to US and East Asian goods. Though on the bright side for the Europeans the rise of the Euro against the dollar has reduced oil prices for them in Euros.

The East Asians are selling US bonds.

The dollar crossed the barrier of $1.43 against the euro; the broader dollar index fell to 77.478, the lowest since the series began in 1973.

The plunge follows data released this week by the US Treasury showing a record $163bn (80bn) exodus from all forms of US assets, led by unprecedented levels of US bonds sales by Japan, China and Taiwan.

The big US trade deficit has gone on for too long. Holders of US bonds have figured out that the pressures in favor of a correction have grown so strong that holding US bonds is a bad idea. Chinese holders of US bonds are thinking the Chinese yuan is going to rise against the US dollar and they do not want to hold dollar assets which will decline in value as the yuan rises.

Share |      By Randall Parker at 2007 October 18 10:26 PM  Economics Globalization


Comments
Wolf-Dog said at October 19, 2007 1:33 AM:

Randall Parker:"The EU, unlike the US, still runs a net trade surplus with the rest of the world. But the dollar's decline has made European goods more expensive relative to US and East Asian goods.
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The reason the EU has net trade surplus is because the US is running a net trade deficit with the EU in the order of $100 billion. Without that surplus with the US, the EU would actually run a net trade deficit because of China. The protectionist Europeans will soon realize that the US is unable to continue the same trade deficit of $700 per year (nearly 5 % of the US GDP), and very soon there will be trade tension against China.

Kenelm Digby said at October 19, 2007 4:39 AM:

If you care to log on to the 'CIA world fact-book' site, (which is presumably authorative being the condensed wisdom of billions of dollars of intelligence analysis), you will see that when GDP is measured at purchasing power parity, China's aggregate GDP is only a few years away from parity (and eventual overhauling) of the USA's GDP.

Wolf-Dog said at October 19, 2007 5:51 AM:

One important aspect of the Chinese economy, is that despite the enormous growth, the dollars and other foreign currency that are accumulating in the coffers of the Chinese banks, are not being converted into Chinese currency in order to be given to the working people to raise their standard of living (and their rate of consumption). Thus the average Chinese worker is still condemned to slave level low wages. Both in order to support the value of the dollar to make exports possible, and also for other reasons, the Chinese government and private industry, chose this method of operation. But ultimately, as China's own currency becomes prestigious enough to be accepted by raw materials producing countries, then the internal consumption in China will almost certainly start skyrocketing. At that time, there will be more pressure and competition for raw materials in the world.

John S Bolton said at October 19, 2007 7:41 AM:

China will have 15 or more years of 0-1% per capita growth, on the analogy to Japan, which used dollar-support to get high growth from export manufactures, but reached a point where they could no longer increase the scale of currency interventions, holding them to per capita stagnation. China is up against this effect, having already reached the level of hundreds of billions in dollar support from their central bank per year, andthey will hit Japan-type 0-1% per capita growth, while remaining at the level of hundreds, not even thousands of dollars, in per capita output. Diminishing returns to additional countries of size using the growth model of dollar-support export manufactures subsidy from a central bank, has long since set in. Sorry China, you will not be sharklist.

Wolf-Dog said at October 19, 2007 9:08 AM:


But it is also possible that China will not be as docile as Japan: For one thing, China still has the option of using its cheap but improving-quality manufactured goods as "currency" to buy raw materials from poor countries. This bartering method would certainly work with many countries like Iran and many African countries who sell minerals. This method would also probably work with South America.

guest said at October 19, 2007 11:01 AM:

Chinese workers are not earning "slave-level wages" because of government intervention, but rather because their labor pool is huge and it's still very much underemployed. Because of this, China's forex policies actually have very little effect.

"they will hit Japan-type 0-1% per capita growth, while remaining at the level of hundreds, not even thousands of dollars, in per capita output." BS. There are a lot of reasons why China's growth may stagnate, but they're not going to hit potential output for quite some time.

Dragon Horse said at October 19, 2007 7:25 PM:

What I do know is China will surpass Germany as the number 3rd largest economy in the next year. If current treads keep up it will take them almost 20 years to surpass Japan and well over 50 to surpass America. If current trends hold and that is iffy. They can not maintain 11% growth forever and balance that with inflation pressures, soon they will run out of U.S. currency to balance it.

China, unlike Japan, has a large enough internal market to generate significant growth that is not export dependent, similar to America. Having 1.3 billion people who make about $3K/year (about $9K PPP) gives them a lot of potential room to grow. They have also signed up with ASEAN+3 (With S.Korea and Japan) to create the largest trade group in the world. It will in no way be as liberal as the EU or even NAFTA, but any uptake in interregional trade and capital flow will benefit China as well.

The trick for the CCP is to maintain enough growth to offset domestic pressures that could bring down the CCP. They know that the Western regions and the rural areas must be developed or insurrection will increase. Almost every Chinese revolution started in rural areas and due to prolonged bad economies and intense corruption. This is what the CCP is trying to head off with fast growth and development. How long they can maintain this balance I don't know. Right now the only thing that seems likely to derail this will be some type of outbreak of conflict with North Korea or worse Taiwan. Both seems unlikely for the time being. Any issue with Taiwan will force the CCP to take action or risk losing face (for a third time to the U.S.) over Taiwan. That, in and of itself, will cause massive nationalist unrest in China (you reap what you so).

I am optomistic though. The Chinese (communist or otherwise) are highly pragmatic and usually take the long view in terms of planning and action...unlike the West. I have more confidence China will be a nation-state 500 years from now than I do the United States. :-)

Kenelm Digby said at October 20, 2007 4:31 AM:

Of course, if fiat money was never invented, and 'money' actually represented real, portable lumps of intrinsic wealth, the USA would have run out of 'lumps of wealth' years ago to the point where they would be as common as the proverbial 'hen's teeth'.
The whole ridiculous, impossible situation is only prolonged to the point of abbsurdity (if it wasn't so serious), by the fiction of paper money.

Randall Parker said at October 20, 2007 10:31 AM:

John Bolton,

China has a long run of economic expansion ahead of it because it can so easily accumulate capital that uses existing technology. It won't start running into problems until it starts reaching limits on what it can do with just simple capital accumulation. China ought to be able to reach half of US per capita GDP.

Kenelm Digby said at October 21, 2007 6:18 AM:

Dragon Horse,
By your own figures, if Chinese per capita GDP by PPP is approximately $9000, and that of the USA is taken at $40000, and allowing for the fact that China's population is over four times that of the USA, it will be seen that China's aggregate GDP is already within a gnat's whisker of that of the USA, perhaps 18 months growth at 11% per annum rate will bridge the gap, not the 50 years you claim!
Also considering growth rates and the liklihood the will remain roughly the same (I have every confidence in the Chinese to do so), the in terms of per capita GDP, China will surpass the USA in roughly 14 years at the very most.

Dragon Horse said at October 21, 2007 6:31 AM:

Kenelm Digby:

There is a big difference between PPP per capita and Real GDP. I have never read economist who thinks China can surpass America in 18 years, let alone 18 months. If you can find someone who is not a crackpot, I will listen.

Japan has stagnated for over 10 years and still managed to stay above Germany in Real GDP.

John S Bolton said at October 21, 2007 2:55 PM:

I don't mean that China will permanently remain at a low level, but that they will hit an extended slow-growth period, while still at a low level, on account of the diminishing returns on the growth model copied from Japan. They will switch to internal improvements of much lower return, as Japan did when unable to continue financing and shipping out manufactures at more than low percentage increases. The probem with their model is that it requires ever-increasing strictness of control on credit expansion originating in the dollar hoard of the central bank, leakage is inevitable, as businessmen use their dollars to borrow against, hence the need for continually more minute and strict procedures against that leakage.

Kenelm Digby said at October 22, 2007 3:39 AM:

Dragon Horse,
A very good proxy, that is free of currency manipulations and distortions etc that are inherent in all crude cross-national 'comparisons of wealth', is to compare the actual wattage of electrical power produced per annum by a nation. - It correlates very well with the level of industrial development and the domestic standard of living of a particular household.
I don't have the figures with me to quote, but last time I looked China was within an ace of matching the USA, and no doubt will surpass the USA in the not too distant future.
Likewise, a certain level of income is required everywhere in order to purchase and run a car - an income that many, many English people cannot afford even today, for example.
Last yera the Chinese purchased the enormous total of 8 million new cars, a number that grows by the ridiculous amount of 25% per annum - so in the very near future they will overhaul the USA in that too.
Most of the world's cement is used by China (they are 'only' 20% of the planets population)ditto for glass and steel, and their oil consumption is rising ominously.


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