When
will China become the world’s no. 1 economy?
(14
December 2001)
There are
at least 2 great news for China this year: a successful bid to stage the 2008
Olympic Games; and a secure membership of the World Trade Organisation (WTO)
after 15 years of negotiations.
Since the opening-up of the country in 1978, China has experienced a tremendous economic growth. A lot of people think that the 21st century is the ‘China century’. Some businessmen have even persuaded me to expand our family business further in Mainland China (although we have already done quite a lot investments there). At present, China is the 7th largest economy in the world and its size of gross domestic product (GDP) is about 10% of the United States’s. The question being concerned is when China will take over the American status and become the world’s number 1 economy.
In order to predict when this will happen, I did a simple calculation last year with the following equation:
GDPChina(t) = GDPUSA2000 = GDPChina2000 ´ (1 + g)n
where GDP is the gross domestic product (in value term), t is time, g is the growth rate and n is the number of years.
Assuming that China maintains its present growth rate of 7-8% per annum, it will take about 30 years to catch up the present US economy. In other words, China will not become the world’s number 1 economy before 2030 (or not even before 2050), i.e. t = 2030. The answer might surprise to a lot of people, especially those who have advocated how impressive China is. Whatever they think, the result (n = 30 years) is indeed, a hard fact, not economic theory.
The above study assumed that the US economy stopped growing at all and China grew at 7-8% annually. In reality, all economies do grow in different extents even if they have some very bad times. If the US economy grows at its trend rate of 3.5% per annum, it will take more than 30 years for China to catch up the America. However, is China able to maintain a growth rate of 7-8% for 30 years? I doubt about it! On the other hand, China’s government officials may have over-estimated its GDP growth rate. As a rule of thumb, the less advanced an economy is, the less accurate and reliable of its statistical data will be.
In conclusion, the Chinese economy is not as good as many commentators have thought. Although the membership of the WTO will bring fruitful economic benefits in the long run, China has still got to cope with its internal problems such as high urban unemployment (at least 8%) and high rural underemployment (around 30%), low average income (about US$900 per year), weak banking and financial systems and unstable legal system. Furthermore, China’s farms and factories will inevitably face more external competitions with the WTO membership (and the market-opening). Inversely, the European Union (EU) is far more advanced than China and is getting larger gradually. It would become the world power by taking over the American status this century.