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According to the International Monetary Fund (IMF) "World Economic Outlook," China's output will surpass that of the United States in 2016 - only five years from now.
But don't worry. The IMF calculation is based on "purchasing power parity" (PPP), which does not reflect real money. It relies on projecting China's stellar growth rates five years into the future. And it relies on Chinese official statistics, which are more than a little questionable.
(In fact, after the media storm that resulted, the IMF apparently even soft-pedaled its prediction that China would leapfrog the United States in just five years; in a subsequent interview, an IMF spokesman reportedly said that, by non-PPP measures, the U.S. economy "will still be 70% larger by 2016." A recent World Bank forecast concluded that China could overtake the United States by 2030.)
This prediction - and the attention it continues to draw - serves a useful purpose, particularly if it's given the scrutiny that it deserves.
For global investors with China-based holdings, it reminds us of that country's long-term potential - and the fact that such potential is always tempered by near-term risk. For the rest of us, it reminds us that China's ascendance is inevitable - in fact, is already happening - and will be with us for a long time, even if that Asian giant isn't immediately going to overwhelm the rest of the world.
And for our elected leaders in Washington, the IMF report - false alarm or not - should serve as a wakeup call to attack and address the many problems that threaten this country's global leadership.
IMF Report: A Closer Look
I had some problems with this prediction from the moment it hit the headlines.
Let's start with the IMF statistics themselves. They measure gross domestic product (GDP) on the basis of "purchasing power parity," rather than by market exchange rates.
That makes sense if you're comparing living standards: If you are talking about what the typical China consumer can buy, he or she is about one-sixth as well off as his or her American counterpart, not one-twentieth.
However, the use of the PPP measure makes much less sense when looking at international trade or political power. That's because individual purchasing power includes such items as haircuts, which are much cheaper in Beijing than in Boston (except, doubtless, at a couple of very overpriced salons in Shanghai or one of the other burgeoning financial centers) and cannot easily be traded internationally.
On the other hand, goods that are traded internationally are subject to global market forces and are generally about the same price everywhere they are sold. In fact, some of those goods may even be cheaper in the United States, since our distribution system is more efficient and our tariffs lower.
That's also true of large-scale armaments; you will be able to get the People's Liberation Army (PLA) squaddies to work for much less than their U.S. counterparts, but the cost of a fighter jet or a missile with certain capabilities is pretty much standard around the world.
So even if the IMF's 2016 forecast was an accurate one, there's no way that China would be able to project as much military power as the United States, or to distribute as much foreign aid and subsidies to client states.
For at least a decade beyond 2016 - and probably more - China will be a substantial No. 2 ... a market that can't be ignored ... but not No. 1.
The Travails of Timing
When you are estimating future growth rates, the farther out you go, the more inaccurate your predictions become: If you were to take China's current growth rate and project it forward 50 years into the future, the Asian giant would have absorbed the whole of world GDP and be starting work on Mars.
Even a five-year projection - such as the one the IMF put forth - does not allow for the possibility that China will experience an economic hiccup before that period ends. The recent news that China has just fired the head of its $270 billion high-speed rail network for embezzlement, and is now running the trains 30 miles per hour slower than before for safety reasons, indicates that - in a command economy like China's - much of the apparently soaring output may have been wasted.
My 1990 Economist diary claimed that the centrally planned East Germany was richer than the free-market Britain; as a native Brit who had recently visited East Germany, I can tell you that this wasn't the case - in fact, it wasn't even close.
Indeed, when the Berlin Wall came down, we saw the former Comecon (Council for Mutual Economic Assistance) economies lose as much as 60% of their GDP as factories closed because their output was uncompetitive in the free market. Similarly, up to half of China's GDP may be wasted: Think of all the empty offices and apartment blocks, developed by state-guaranteed companies, all of which are held as assets on the balance sheets of China's banking system.
Long-term, there's no question that China has great potential. At the same time, however, I think it very unlikely that China's economy will make it to 2016 without a major banking crisis, which will knock back its GDP for several years.
Long-Term Potential/Near-Term Peril?
The IMF numbers aren't the only ones that I feel are suspect - so, too, are many of China's growth statistics. GDP figures are announced immediately after the end of each quarter, which given China's size and diversity means they must reflect the wishes of the leadership more than any measurement of reality.
Sometimes, of course, the leadership may wish to record lower growth, to show that some monetary or fiscal tightening is working. But I'll bet that most of the time, the temptation is to "round up," as opposed to rounding down.
Far too many Western analysts and observers spend most of their time in the major urban centers, where growth has been fastest, and therefore aren't aware of, don't get to see, or even purposely ignore, stagnant areas or places where central planning has wasted billions. The prolonged rapture about the Chinese high-speed rail plan by a number of U.S. commentators is one good example of a case in which too many reporters took too many of China's claims at face value and failed to examine the challenges and problems that were hidden by the hype.
So my guess is that, even now, China's GDP and growth rates are not as impressive as reported.
The bottom line: China is big, getting bigger, and its growth can't be ignored - especially given its long-term investment potential. But there are near-term challenges, many of them substantial. If China does not have a major economic trauma, then indeed by 2030 or so it will be close to overtaking the United States. But we have a lot more than five years in which to make the necessary adjustments.
Our leaders should use this as a wakeup call.
In China's case, however, the "short" fund - the ProShares UltraShort FTSE/Xinhua 25 Fund (NYSE: FXP) - has far too great a "tracking error" to be worth buying - it managed to halve in value in 2007-08, when the Chinese market also halved, thus completely failing to achieve its objective.
Instead, it's worth thinking about what the United States must do in order to meet the economic challenge that China poses, and to look at Latin American countries whose prosperity must be made more assured. You might therefore look at the two countries - Mexico and Colombia - that would benefit from increased U.S. economic involvement with neighbors. One great way to play this: The iShares MSCI Mexico Investable Index Fund (NYSE: EWW).
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News and Related Story Links:
- Want China Times:
U.S. still ahead of China GDP by 2016: IMF spokesman. - International Monetary Fund:
Official Website. - The Times of India:
China could overtake US economy by 2030: World Bank. - Wikipedia:
Purchasing Power Parity (PPP). - Fast Company:
China's Stealth Fighter Flies, But Does It Work By Ripping Off U.S. Tech? - Wikipedia:
People's Liberation Army (PLA). - The BBC:
The Night the Wall Came Down. - ETF Trends:
10 Reasons the ‘Tracking Error' Occurs.
I think IMF is right.
USA has the biggest sovereign debt of the world, moreover has had two stupid presidents in a row.
Personally I have sold everything US$ denominated, I know many swiss banks are doing the same and others will follow.
USA is repeating the mistake of the thirtiees. Protectionism.
Bye bye America.
So China consumer ADR stocks?
"…in a command economy like China's – much of the apparently soaring output may have been wasted." Is it helpful to see China in these terms, or just prejudice? Here in the UK, government does roughly half of all spending. In China, it's 25%. Which is the command economy? As for waste, there are plenty of "market " economies whose governments can be observed throwing good money after bad.
If it takes authoritarian rule to curb world population, is that perhaps a price we'll have to pay?
You've got it wrong! China will sooner rather than later start calling the shots – and indeed much sooner that 2016. But this won't be China's century nor will it be that of the US. You'd be well advised to watch the EU as it develops into an economic, social, political and military power house – a development the founders of the original Common Market envisaged and for which those at the centre of power in the European project have not lost sight of – that is the establishing of a European super-state. When it comes to fruition all of us will see something the likes of which has nevver been known before.
You mention PPP and it not being "real money", as well as Chinas' statistics being questionable. Fair enough to a point, but how much "real money" does the US actually have now? How much is it generating in exports? and investing in the growth of exports?
I will agree whilst China is unlikely to leapfrog the US in 5 years, it will likely be jolly close to it.
Several funds have been set up in an attempt to short the Chinese economy – several of which initially released in a flurry of media, only to retreat back to the sidelines, presumably because they are not hauling gains at anywhere near the rate expected.
Like most investment sectors – moderation is the key, coupled with diversification. China appears to have been very capable at controlling its mortgage market, investing into its natural reserves, as well as importing at low rates from Africa. All it needs to do is keep a close eye on it all.
Stil remeber 30 yars ago what China was like. There were nothing else beside almost billion starved people. Then 10 years later, 20 years later, and 30 years later look at China now. While you don't over estimate the Chinese, you never under estimate them. They are different animals
I think if you just look at how China values education,they are going to pass us.Look at how students in high schools here compare to those in China.In China parents are much more motivated to see their children get a great education than in the U.S.This applies to other fast growing countries in Asia too.Education in the U.S. reminds me of the saying about the old Soviet Union."They pretend to pay us and we pretend to work".Many students in the U.S. could say,"They pretend to teach us and we pretend to learn".So,how is America going to compete with a generation less educated and expecting much higher compensation.I could go on about our welfare state,huge deficits,crumbling infrastructure,etc.I don't know the date China passes us,but it will happen.Go to link to read about China's obsession with education.
Dear reader,…. I am visiting China on a regular base for nearly ten years. I admire the country for all its developments,… China will win the economic war without shooting one bullet,…You can not blame China, they are not ready for the future ,… they are the future,… it has already secured access to all the natural resources available wherever in the world, which it needs as the world main supplier for just about anything. One of the reader just said "never underestimate them,.." I could not agree more.
I will not say that Martin Hutchinson is ignorant, he has a too good opinion over several issues, but in this article about China he shows not being well informed,… I would suggest visit China, keep your eyes open, and you will be amazed, enjoy it and come back after 1 or 2 years… you will not believe your eyes.
I use their public transport system very often,… the D train just over 200 KM per hour, Their Monorail just over 300 KM per hour and the G train over 355 KM per hour,. ( for the non metric thinkers in the USA this is an equivalent of more than 220 MPH it is very convenient and safe,…), so please Mr. Hutchinson don't give the impression that it is just so~so,… It is like their economy,… and their economic power,… it goes and goes!!
When in the year 2000 the Olympic comity pronounced that China would organize the games of 2008 many countries where very skeptical,… well we have seen it all, they did open the eyes of the world… not 1 warning that they were behind schedule,… they make their plans and go. Not like Athens in 2004 where the swimming pool had no roof nor walls. Only think of the openings and closing ceremony in Beijing.
Well I could continue,…. reporting over this China,… but find out yourself, kind regards, harmen de bondt
I'd like to add to the comments that Hutchinson has it wrong on China.
I invest there based on two advisors, and the profits have been adequate, if not as great as a few years ago.
Further, some of my relatives (fluent in Mandarin) visit there regularly and their comments suggest a different story from Hutchinsons. It appears one might split China into five north south economic belts, each of about 260 million people (very roughly). The first two belts near the shore line, are at the same level as the average Western European country for standard of living. The third is equal to Eastern Euroope, but is a "work in progress." The remaining two are third world in living standards.
The first two belts are nearly the same as the EU in population and in GDP. This alone is competitive with the US. Further, the next belt will bring in another 260 million during the next five year plan, with the total easily surpasing the US.
And then there is the high speed train. China has more high speed rail lines (in operation or under construction) than the rest of the world combined. While the US has to build its first mile of high speed commercial line. I traveled throughout Spain last year, almost entirely on the high speed rail and I was amazed at the excellent ride on these trains and the coverage Spain has. Yet the US is still working on Amtrak which is unsafe at even the modest 75-80 mph with their rickety ride.
Lastly, on military capability there is no question China will not be able to project a significant military force more than say 500 miles from its borders in any direction for the next 10 yeqars. But equally, there is no match to China inside that range today.
Tib Csabai
China has one big problem as the country moves forward — the Yuan or RMB.
Their currency does not circulate outside of China, Hong Kong and a few other Asian countries. Until China can figure out a way to make the Yuan into a world traded currency, without currency or credit controls, the US Dollar and the US economy will continue to reign supreme.
(Now the double deficits in the US [budget & trade] are another story for another article on the possible demise of the USA! To be discussed at a later date.)
Geee…Those comments are really funny! Is this some comic book now?…Last time I checked still was an economic newsletter.
Well, now let's see…Five years! Hell, that's a lot of time, especially when you assume the trajectory will be linear and you willingly ignore the writing on the wall !… Hitler promissed to the German people, just before to attack Soviet Union a " Thousand Years Reich". That was in the summer of 1941. Five years later?… 1946?…Anybody?…And I can bet that most economic analysts leaving a shadow on Earth surface today, if they would live in 1935 would declare, swear, and maybe get a Nobel price telling to everybody wanted to lisen that Germany is a " modern economic miracle"…
Fast forward to 1988 when the Imperial Palace from Tokyo was worth " more than the entire state of California"…Five years latter?…1993?… Anybody?…
And now about the writing on the wall. A country of 1.3 billion people, willingly destroying their scarce arable land base and their enviroment for short term profits definitelly doesn't sound as the next superpower to me. For God's sake, right now, if China would face an international embargo ( theoretically speaking ) at least half of its population will die of starvation! They cannot feed themselfs with what they are able to produce! And if you think that embargo cannot happen, think again! Is not a political one – is an economic one – and it's called "the price of oil " and it's happening right now! As long as China has to import food, pay for shipping that food to the mainland and oil prices stay where they are right now – China is only a nation of slaves – it will never became a superpower!…
Sticking with the "writing on the wall" theme – I'm sorry Mr Hutchinson, but if you really hope the leading people in this country will do something to benefit USA in the next five years, you are delusional. Government, Congress, Senate, all are filled at this point with clowns and puppets.People who voted them in office are brain-washed systematically 24 hours a day.The real power in this country is in the hands of few crimminal Banksters, who don't give a shit about USA as long as their coffers are full and keep getting fuller. I think is time for a Revolution…
Or China will do that first?…
Many countries besides China will overtake the USA. The US has too much debt (approx $17 trillion true debt and counting) and hundreds of trillions of dollars of unfunded liablilities that will soon come home to roost. The sad part is the USA has not the integrity to step aside and will take as many other countries down with her in the hopes of the leveling the palying field.The fact remains and people are waking up to this fact, the US is already behind much of the world's problems whether it's food, oil, metals or whatever. I believe once the US falls along with a couple of puppet countries, the world will be a better place.
Mario i will like to ask you one question who would put china embargo? do you learn history of world conflict? before your comment you need to learn more about chinese at the world stage
Mario@ the other think i explaine to you chinese economic development has benefited many americans including boeing, GE, google, american farmers so if two country split economically american wil suffer and trouble great depresion gov't they face social unrest and american become next egypt jasmine revolution
It ain't over 'til the fat lady sings. In the 1950s everybody said it would be the U.S.S.R then 1980s everybody said it would be Japan. Look at where they are now. So now they say it's Red China. Nobody can tell me what the stock market's going to do in 5 minutes much less who will rule the world in 5 or 10 years. Even if Communist China becomes the worlds largest economy that doesn't mean the ballance of power will shift overnight. The U.S overtook Great Britian in the 1870s and it wasn't until 1945 that America became the global superpower it is. (Our founding fathers never intended us for such a roll.) The fact that Communist China treats it's people like cattle and doesn't even practice basic human rights should say everything about their Government. Also they have no enviromental codes at all. Considering the size of their population 1.3 billion compared to 300 million Americans. I'm suprised that it's taken them this long to catch up. If only half of China had full time employment they could easily overtake everybody just by shear numbers. I just hope and pray that it is a peaceful and democratic rise. Either way I don't think they are much of a threat to us considering that any conflict between China and the U.S. would plung both economies into the toilet. (We could always buy our cheap goods from Brazil and India) and would most likely end in a nuclear shootout and the end of life on earth. Not to mention the average American makes more in a day than the average person in China makes in a year. Again I can honestly say It's time to bring the eagle back to it's nest and let the world run itself for a century or two. Prisoners in America have it better in most cases than anyone with a democratic tilt in China. God bless Freedom and liberty and all who long for it everywhere!
why not you guys talk about India ?