OECD: China will be Largest Economy Around 2016
Image Credit: danbri (flickr)

OECD: China will be Largest Economy Around 2016

0 Likes
14 comments

China has already overtaken the EU as the second largest economy in the world, and can be expected to surpass the U.S. economy as the world’s biggest economy around 2016, according to the Organisation for Economic Co-operation and Development (OECD).

This is just one of the conclusions the OECD puts forth in the latest edition of its Economy Survey of China report, which was released on Friday.

The update to the OECD’s 2010 Economic Survey of China paints a highly optimistic picture about the prospects for the Chinese economy in the years ahead.

In the near term the Paris-based organization expects China’s economy to grow by 8.5 percent in 2013—up from 7.8 percent in 2012— and even more (8.9 percent) next year. Growth will average about 8 percent over the next decade, the report forecasts.

While noting that the Chinese economy slowed down significantly in 2011 and 2012, the OECD concludes that China’s “rebalancing has made headway and a gradual reacceleration is in train.”

Specifically, the OECD commends the rebalance of China’s economy for pushing the current account surplus down from 10 percent of GDP in 2007 to less than 3 percent today. Inflation has also been brought under control after peaking at 6.6 percent in the middle of 2011 after the enormous financial stimulus package increased the money supply within China by a stunning 30 percent in 2009 alone.

Notably the report concludes that growth in the economy is increasingly coming from domestic consumption compared with investment. To encourage this trend further, the OECD says the country will need to continue to encourage greater urbanization.

More than half the Chinese population already lives in cities, and within China’s cities the per capita income is now as high as some countries within the OECD itself, in no small part due to productivity gains over the past decade.  Furthermore, Premier Li Keqiang has already indicated that accelerating the pace of urbanization will be a top priority of the new administration.

Despite this overall highly favorable assessment of China’s economic prospects, the OECD does highlight a number of potential challenges that could potentially slow growth, including the violate state of foreign markets and the growing environmental costs of Beijing’s economic growth policies.

However, it devotes particularly attention to the risks China’s booming shadow banking industry are creating, and estimates that “taking into account various off-budget forms of debt,” total public debt was 57% of GDP by the end of 2010.

Zachary Keck is assistant editor of The Diplomat.

Comments
14
Ted
April 13, 2013 at 22:10

By that standard, Canada, Australia, and all the Scandinavian countries have greater economies than the US. Either per capita GDP trumps total GDP or it doesn't. 

I think most people recognize that sheer size has an importance on its own. 

Ted
April 13, 2013 at 21:44

What the…

It's nominal GDP that fluctuates wildly by currency exchange rates, pretty much by definition. And the main advantage of PPP comparisons is its relative stability. 

 

Bigben_usa
March 31, 2013 at 07:14

It's not that big of a deal, their populatoin is sevaral times larger than us. The real accomplishment is if their per capita income can reach the leval of advanced economies like the US, western Europe, Japan or evern South Korea and Taiwan. That is unlikely to happen anytime soon. 

Dean
March 27, 2013 at 03:37

Not so soon, comrade!  This kind of 'rosy prediction' plus such childish arrogance, swagger, illusions, & misperceptions (Chinese characteristics!) etc. will surely bring your country down for good, comrade.  Remember even  when China becomes the largest economy in the world (if luckily not collapsing in the coming years!), it's still a poor backward 'superpower' & has a long way to go to catch up with the developed world.

Kim's Uncle
March 27, 2013 at 03:07

So when can we expect a Chinese car company exporting Chinese made cars to advanced countries?

Well as I see it, western consumers want to live and drive safely from point A to point B!

I think Chinese should concentrate on quality control first before crowing about taking over the world!

BB
March 27, 2013 at 00:28

Some thoughts for China. Reform! Reform! Reform!

The Last Chance for Survival

03.22.2013 11:38

With China facing an array of problems –a looming banking crisis being the most critical – changes must be made to unleash untapped productivity.

By Andy Xie

 

The 20 percent capital gains tax is the latest half measure in the government's attempt to stabilize, rather than burst, the property bubble. If the measure deflates the bubble, new measures may appear to revive speculation, as occurred in 2008 and 2012. Managing rather than rooting out speculation is a dangerous game. The prolonged bubble will eventually bring a bill large enough to sink the banking system.
 
China's economy has become dependent on the bubble to turn bank loans and gray income into government revenue. If the bubble pops, the government will be destabilized. If the bubble remains, society is destabilized. The country must choose.
 
The bubble is a form of leverage, i.e., borrowing from the future, in achieving growth. Lending new money for repayment is another. Unsafe food and polluted water and air are also manifestations of not paying the full price for growth. China is stretching its society to the limits for the sake of sustaining growth, all in the name of social stability. But, China suffers a labor shortage and inflation. Growth under the existing model exacerbates both. How could such growth be good for social stability?
 
The labor shortage provides a good background for restructuring the economy. The country's position as the factory of the world is still solid. Hence, any slowdown from restructuring the economy would be limited and would not lead to destabilizing high levels of unemployment. The resulting low inflation would enhance social stability.

If China keeps pushing growth through fixed-asset investment and credit, a full-blown banking crisis is likely within five years. Kicking the can down the road is not a viable option for the new government. Reform is necessary for -survival, not a choice.

Cooking the Bubble
 
Inflation within and currency appreciation without are the macro combination ideal for cooking a big bubble. Japan had it in the 1980s, Southeast Asia in the 1990s. China has had the same since 2005. The East Asian development model is based on manufacturing exports. When currency appreciation pressure materializes, there is political resistance. The resistance leads to rapid monetary growth and inflation at home, and persistent expectations for currency appreciation abroad. The environment sucks a disproportionate share of monetary growth into the property market, which delays the inflationary impact and justifies its continuation.
 
China's currency appreciation pressure began in 2004. When it became a political issue in the Sino-U.S. relationship, it supported the expectation of a one-way bet on the yuan, triggering massive hot money inflation. China's broad money supply has quadrupled since. Most of the monetary growth has gone into the property market, which in turn becomes government revenue. Like everywhere else, China's property bubble is a monetary phenomenon.
 
Recooking the Bubble

 
When the global financial crisis broke out in 2008, speculative fervor froze in China. The live pictures of speculators crashing and burning in the United States and Europe frightened away China's. China's economy tanked on both falling exports and a crumbling bubble.
 
The 2008 stimulus was justified because it supported employment. Its practical outcome was to revive speculation, subsidized by loose bank lending. It emboldened China's speculators to think that even if bubbles were popping everywhere else, China could go it alone. That psychology has given the government extra room to manage growth in the short term, but its long-term consequences are severe.
 
The bubble recooking occurred again last year. When the market froze in the middle of last year, state-owned enterprises used borrowed money to bid up land prices, manufacturing an upward price curve. Its psychological impact eventually convinced speculators to play again. Banks' loosening lending standards helped the revival.
 
Prolonging the Bubble
 
The government has introduced tightening measures against property speculation from time to time. These measures have never been serious enough to stamp out speculation. They merely slowed and extended it. The ineffectiveness of the measures keeps up the dream that prices could surge when the government either loosens up or is overwhelmed. That dream keeps speculators in the game.
 
The latest measure – a 20 percent capital gains tax, yet to be fleshed out in detail – is the latest example. In the short term it sparked a frenzy because speculators are rushing to buy before the tax comes into effect. But this revival in speculation is a bounce in a long-term bear market. Without government intervention it would burn out soon. But government action will convince speculators that any cooling in the market is due to government action, i.e., the market could go much higher otherwise, not a fundamental change in the macro environment. It keeps speculators' hopes alive. They won't leave the game. Again, the unfulfilled desire creates some policy room to improve the economy in the short term. When the government removes some of the tightening measures, the speculators will come back.
 
Recycling Gray Income
 
China's property market serves an important function in recycling gray income into government coffers. The scale of the country's gray income is very large, possibly one-tenth of GDP. If the money leaves the country, it will trigger currency devaluation. This factor distinguishes China's bubble from Japan's or Southeast Asia's before. This is why the property tightening measures are always half-hearted.
 
Speculation and corruption are the twin evils that have plagued China in its 150 years of modernization. The country has veered off its development path when these factors destabilize the governing system. The people of China are highly competitive in the global economy. In a reasonably sound system, the country would rise to the top tier of the global economic hierarchy. In the past five years, these twin factors have risen again to threaten development.
 The Long Bear Market Ahead
 
China's monetary growth rate has slowed because the weak global economy holds down its export growth rate. Most developed economies face severe structural problems that hold down their demand for many years. Hence, China's money growth rate is likely to trend down. If China targets the rate of monetary growth substantially above the export growth rate, it would lead to devaluation and capital outflow, which would set off a financial crisis.
 
The bubble in the East Asia model always ends with an export boom. As stated above, the bubble thrives on inflation within and appreciation without. When the export boom ends, the two conditions cannot be met simultaneously. 
 
The change in the monetary environment coincides with population aging and declining property demand. During rapid industrialization, the birthrate declines naturally due to rising costs of raising children. The one-child policy has magnified this trend. This is why the population ages so fast. The per capita income of the working age population shrank last year to merely US$ 6,000. This factor is likely to make China's property bear market worse than Japan's.
 
Many argue that China's urbanization has a long way to go and, hence, demand can grow despite aging. This idea is not really consistent with facts on the ground. Few people in their prime remain in the countryside. The high growth phase of China's urbanization is likely over. Big cities may grow by attracting people from small cities due to better employment opportunities, but this is redistribution, not absolute growth.
 
In addition to the impact of macro development, the stock of sold but empty flats, probably 30 million, and the buildings under construction, possibly another 50 million, will weigh on the market for years to come. No other country has experienced such a massive supply overhang after a bubble.

The Key to Stability
 
The growth strategy based on quantity expansion has reached its limits in China. Credit, environment and asset prices have little room to stretch. Beyond the limits, inflation and a banking crisis await.
 
In the past five years, the growth has had little impact on improving the quality of life. Inflation offsets much of the wage increase. If property prices are taken into account, most people have been set back in living standards. On the other hand, food safety, water and air pollution, health care and education costs weigh heavily on China's emerging middle class, threatening to crash them before they fully emerge.
 
The boost in monetary growth in the past few months has turned into inflation quickly. It reflects that the economy cannot support the supply of money growing faster than the economy, i.e., the economy is prone to inflation. Another way of looking at it is that financial depth is saturated. The current credit to GDP ratio is too high to rise further.
 
Controlling money supply is paramount to China's stability. It needs to be in line with real the GDP growth rate plus the inflation target. If the real GDP growth rate is 7 percent and the inflation target is 3 percent, the money supply needs to be limited to a 10 percent growth rate. I believe that China's stability is not consistent with money supply growing substantially above 10 percent.
 
The Answer is Reform

 
Surplus labor, underutilized resources and ignoring the environment have propelled China's growth. All these factors have been exhausted. Business as usual won't work anymore. But, China's growth story is not over. China's room for productivity gains is massive. Hence, growth could be revived through better resource allocation.
 
The country's labor force is consistent with per capita income above US$ 15,000. Multinational companies have factories in China and developed economies. The factories in China are as productive as in the latter. This demonstrates that China's labor productivity could support a much higher level of income. The low average productivity is due to resources being concentrated in areas of low productivity.
 
Fixed-asset investment in the state sector and property investment are about 40 percent of GDP. Property is an unproductive asset. It is worth money because the people who use it are productive in some other activities. The story that property is productive due to price appreciation is just a Ponzi scheme. The concentration of resources in an unproductive sector decreases the overall economic efficiency and slows growth.
 
Efficiency in the vast state sector investment has declined sharply in the past five years. The returns on capital in the state sector are about 6 percent, compared to 22 percent for S&P 500 companies. The lower the return, the more money per unit of economic growth. This is why China's economy has become so credit hungry. More money for growth is a dead end. It will lead to inflation, currency devaluation and financial crisis.
 
Capping the State Sector
 
Even though reforms are recognized as necessary and inevitable, the excuse is often given that they are just too hard. Resistance from vested interests is often used for advocating patience. First, when the economy is on the brink, the resistance from vested interests should not justify taking no action. After all, the government is supposed to be all powerful. Second, an effective option is to cap public spending at the current level, not reducing it. It cannot be too hard to live on the same money as yesterday. The vested interests ought to be able to live with that.
 
China's labor force is quite productive. This is why the country's position as the factory of the world is solid. Even in labor-intensive industries like textiles and garments, it remains on top of the world, ten times bigger than Vietnam's even though Vietnam's wage level is half of China's. In the electronics industry, no other country is coming to take China's market share. In machinery, the momentum is decidedly on China's side.
 
When the state sector caps its spending, the growth in capital supply will go to the household sector and private enterprises. The overall capital efficiency will gradually improve. China's economy would regain momentum through productivity improvement.
 
No other country in the world has the option to go forward like China. Its untapped labor productivity is so vast that, when released, it could solve all the problems that the country faces. All it takes is for the state sector to take a step back. That cannot be too hard to implement. (CaixinOnline)

Harold
March 26, 2013 at 22:50

2012
2013
2014
2015
2016
2017

51.93
57.123
62.8353
69.11883
76.03071
83.63378

10% YOY

Do not forget CPI and revaluation of RMB.

P.S. The method to caculate GDP is different. China's GDP is under valued.

W. Tseng
March 26, 2013 at 16:25

 

 

Every report made by the west is suspect & I believe have a hidden agenda. Not unlike their military counterparts that espouses the explosive growth of the Chinese PLA & exaggerates their threat so they can increase their own budget. Perhaps the OECD’s intention (without offending anyone) is to galvanise western action & unify them against such a growing menace. Like some of the above comments pointed out, there is still a long way for China to catch up rather than surpass western prosperity but they are steadilly posing a danger to US/western hegemony & needs to be addressed.

Miheer
March 26, 2013 at 13:37

The OECD report talks of the size of Economy in terms of PPP(Purchasing power parity) not in nominal exchange rate.The IMF also predicts China to surpass US economy in PPP terms by 2017 and probably in nominal exchange rate by 2025-30…..

angelus512
March 26, 2013 at 10:53

Yeah I was wondering what they were smoking. Also with the whole "bigger than the EU". Wow……lol

China's GDP is 8.25 trillion currently. The US is roughly 14-15 trillion or almost double.

The EU if I recall is around 17-18 trillion all up.

I love how sensationalist reports like this love to quote figures but neglect to mention they are using PPP (purchasing power partity) index and not GDP which is important to note as PPP fluctatures wildly based on currency. GDP is a more stable figure.

Bankotsu 2
March 26, 2013 at 03:04

The Chinese are already here. We speak your language, we are in your neighbourhoods, we are working in all levels of your government. We already have replaced the US. The US Senators tremble in fear for the safety of their family, while remaining constantly eager at the prospect of Chinese coin.

Tomorrow, the Chinese can tell you whether there is going to be a fire in the Honda factory in Vietnam or Thailand and whether the share prices will crash or rise the next day. Resistance is futile and corporations and US Senators know that. It is time for the world to grow rich with the Chinese, or suffer imminent extinction like Shinzo Abe and his family.

James
March 26, 2013 at 01:26

Even if this extrapolation  is 'correct', with the Chinese population 4 times of the US', Chinese GDP must be at least 4x $16 trillions= $64 Ts to be called nominally 'equal' to the US' economy, pal!

John Chan
March 26, 2013 at 01:22

EU’s GDP is larger than USA’s GDP, “China has already overtaken the EU as the second largest economy in the world,” is questionable.

G7’s living standard has reached plateau before 2008, even if their economies recover they cannot help world GDP’s growth in any meaningful way. The G7 has passed their prime. The next phase of global prosperity depends on the emerging markets, particularly China’s growth.

G7 led the world economy growth about 60 years since WWII, China’s population is twice the G7’s population, when China reaches G7’s GDP per capita, China will bring the world another 120 years economy growth and prosperity at least.

 

Bankotsu
March 25, 2013 at 23:29

I think this report by OECD is an exaggeration. China won't surpass the U.S that soon.

Share your thoughts

Your Name
required
Your Email
required, but not published
Your Comment
required

Newsletter
Sign up for our weekly newsletter
The Diplomat Brief