OECD: China will be Largest Economy Around 2016
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OECD: China will be Largest Economy Around 2016

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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.

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