China is developing fast and, even though it has some issues with human rights, pollution and corruption, people have been speculating that it could be the next global super power.
China has a population of 1.3 billion, which is four times the U.S. population of 308 million. Simple math dictates that if four Chinese people can match one U.S. person in productivity, China will surpass the U.S. in production.
Using International Monetary Fund's 2009 list, their GDPs in U.S. dollars are:
- USA: $14.2 trillion
- China: $4.9 trillion
In order for China to out produce the U.S., it needs to produce three times more than it does right now.
Growth rates also figure into the picture. China is developing much more rapidly that the U.S. While our economy is in a recession now, 17-year estimates for GDP per capita annualized growth is 4.17% for the U.S. verses 12.13% for China.
Running these two numbers into the future, China will overtake the U.S. in 2025. Now, I'm not the first person to run numbers like this to calculate when China will overtake the U.S. I expect these numbers are pretty accurate estimates, but I don't trust all the numbers that come from China. Even something as simple as the age of Olympic competitors can be complicated.
But this does not tell the whole story. China does not run on dollars; it runs on yuans, and that rate does change. The yuan has been mostly pegged to the U.S. dollar since 1994. Recently, under pressure from Washington, China loosened the exchange rate, but it is still far from free. Right now one U.S. dollar is worth 6.79 Chinese yuan.
To explain this in simple terms, if you have Chinese for lunch in America it might cost you $7, but if you fly to China, that lunch costs you 10 yuan ($1.47). While certainly the lunches are a little different, they are equivalent, but one is counted as four times more "productive" that the other. This is a result of the exchange rates, and exchange rates do change.
One tool economists use to calculate what exchange rates would be without manipulation is called purchasing power parity. And the International Monetary Fund estimated that in 2008 the dollar would be equal to 3.8 yuan (or renminbi) if it were allowed to float freely. That would basically represent an 80% increase in the value of the yuan and all Chinese production. Assuming that China and the U.S. continue to grow at current rates and the yuan is allowed to appreciate 80% against the dollar; China will surpass the U.S. as the economic superpower in 2017. That is only seven years from now. Now that is something to think about.
Do you think we should be worried?
Recent travels have taken Kevin Kersten to China, where he was impressed by what he saw.
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Reader Comments (Page 1 of 1)
6-27-2010 @ 1:48PM
Harry said...
hmmm...why exactly should you be worried? the US as the leading power hasn't exactly been a boon to the world, toppling democratically elected governments in central and south america, invading countries like Iraq on a whim (or deception), protecting pariah nations like Israel. At least China in its past history hasn't shown itself to be as aggressive even when they were significantly more powerful than everyone else.
6-27-2010 @ 1:55PM
DROF2TH said...
If we have these tax and spend fools in office, we are doomed!
6-28-2010 @ 1:59AM
Mike said...
Hmm, I'll answer your question with another question. Will we have the Democrats in charge of economic policy? If so then yes.
6-28-2010 @ 2:22AM
hhz022 said...
Hmm.... Maths, maths.... One more thing: China is in black whereas USA is in red. Don't refer to China as Red China anymore, but we can call USA as Red USA.
6-28-2010 @ 2:45PM
Tha Slantize said...
How does a floating exchange rate becoming 1 to 3.8 result in increased production??? It's the fact that China is artificially dumping more RMB's into FOREX that's resulting in the artificial exchange rate. A weaker RMB means China can produce more and more and export more and more without strengthening its own currency. Strengthening currency results in more buying power, not exporting power. Right now, China's economy is extremely dependent on its manufacturing industry, and to allow China's currency to float into a stronger currency would actually result in less production as its population would be buying imported goods (hurting its own manufacturing industry and thus less production).