Will Chinahave the biggest economy and the largest population?
Will it haveboth the biggest economy and the largest population, asks Simon Cox
In ranking acountry’s weight in the world, two attributes stand out: manpower and money;or, more precisely, population and production. Until the 19th century, the twowent together. The country that could sustain the largest population—China—alsohad the largest economy, almost by definition. America eventually broke thatlink, becoming the biggest economy in the world by 1890 despite having lessthan a fifth of China’s population, according to estimates by Angus Maddison,an economic historian, and his successors. But the ancient pattern is slowlyreasserting itself. Is China now destined to reclaim both crowns, becoming theworld’s biggest economy as well as its most populous country?
By some measures, it already has. The IMF reckons China’s GDP overtookAmerica’s in 2014 and that it will be almost a quarter larger in 2018. Thesecalculations convert China’s GDP into dollars at purchasing-power parity (PPP),the exchange rate that would equalise the dollar price of similar goods in bothcountries. This ranking also lines up with some other crude proxies foreconomic bulk. China emits more than twice as much carbon dioxide as Americaand produces almost 50% more electricity. Even allowing for China’s dirtiereconomy, that is a big gap.
Despite the commonsense appeal of the PPP approach, it fails to impressmany arbiters of economic status. The results, after all, have limitedapplication in the global marketplace. In order to buy internationally tradedgoods, services and assets, China must convert its yuan not at PPP but at themarket exchange rate of roughly 6.6 to the dollar.
So when will China’s economy overtake America’s at market exchange rates?Five or six years ago it was possible to believe the moment was fastapproaching. Back then, China’s GDP was growing at a double-digit pace. Itsexchange rate was appreciating against the dollar. And its low prices wererising rapidly towards American levels. Thanks to the combination of these threeforces, China’s dollar GDP grew by a remarkable 24% in 2011 alone.
Not so fast
At the end of that year The Economist updated aninteractive chart which invited readers to predict the date of America’seconomic eclipse. The chart’s creator included some default assumptions forgrowth, inflation and the exchange rate, to help readers get started. No onethought China’s dollar GDP could continue growing at 24% for long. But itseemed possible that the yuan would continue to strengthen, perhaps at the gentlerpace of 3% a year; that China’s prices would rise much as they had in the tenyears before; and that China’s GDP growth would slow from double digits to7.75% on average. Plugging those assumptions into the chart showed that Chinawould catch America by 2018.
That prediction, we can safely predict, will not come true. AlthoughChina’s growth has remained robust, averaging over 7% since 2011, the yuan isnow weaker, not stronger, against the dollar. And China’s prices rose lessquickly than America’s in 2014-16, as the world’s workshop succumbed toindustrial deflation. So China’s dollar GDP is still far short of America’s(see chart).
One person who foresaw this failure is Michael Pettis of the GuanghuaSchool of Management at Peking University. He challenged The Economist toa bet in early 2012, wagering that China would not catch America by 2018. (Notliking our chances, we challenged him to a counter-bet: that China’s growthwould exceed 3.5% this decade, contrary to Mr Pettis’s pessimistic projections.Given China’s strong growth since then, it now seems safe to assume that thewager will end in a score draw: one own-goal apiece.)
Because of the delay in China’s economic ascent, the game of nationalgreatness has taken on a new twist. China’s GDP will eventually overtakeAmerica’s. But will it do so before India’s population overtakes China’s?Perhaps China will grab the economic crown only after losing its demographicone. Some think the game is already up. Yi Fuxian of the University ofWisconsin-Madison believes China’s government has overestimated the country’spopulation by about 90m, because it has failed to recognise a catastrophicdecline in the national fertility rate. If he’s right, India is already themost populous country in the world.
Even on official numbers, India is getting close. The UN thinks India’spopulation will overtake China’s as early as 2024. That would give China justsix years to catch America economically, before India surpasses itdemographically. To close the gap with America in time, China’s dollar GDP willprobably have to grow by 11-12% a year: say, 6% growth, 3% inflation and astrengthening of the yuan to 5.96 to the dollar. That would be a remarkablerebound from the disinflation and depreciation of recent years. It is notimpossible. But we wouldn’t want to bet on it.