China’s Economy to Surpass that of US by 2016: IMF

The latest prediction by the International Monetary Fund is that China’s GDP is expected to surpass the GDP of America by the year 2016. From the Economic Times:

The Chinese economy will surpass that of the US by 2016, the International Monetary Fund ( IMF ) has predicted.

According to the IMF’s forecast, based on “purchasing power parities”, China’s gross domestic product (GDP) will rise from $11.2 trillion in 2011 to $19 trillion in 2016, while the American economy will increase from $15.2 trillion to $18.8 trillion.

China’s share of the global economy will ascend from 14 percent to 18 percent, while the US’ share will descend to 17.7 percent, China Daily reported.

This  news comes after the recent S&P downgrade of America’s sovereign debt outlook. It seems to add more evidence to the idea that the  “Age of America” is over and it will soon be replaced by the Rise of China . From Yahoo News:

This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s economic hegemony.”

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.

The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.

Despite this “bombshell” prediction, many commentators remark that these statistics are misleading if taken at face value, because such predictions are based on purchasing power parity rather than GDP at market rates. Most argue that analyzed with different methods, America will most likely stay the #1 economy in the world despite China’seconomic growth. From CNN:

An analyst at the IMF said in a statement much hinges on whether economic size is measured by purchasing power parity – what your money can actually buy on the ground in any given economy, the basis of the famous “Big Mac” index – or GDP at market rates – which is measured by converting the national currency into a common currency (normally the U.S. dollar) and measuring how much is flowing through the economy.

The IMF projects U.S. GDP in dollars will be $15.2 trillion this year while China’s will be $6.5 trillion, rising to $18.8 trillion and $11.2 trillion respectively by 2016. Under this measure, the US looks likely to stay the world’s No. 1 economy if current growth rates are maintained.

“The IMF considers that GDP in purchase-power-parity (PPP) terms is not the most appropriate measure for comparing the relative size of countries to the global economy, because PPP price levels are influenced by non-traded services, which are more relevant domestically than globally,” the IMF said.

“The Fund believes that GDP at market rates is a more relevant comparison. Under this metric, the U.S. is currently 130% bigger than China, and will still be 70% larger by 2016.”

Nevertheless, this news has one again put China in the limelight. Potential presidential candidates, such as Mitt Romney, have come out and responded harshly to the idea that China will overtake America. From Fox News:

Former Massachusetts Governor Mitt Romney said in a Fox News interview with Greta Van Susteren that American trade policy toward China has been too lax.

“We’ve allowed them to manipulate their currency to make our products more expensive than theirs, and that has allowed them to come into our country and replace a lot of jobs in this country,” Romney said. “At the same time, they make it very difficult for our intellectual property products, whether that’s software or other technology, from being able to go into their country. They steal that technology.”

Other American pundits and journalists are also exhibiting a sense of deep loss and worry about what this means for the future if and when China’s economy surpasses that of the U.S. From CNN:

The year 2016… Mark your calendars.

It’s the year the International Monetary Fund projects China’s economy will overtake the U.S. economy. Or as Brett Arends, a columnist for MarketWatch writes, “The moment when the ‘Age of America’ will end.” He says if the IMF is right, whoever wins the presidency in 2012 will be the last U.S. president to preside over the world’s largest economy.

Kind of sad… and kind of scary.

Other forecasters have set the date the U.S. falls to second place a decade later. The IMF projections are based on something called “purchasing power parities,” what people in both countries earn and spend domestically. Either way, China will pass us by in a matter of years.

It’s just another kick in the stomach to this country’s already-battered economy.

While the actual date may be contested, it seems clear that there are bound to be a number of consequences when  China surpasses America as the world’s largest economy.

April 26, 2011 6:00 PM
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