Will China's Economy Really Surpass the U.S. This Year?

China Economy
Eugene Hoshiko/AP
In 2007, legendary hedge fund manager Jim Rogers sold his beloved Manhattan townhouse, packed up his wife and 4-year-old daughter, and moved to China.

"This is China's century," Rogers said. "If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to China."

And according to the data in a new report by the World Bank's International Comparison Program, Rogers' prediction of Chinese economic dominance may come true this year -- which, as the Financial Times points out, is 5 years ahead of what was previously forecast.

The King Since 1872

Economists and statisticians have recognized for years the inevitability of the Chinese economy eventually eclipsing that of the U.S. -– the world leader since it overtook the United Kingdom in 1872 –- but the speed at which that shift appears to have accelerated is a surprise.

In 2005, the ICP numbers showed that China's economy was only about 43 percent of the size of the U.S. economy; by 2011 (the data year the report is based on), China's GDP had reached 86.9 percent of U.S. GDP.

By extrapolating those numbers and using the International Monetary Fund's growth estimates from 2011 to now –- 7.6 percent for the U.S. and 24 percent for China –- it would seem that China is in fact about to end the United States' 142-year reign as global economic potentate.

Or is it?

Though there is no denying that China experienced tremendous growth in the six years between the two ICP reports, the acceleration in the numbers may be more a consequence of the ICP's change in methodology than in actual growth.

After revising the way it determined purchasing power parity -– essentially the cost of day-to-day living –- the ICP concluded that larger developing countries, like China and India, have economies that are expanding faster than previously thought.

Many Questions and Asterisks

But even assuming that the new methodology is sound, there still are reasons to suspect that China may have a long way to go before it can cry "We're No. 1!" -- most importantly having to do with the accuracy of Chinese economic data.

China's numbers have long been questionable among economists, as China's National Bureau of Statistics has been accused –- either due to gross incompetence or outright deceit -- of double-counting various economic activities, such as factory production.

The Chinese admit this among themselves, as evidenced by a 2007 diplomatic cable published by WikiLeaks, in which Li Keqiang, China's current premier and at the time a regional party head, stated that the figures used to determine China's GDP are "manmade" and "for reference only."

Further muddying the economic waters, the bureau itself, according the ICP report, "expressed reservations" about the study's methodology and "did not agree to publish the headline results for China." The report added "the NBS of China does not endorse these results as official statistics."

There is also a question about recent rates of economic growth. 2011 was a year in which the U.S. was still reeling from the 2008 financial crisis -- a black swan event in American history -– flattening GDP, which has only started to get back on track. Growth of China's GDP, on the other hand, has slowed significantly since 2011, coming in at 7.7 percent for 2013, the lowest level in 14 years.

Disagreements Abound

Given these facts, it's hard to find agreement with the ICP's conclusions about China's eminent economic dominance. Even Rogers has recently expressed concerns about the high levels of debt in companies and regional provinces in China being a drag on growth, though he sees those issues as minor in the grand scheme of things. As he put it in a recent interview with Business Insider:

"As the U.S. was rising to its power and glory during the 19th century, we had a horrible civil war, 15 depressions [Yes, with a D], few human rights, little rule of law, periodic massacres in the streets, etc., etc. yet we still became the most successful country in the 20th century. "China will have plenty of setbacks along the way as does every country, company, family, and individual that rises."

No man is an island, or even a peninsula, so I encourage your feedback in the comments below. And don't forget to pick up my book, "Trading: The Best of the Best -- Top Trading Tips for Our Time."

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Eric Delapena

Endogenous growth see that China huge and very massive pull out the low riding methods and make it look like a mouse issue of capital freedom only when USA has the spending advantages it's not the Obama care who framed Roger rabbit it's the person of care who invited the Rabbit to the funds

May 06 2014 at 1:28 PM Report abuse rate up rate down Reply

Of course we will surpass America as the worlds largest economy if not this year then certainly in the next 3 years. The rapid fall of America is stunning if not humorous. Americas government has become a corrupt sham that caters to whomever will give her politicians the biggest kickbacks. Greed and hatred rule the days in America now. Americas court system is pathetic as well. Money in America talks and your most vicious criminals walk. You are running out of scapegoats America. You had it all and your government and corporations willingly gave it away for a few dollars. Keep blaming your citizens America for your political blunders.

May 04 2014 at 6:17 PM Report abuse -1 rate up rate down Reply

Bigger isn't always better. China has no labor laws, no environmental restrictions and the quality of life generally sucks for most their people. Once they try to mimic our lifestyle they'll quickly realize they are merely the kings of the low-baller's. The one thing they do have right is that their busines IS business, everything they do is in their interest...whereas we over here in the U.S. continue to give aid to other countries, police the world and our work ethic has given way to a young generation of degenerate brats with entitlement issues while our unemployed and no-ambition lazy class has swelled to record numbers. Unless we are willing to let our poor starve, screw the environment in favor of capitalism and start being uber-selfish about our interest...we'll continue to decay. I don't make the rules, I just understand them.

May 04 2014 at 12:20 AM Report abuse +3 rate up rate down Reply
Melissa Li

China is going to continue its path to success while the US slows down. Americans keep shooting themselves in the foot.. and it won't stop any time soon...Many American have a steak taste on a hamburger budget . That's part of the problem we now face from a long time ago. They feel entitled to a job, a house, a high salary, etc... They borrow to the max and then whine about now having enough money . Nice house , car or truck and boat. Can you afford them or does it really matter at this period of time?

Me - I'm going to constantly educate/improve myself. I’m going to rent until I have enough money to buy a comparable place in full. And only when I find a place I want to spend the rest of my life in.

While waiting for that, I will make smart decisions with my money:

1) Paying off my debts as they come to me. Never holding a credit card balance longer than a month. If this means living in a small studio apartment and eating ramen, rice, and beans, so be it.
2) I will always buy small, fuel efficient and durable cars. I drive a 2006 Honda Civic now. It costs me nothing to fill up and next to nothing to insure ($25/month from Insurance Panda… woohoo!). I will not drive when I don’t need to, and use public transportation whenever possible.
3) Developing multiple revenue streams. Doing side jobs. Building up small businesses. Doing contract work. Basically doing whatever I can to generate income from multiple sources.
4) Grow my revenue and assets no matter what. Make sure I am always expanding and develop them to the point that they consistently generate reliable cash flow.
5) I need life insurance to protect my daughter, but I ditched a $275 a month whole life policy for a policy from LifeAnt and now I only spend $25 a month. I save the difference to my Roth IRA.
6) The most important one - make as much as I can. Save as much as I can.

May 03 2014 at 2:59 PM Report abuse +3 rate up rate down Reply
1 reply to Melissa Li's comment

Sobering thoughts, unfortunately our government and citizens prefer instant gratification. Buy now pay ( or not ) later. I hope when you do buy a house it will be in my neighborhood.

May 03 2014 at 11:54 PM Report abuse -5 rate up rate down Reply

I can think of no two items more symbolic of America than our flag or a barbeque grill. Last I looked I could find none made in America sold at WalMart and in fact the clerk chuckled when I asked if any American flags they sold were made in the USA.

Let's make a deal. Let's agree to pay say 10% more for items made in America if the Walton Heirs will agree to take 10% off their barely taxed incomes.

Made in China and profited by the Waltons....the greatest wealth transfer in history.

May 03 2014 at 12:07 PM Report abuse +1 rate up rate down Reply

If China takes this title it is because we gave it to them.

May 03 2014 at 10:40 AM Report abuse +1 rate up rate down Reply

Is that a surprise that the US continues its decline after exporting its economy to China over the past 30 years? Free trade is a myth and is a one sided practice. We are hellbent to becoming a third world economy.

While I greatly detest the polices of the current White House occupant, every President since Nixon's opening of China and every Congress since that time bears the responsibility for our continued decline. US corporations bear a heavy responsibility too as they continue to invest offshore at the expense of the US economy.

Globalization and Free Trade mean only that the poor schmo making $15 an hour with 20 year old technology is competing with the Far East guy making $10 an hour with new investment in new technology. Productivity was the US advantage. With lack of US investment and continued US investment offshore, productivity is no longer our advantage. Our competitive tool box is near empty and left with only wages. Any wonder unemployment is persistently high? Look no further than DC for policy blunders. Levi import taxes on goods and screw free trade. It is a lie promoted by US corporations.

So thank you Federal government and the corporations - yes you Pfizer as you join the march offshore - for the continuing decline of the United States. As for the voting public, remember, we voted the Federal Dumb Butts in. Stand up, grow somethings and vote them out.

May 03 2014 at 10:11 AM Report abuse +3 rate up rate down Reply
1 reply to Cary's comment

Well said Cary...finally someone with a brain!!!

May 03 2014 at 10:18 AM Report abuse +1 rate up rate down Reply

Americas ship has sailed...and we the people are to blame. Bad leadership, greedy, unethical politicians...a business community that puts their best interests and that of their shareholders before that of their country. We are our own worst enemy and demonstrate to the world the failure and pitfalls of Democratic Capitalism.

May 03 2014 at 10:05 AM Report abuse +5 rate up rate down Reply

It may be the largest economy, but it is also one of the poorest. A bigger market is not always better when you're trying to sell something. After all, the amount IN the wallet is more important than the number of empty wallets. Sure, if you want cheap labor, it's a great place to set up sweat shops. But that is only one facet of business. Don't expect to sell what you make there more than you can in America or Europe (unless it is super cheap).

May 03 2014 at 10:01 AM Report abuse +2 rate up rate down Reply
Tom P

Thank you Obama for helping this country lose all its respect, and all its previous stature

May 03 2014 at 9:55 AM Report abuse -13 rate up rate down Reply
1 reply to Tom P's comment

Mindless whining with no basis in reality.

May 03 2014 at 10:16 AM Report abuse +3 rate up rate down Reply
1 reply to Douglas's comment

Think some more doug. 5 years and we still see no progress. Except of course our increase in socialist inspired programs and crazy spending spending. Our final death blow to America will come when the taxes catch up with the spending.

May 03 2014 at 10:44 AM Report abuse -8 rate up rate down