109. Prospects of the China Economy

China has emerged as the dominant global economic power in terms of its GNP.  However, in many respects it is still lagging and will take years to catch up with the superior wealth of USA. It is the purpose of this blog to offer an assessments of the current prospects by China to achieve dominance in terms of economics, welfare and as a global trader.

China GNP, defined in PPP terms, exceeded USA as well as European GNP in 2014:

The rate of increase in GDP is unprecedented and if continued will place China at multiples of USA economic levels.

The rise in the Chinese GDP is best explained by analyzing the GDP annual growth rates for the USA and the total World economy:

There is no question that the Chinese GNI per capita growth rate exceeds the USA growth rate and approximates the World total, which tracks the dominant global economic force which nowadays is still the USA.

Based on recent average GNI/capita growth rates we have projected the year when China can be expected to reach average levels of USA prosperity. Using such projections parity is reached in 2024, which may be an overoptimistic projection which assumes a continuation of former growth rates.

Future outcomes will be also dictated by the projected balance of trade:

China shows a favorable balance of trade whereas the USA has been losing its prior positive balances since 1982.  At present it is unlikely that the USA trade deficit will be reversed, which confirms that the economic position the USA will continue to be weakened,

The major inhibition on China growth will continue to be demographic. As compared with the USA over 10% of its population cannot be counted to be in the workforce:

China's population still remains largely rural with up to 100 million still under the Chinese poverty line.  Improving this demographic shortfall remains as one of the top three priorities for the Chinese government to overcame.  We consider that a significant risk to the achievement of the currently set political goals.

One of the indicators about the Chinese improvements is the international valuation of the Chinese Yuan currency denominated in the internationally dominant Dollar:

The rise in the Yuan relative to the Dollar can be largely explained by the drop in the international currency markets of the Dollar as result of an increase in the USA levels of debt.  This decline is best illustrated in the following chart:

The current trend indicates that the trade value of the USA dollar will keep declining in international transactions while the value of the Chinese currency will be rising as indicated by the most recent nomination of the trading in petroleum that omits its traditional dependency on the Dollar.

Meanwhile the presence of inflationary effects on the reliability in currency has emerged as an influence. Since 1983 the Dollar has been subjected to inflation, bringing its 2017 level of depreciation to 93%:

Although USA inflationary pressures have leveled off at 2%, the prospects of that to rise is not imminent, as indicated by a rise in short-term interest rates. However, what matters is to deflate the past rise in GNP to calculate the worth of "real" GNP:

The deflated USA GNP shows remarkable declines after 2005 which shows the lasting damage incurred when the GNP dipped and did not recover until in 2015 after receiving large amount of debt financing.  This chart signals that from a global standpoint the economic dominance of the USA started receiving after suffering from the most serious damage since the depression after 1929.

To show the economic differences between China and the USA we are plotting the effects of inflation on GDP growth:

The USA GDP growth rate minus the inflation rate fluctuates between +3% in 1998 and -4% in 2008.  It averages a spread between GDP and inflation of about 0%, which means that the economic gains over a period of 20 years was nullified.  Meanwhile, the China growth rates fluctuate between 11% in 2006 and 4% in 2008. After accounting for inflation China has nevertheless manage to deliver a real GDP growth that averaged about 6% over 20 years.

Conclusions:

In the past 10 years China has delivered an unprecedented GDP growth rate of historical proportions. If we evaluate this performance we can only conclude that such a rate of progress is likely to continue under the leadership that appears to be highly competent.

The obstacles to achieve such high gains will be demographic, environmental and political.  That introduces into our projections elements of risk that, at this time appear to be manageable.

Meanwhile the relative global position of the US economy is declining, which is also accompanied by a slow deterioration of the position of the Dollar as a globally accepted currency for most transactions.  Whether such decline can be arrested is questionable because it is influenced not only by a loss in economic superiority but also by adverse political conditions.

We must therefore conclude that Chinese currency will in due course start displacing the USA dollar as the dominant means for conducting global trade. What will be the political consequences and timing for such changes cannot be predicted at this time, though it is our belief that a power politics is ultimately shaped by the underlying economics of superior economic performance.

dependency ratios for China and the USA (% of working-age population) show remarkable differences;

Age dependency ratio is the ratio of dependents dependents per 100 working-age population. In China the 2016 dependency ratio is 38 working age workers, in the US the dependency ratio is 54 

World Bank staff estimates based on age distributions of United Nations Population Division's World Population Prospects. For the USA there has been a Age dependency ratio is the ratio of dependents--people younger than 15 or older than 64--to the working-age population--those ages 15-64. Data are shown as the proportion of dependents per 100 working-age population.

Age dependency ratio (% of working-age population).

Nei Mongol (Inner Mongolia), Ningxia, Xinjiang Uygur, Xizane   i Mongol Guangxi, Nei Mongol (Inner Mongolia), Ningxia, Xinjiang Uygur, Xizang (Tibet)