China to become world′s largest economy in a decade | Asia| An in-depth look at news from across the continent | DW | 08.09.2014
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China to become world's largest economy in a decade

China is set to overtake the US as the world's biggest economy in 2024, as consumer spending is expected to almost quadruple within the next ten years, according to IHS. But analysts also point to major challenges ahead.

Global analytics firm IHS forecasts that China's nominal gross domestic product will amount to 28.25 trillion USD in 2024, compared to the US' 27.31 trillion USD. "Over the next 10 years, China's economy is expected to "re-balance towards more rapid growth in consumption, which will help the structure of the domestic economy as well as growth for the Asia Pacific (APAC) as a region," said Rajiv Biswas, chief Asia economist at IHS, in a September 8 press release.

Consumer spending is key

According to the data, consumer spending is forecast to grow at an annual average rate of 7.7 percent in real terms over the next decade - from 3 trillion USD to 11 trillion USD - becoming a key engine of global consumer demand and world growth. Moreover, the Asian economic giant's share of world GDP is expected to rise from around 12 percent in 2013 to 20 percent by 2025.

"As incomes rise, Chinese households no longer need to save such a high proportion of their incomes for such contingencies as health care and retirement savings, allowing a higher proportion of income to be allocated for consumer spending," said Biswas.

Certain Chinese government measures such as the roll-out of large-scale health care programs in both rural and urban China also support this development by reducing the need for households to save for healthcare. Moreover, Beijing has decided in recent years to back large annual increases in minimum wage levels in Chinese provinces, helping to boost consumer spending power.

A worker packs products made with rare earths

Biswas: 'A higher proportion of Chinese incomes can be allocated for consumer spending'

A record trade surplus

The IHS forecast follows data released by China's General Administration of Customs revealing that the country's monthly trade surplus reached an all-time high of 49.8 billion USD, a jump of 77.8 per cent.

However, while exports rose 9.4 per cent year-on-year to 208.5 billion USD in August, China's import growth unexpectedly fell for the second consecutive month, posting its worst performance in over a year. According to Mark Williams, Chief Asia Economist at the UK-based economic research consultancy Capital Economics, the slump is due to weakness in domestic demand, particularly stemming from the slowdown in the property sector which, in turn, has hit imports.

Different ways of measuring

This is not the first time that analysts have predicted that China will surpass the US as the leading economic power, but many tend to disagree about when exactly this will happen. The varying estimates crucially depend on each organization's forecasts about the rate of GDP growth in China and the US.

For example, while the World Bank estimates China's GDP will grow at 7.5 percent in 2015, IHS forecasts a 7.3 percent growth rate. But there are also other factors such as exchange rate assumptions, which can have a big impact on the calculation of nominal GDP comparisons in USD terms.

The top economy already?

But that's not all. Estimates based on the so-called purchasing power parity (PPP) include even more factors. This is why, for instance, the International Comparison Program, which involves organizations such as the World Bank and the United Nations, said in an April statement that China was poised to become the world's largest economy earlier than expected, possibly as soon as this year, based on PPP.

The reason: In 2011 Chinese GDP in nominal terms amounted to 7.3 trillion USD while the US' for the same year was more than twice that figure - 15.5 trillion USD. However, after adjusting to price levels in each country - the basis for calculating GDP in PPP terms - the figure for China rose to 13.49 trillion USD.

Although both methods of measuring GDP have their advantages and disadvantages, some analysts argue that calculating and comparing varying costs of goods and services in different countries may be a very complex exercise, which can impact upon accuracy.

Regardless of the measures used, pundits agree that China will surpass the US as the leading economic power in the coming years. But so what? asks analyst Williams. "China's population is so big that all it needs to become the world's largest economy is to raise average per capita incomes to a quarter of the level of those in the US", he says, pointing out that the moment when China's GDP overtakes that of the US is irrelevant for any given market.

After all, Williams adds, China has already become world leader in many areas - in commodity demand, industrial output, the value of its exports, coal and steel output, and car sales to take just a few. "For many markets, the impact of China's rise has already been felt. In coming years, that impact will increasingly be felt in other areas such as global financial markets as China's capital controls are relaxed."

Hongkong financial district skyline

Williams: 'All China needs to do to become the world's largest economy is to raise average per capita incomes to a quarter of the level of those in the US'

Challenges ahead

But the country still faces many challenges in the years ahead. Over the next decade, it needs to transform its economy "from the low-cost manufacturing export-driven economy of the past three decades into a higher value-added economy, competing in more sophisticated, higher value-added exports," said Biswas.

This view is shared by economist Williams who stated that the different rate at which China's rise has been felt in different areas underlines that we should focus more on the structure of China's growth than the overall speed. "The big challenges in coming years are going to be to move China's growth model away from commodity intensive investment, to open up the financial system and to allow market signals to play a greater role through the economy," he told DW.

The fact that China is projected to account for 20 percent of global GDP may imply a significant increase in the country's trade and investment flows with other countries, increasing Beijing's global weight as a superpower. Analysts also believe that economic expansion will also go hand in hand with hikes in defense budget expenditure, resulting in China's military power growing substantially.

"This will significantly increase China's military influence and reach in the Asia-Pacific region initially and eventually also globally," said Biswas. However China's ability to provide development aid and financing will also grow considerably as it becomes the world's largest economy, thus increasing its political weight and clout with other countries worldwide, notably developing countries.

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