China’s V-shaped recovery from the coronavirus pandemic has accelerated this century’s most significant economic shift: its rapid catch-up and likely toppling of the U.S. as the world’s biggest economy.
As the only major economy to have expanded in 2020 while the rest of the world was experiencing contractions not seen since the Great Depression, China increased its share of global output and narrowed the gap with the U.S. Some economists now predict China’s economy will likely become the world’s biggest by 2028—two years earlier than previously forecast—with Nomura Holdings Inc. saying the crossover could be as early as 2026, depending on the strength of its currency against the dollar.
China had a faster recovery from the pandemic
Met the expected 2020 GDP growth
China was one of the few countries that had positive GDP growth.
Turkey
2% points less
2020 GDP YoY growth versus pre-pandemic forecast
Real 2020 YoY growth
South Korea
China
-11%
0
3%
4
Australia
Russia
Japan
U.S.
Germany
6
Saudi Arabia
Brazil
Indonesia
Canada
8
South Africa
Argentina
Italy
France
Mexico
10
U.K.
12
Spain
0
200
400
600
800
1,000
1,200
Covid-19 deaths per million population (Dec. 31, 2020)
China was one of the few countries that had positive GDP growth.
Met the expected 2020 real YoY GDP growth
Turkey
2020 GDP YoY growth versus pre-pandemic forecast
2% points less
South Korea
China
4
Australia
Russia
Japan
U.S.
Germany
6
Brazil
Saudi Arabia
Canada
Indonesia
8
Argentina
South
Africa
Italy
France
Mexico
10
U.K.
Real 2020 YoY growth
12
-11%
0
3%
Spain
0
400
800
1,200
Covid-19 Deaths per million population
(Dec. 31, 2020)
Sources: Bloomberg Economics; IMF; Johns Hopkins University; International Data Base; United States Census Bureau
It’s a prospect causing much anxiety in Washington. In his first press conference since taking office, President Joe Biden vowed he won’t let China overtake the U.S., promising more spending on innovation and infrastructure to boost the American economy.
“They have an overall goal to become the leading country in the world, the wealthiest country in the world and the most powerful country in the world,” he said. “That’s not going to happen on my watch.”
Biden is doubling down on measures imposed by the Trump administration to cut China’s access to key technologies such as microchips. China is also meeting fiercer opposition elsewhere: In Europe, Chinese companies face tighter investment screening, and in Asia rivals Japan, India and Australia are combining with the U.S. to create a geopolitical bloc aimed at limiting China’s influence.
That’s not stopping Beijing, where the leadership has put forward ambitious targets to double the size of the economy by 2035. The government is increasing spending on scientific research and innovation as it seeks to become a global leader in areas from artificial intelligence to biotechnology and green energy.
“The world today is undergoing major changes not seen for a century, but time and trends are on our side,” President Xi Jinping told party officials in January.
The Fortune Global 500 is now more Chinese than American
2000
’05
’10
’15
’20
Three out of the top five were Chinese companies in 2020.
1st
Chinese
companies
U.S.
companies
Others
500
Source: Fortune Global 500 Database
Last year saw several milestones signifying China’s rising global influence: it attracted more foreign investment than the U.S. for the first time and the number of Chinese companies on Fortune’s list of the world’s largest overtook the U.S. And for all the talk of supply-chain diversification amid the trade war, China’s share of global trade actually increased at a record pace as the world snapped up its masks, medical equipment and work-from-home gear.
In fact, China has already overtaken the U.S. if GDP is calculated on purchasing power parity terms, which adjusts exchange rates to account for price differences between countries.
Even so, there’s no shortage of pessimists who think China’s development will stall. They say soaring debt levels threatens financial collapse and political repression in its one-party system will smother economic vibrancy. But China has a long track-record of proving its detractors wrong. Xi has cracked down on almost every form of political dissent, yet the economy has doubled in size over the past decade.
Indeed, some aspects of China’s economy that are often highlighted as weaknesses turned out to be strengths in a pandemic: state-control of the financial system allowed companies to avoid defaults, state-owned companies could be ordered not to lay-off workers and once the virus was under control a surge in state-directed investment got the economy moving again.
China’s pandemic performance is the third time in as many decades that it has emerged stronger than others from a global crisis. Controls on capital flows meant it was barely dented by the Asian financial crisis in the late-1990s, while its investment binge after the 2008 global financial crisis made it a driver of growth for the world.
Despite complaints about unfair competition, foreign multinationals are reaping increased profits from China’s huge consumer market. It’s already the world’s largest market for cars and luxury goods and companies from Nike Inc. to Starbucks Corp. are selling more to Chinese consumers. However, they often have to tread carefully around subjects considered sensitive by Beijing, as Nike and other Western clothing brands found out last week, when they were hit by consumer boycotts in China for raising concerns about alleged forced labor in the far west region of Xinjiang.
Yet the race for economic dominance is far from over. Japan was touted by some in the late 1980s and early 1990s as destined to overtake the U.S., but that never happened. Indeed, Biden’s $1.9 trillion stimulus puts the U.S. on a strong trajectory in 2021 and if he delivers on his promise of a major infrastructure package, the boost to U.S. growth potential could keep China in second place for longer.
Demographics also aren’t in China’s favor. The nation’s low-birth rate means its population is likely to peak in size before the end of the decade. The risk is that even if China overtakes the U.S., it could drop back behind again as rapid aging erodes the economy’s vitality.
Below 65 years old
65 and above
China
U.S.
1.25 billion population
1.00
Projected
0.75
Uncertainty
range
0.50
0.25
0
1950
2000
2050
2100
1950
2000
2050
2100
Below 65 years old
65 and above
China
Uncertainty
range
1.25 billion population
1.00
Projected
0.75
0.50
0.25
0
1950
2000
2050
2100
U.S.
1.25 billion population
1.00
0.75
0.50
0.25
0
1950
2000
2050
2100
Forecasts for early overtaking assume that China will be able to deliver a big enough increase in productivity and capital spending to offset the demographic drag—and while that’s possible, it’s far from guaranteed, said Tom Orlik, Bloomberg Economics’ chief economist.
“A growing rift with the U.S. threatens to block the flow of ideas and innovations required to lift productivity,” he said. “High debt and burgeoning overcapacity suggest that the returns from continued additions to the capital stock are diminishing fast.”
Unlike the U.S., China will also become the world’s largest economy when average incomes are still relatively low—around a sixth of U.S. levels. That limits the appeal of its institutions among more developed countries.
“Global influence is about standards, culture and soft power,” said Yukon Huang, a former World Bank head in China and author of ‘Cracking the China Conundrum: Why Conventional Economic Wisdom Is Wrong.’ He added that “power comes not from the size but from per capita GDP level. In terms of institutional sophistication, China lags the West in many ways. That matters for its power to influence.”
Whether China rises to No. 1 remains to be seen, but it’s clear America is facing the starkest threat to its economic dominance in decades in a rivalry that’s reshaping the world order.