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Home News Feed Stock Market

New chart shows China could overtake the U.S. as the world’s largest economy earlier than expected

CNBC NewsbyCNBC News
February 1, 2021

Workers stand at the port of Qingdao, Shandong province, China June 10, 2019.

Reuters

BEIJING — China is set to overtake the United States as the world’s largest economy a few years earlier than anticipated due to the coronavirus pandemic, analysts said.

The U.S. reported last week that gross domestic product in 2020 contracted by 2.3% to $20.93 trillion in current-dollar terms, based on a preliminary government estimate.

In contrast, China said its GDP expanded by 2.3% last year to 101.6 trillion yuan. That’s about $14.7 trillion, based on an average exchange rate of 6.9 yuan per U.S. dollar, according to Wind Information data.

That puts China’s economy at only $6.2 trillion behind the U.S., down from $7.1 trillion in 2019.

“This (divergence in growth) is consistent with our view that the pandemic has been a much larger blow to the US economy than China’s economy,” Rob Subbaraman of Nomura said in an email Friday. “We believe that on reasonable growth projections the size of China’s economy in USD terms will overtake the US in 2028.”

If the Chinese currency strengthens further to around 6 yuan per U.S. dollar, China could surpass the U.S. two years earlier than anticipated — in 2026, Subbaraman said.

The yuan began strengthening against the U.S. dollar in the last six months to levels not seen in more than two years.

Covid hits the U.S. the hardest

Covid-19 first emerged in late 2019 in the Chinese city of Wuhan.

In an effort to control the virus, authorities shut down more than half of China’s economy in February 2020 and urban unemployment hit a record high of 6.2% that month. GDP contracted by 6.8% in the first quarter.

The outbreak stalled domestically after several weeks, and the economy returned to growth in the second quarter.

Meanwhile, the coronavirus spread widely overseas and became a global pandemic, hitting the U.S. the worst. The U.S. has the most number of Covid-19 deaths and infections in the world.

The U.S. unemployment rate surged above 14% in April and remained above 10% for three more months.

“The latest GDP data shows that China’s recovery enjoyed strong momentum towards the end of 2020, due to its ability to contain the pandemic,” Tai Hui, chief Asia market strategist at J.P. Morgan Asset Management, said in an email Friday. He expects it will take another eight to 10 years for China’s GDP to catch up to that of the U.S.

He said new government restrictions following pockets of coronavirus cases in China in the last several weeks will likely give mixed signals on first quarter growth, while the U.S. will benefit from government support passed late last year.

But Tai added that GDP is “just a convenient comparison” and that when making decisions, investors should also consider differences in economic structure, income, development and competitive edge.

China’s trade surplus with U.S. rises

For economists concerned about the sustainability of long-term growth, much of China’s recovery last year came from traditional industries such as manufacturing, rather than increased domestic consumption.

As overseas demand for face masks and other medical protective gear soared, China’s exports rose 3.6% in U.S. dollar-terms in 2020, while imports fell by 1.1% in the same period.

China’s closely watched trade surplus with the U.S. rose to $317 billion in 2020, up from $296 billion a year earlier, even though the two countries signed a trade agreement in January last year in an effort to reduce that surplus.

On the other hand, China’s domestic consumption didn’t recover as quickly as the rest of the economy.

Retail sales fell 3.9% in 2020, while those in the U.S. rose by 0.6%.

Bruce Pang, head of macro and strategy research at China Renaissance, expects the coronavirus will allow China to overtake the U.S. three to five years earlier than previously expected.

But he said the “real milestone” will be when China can overtake the U.S. in terms of GDP per capita.

With about four times the number of people as the U.S., China’s per capita GDP rose to around $11,000 in 2020, while that of the U.S. was more than five times greater at $63,200.

Read The Original Article on CNBC News

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