China's Economy

The media occasionally writes about China becoming the largest economy in the world surpassing the United States. The Washington Post in an article (Sunday, January 19, 2014) entitled America's slipping to No. 2. Don't freak out. by Charles Kenny (a senior fellow at the Center for Global Development) is one example. The author states that "...the link between the absolute size of your economy and pretty much any measure that truly matters is incredibly weak..."

Here is one of many interesting research papers on just this subject:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1544655

(1) Whether China makes the United States No. 2 in global GDP by 2017, 2020 or 2030 remains unknown, but it is very likely to happen sooner than later

(2) Many people in the U.S., according to surveys, think that this will have a negative impact on the U.S.

This is likely untrue.

Charles Kenny writes that the dollar as a percentage of global reserves has already fallen from 80% to around 40% but that this has not "...spooked global markets...". But the growth of China means that the U.S. and others should benefit from China becoming larger, healthier and more educated. This may also provide more opportunities in travel, in exporting to them and importing from them, and in the potential for increased innovation that will benefit the whole world.

From the www.ssrn.com article referenced above, I would like to highlight that:

(1) Though China's GDP will exceed the U.S. sometime between 2017 - 2030, per capita (because of its large rural population), China is only 1/4th the size of Japan and 1/6th the size of the United States

(2) China represents about 12% of the share of global trade (both imports and exports) of goods and only 4% of the share of global trade in services - the U.S. remains an important player

(3) China's exports will increase toward India and so other developing countries that export similar goods to India will have increased competition to slug through

Some of the good news from these points are that:

(1) China's domestic markets will continue to grow and attract the products that other countries provide (like the U.S.) providing revenue growth worldwide to countries and companies that are globally situated

(2) China, therefore, will continue to attract FDI (Foreign Direct Investment) - it is around $1 trillion today

(3) FDI will, in part, increase domestic consumption in China helping to increase the demand for imports from other countries

As China (and India) continue to grow their middle classes, even though China becomes the world's largest economy measured by GDP with India next in line someday, it will likely mean good things - not bad - for the United States and other countries. A chart in the SSRN article shows that the:

"...Complementary effects of China's trade are increased exports to them and improvement in the trade conditions of exporting countries due to the rising world prices of primary goods driven by demand from China and India..."

"...Competitive effects of China's trade are the substitution of import from China (and India) for local producers..."

"...Openness and integration of China's economy into the world economy...measured as the proportion of imports and exports in GDP..." can help portray China's impact.