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China’s economy will surpass the United States?

China’s economy will surpass the United States?
China’s economy will surpass the United States?

A century ago, China was the world’s largest economy. Many analysts think that the country will return to that position again. But the complexities surrounding the Asian giant, some of which are automatic, will take time to overtake America and return to pole position. Many economists now believe that day may never return.

China has four times the population of America. As a result, the chances of the country’s economy surpassing that of the United States on an equal footing are very difficult. For the country’s total GDP to be the world’s largest, GDP per capita would only be about a quarter of America’s. On the one hand, China has already achieved that modest feat. China’s GDP overtook America’s in 2016 when it achieved ‘purchasing-power parity’ in dollars. It is an approach that tries to standardize goods and services in each country using the same international price.

But even using the more familiar exchange rates prevailing in currency markets, China’s GDP still lags far behind America’s. It reached $17.7 trillion in 2021, compared to $23 trillion in America.

China’s growth is being hampered by the zero-covid policy, falling prices in the housing market, government initiatives in the construction sector and the technology war with the US. Aggressive government regulation of booming sectors such as technology and education is also dampening economic growth. China’s economy expanded 8.1 percent in 2021, but it will be lucky to grow 3 percent this year.

In the long term, China will have to deal with a complex situation due to an unfavorable aging population. Some surveys estimate that the country’s labor force may shrink by 15 percent in the next 15 years.

Capital Economics, a consultancy firm, thinks China’s GDP could approach America’s or surpass it by the mid-2030s. It may fall back again as the country claims its own adverse demographic problems.

One of the most difficult and neglected questions in this debate is the exchange rate between the two countries and what will be the difference in prices between them. Goods and services are still considerably cheaper in China than in America.

If China continues to close the output gap with the US, then its prices should follow suit, which is possible through a stronger currency or faster inflation. These factors can make a big difference in the economic gap between the two countries.

For example, Goldman Sachs predicts that China’s GDP will exceed 38 trillion in 2031, at that year’s prevailing market prices and exchange rates. This is more than double its current GDP and enough to make it the world’s largest economy. Much of which will come from higher prices and currency appreciation.

China’s GDP is forecast to grow by about 47 percent in 2031 (less than 4 percent average growth a year). The price of the country’s goods and services will be about 30 percent higher, and its exchange rate will strengthen by about 13 percent. The combination of these three factors, rather than growth, will determine whether China ever becomes the world’s undisputed economic heavyweight champion.

Source: The Economist


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The article is in Bengali

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