Will China Overtake the United States as the World's Largest Economy?

Will China Overtake the United States as the World's Largest Economy?

In the United States today, we hear a lot of talk about China. Why? Because China is growing, and fast. Americans are proud of their title as the world's largest and most influential economy, and we don't want to give it up. But can China really overtake the United States? How long might this take?

How big is China? There are over 1.3 billion people in China, or one-fifth of the entire world's population. With this large of a market place, it is no wonder that China is growing rapidly. Over the past 30 years, China's GDP has grown at an average annual rate of 10% and with a GDP of $9 trillion, the United States is the only larger economy.

Since 1980, total trade between the two countries has increased from $4.9 billion to a current $343 billion annually. It's also worth noting that China holds a large amount of U.S. Treasury securities, allowing the U.S. to borrow money relatively cheaply. Keep in mind that the Federal Reserve still hold the vast majority of United States debt, along with other institutions, but China holds a sizable chunk that certainly has an impact on the interest the United states government has to pay when borrowing money.

Also, the U.S trade deficit with China has increased twenty-fold in the last 2 decades. China has also been the fastest growing market for US exports. The number of exports doubled from the year 2001 to 2005. As of 2005 China is The United States' 4th largest trading partner. China is the second largest importer of US goods altogether.

Many economists attribute China's rapid growth to major economic reforms in the country combined with a 32% savings rate. Contrast that to America's meager single digit savings rate, and one can see why the Chinese had so much capital to put to work once economic reforms were made. These reforms were primarily aimed at providing more of a free market in all of China's industries. With the introduction of the free market to so many different aspects of this cash heavy economy, investments abounded.

It's worth noting that, while GDP is typically used to measure the size of an economy, a more applicable measure of the quality of living is per capita Income. In this regard, the US is still very far ahead of China. In 2006 the per capita income of an American was $44,196. For the same year, the average Chinese per capita income was a mere $7,473. Global Insight projects that in the year 2025 the average Chinese income per capita income will be $57,145 compared to $92,790 in the US.

So after all that, will China ever be able to claim the crown as the world's largest economy? According to Global Inisght, the answer is yes. Projections have China's economy growing at a rapid clip of 7% per year over the next 20 years. The same projections only predict a 3% growth rate in the United States' GDP over the same period. If those projections pan out, not only will the United States be overtaken by China around the years 2014, but a decade after that, China's economy may be 50% larger than the Unitied States.

It appears then that Americans have good reason to be looking over their shoulders at China's rapid growth. However, we must not jump to the immediate conclusion that this is a negative for us as a country. We too must learn to adapt to the new global market place and we must find out new place in it.