China to Overtake US as World’s Largest Economy by 2023
Nov 04-2013
By Professor Yao. Yang
At Beijing’s CBD International Forum, BiMBA’s Professor Yao Yang, Dean of the National School of Development at Peking University stated China is set to overtake the US as the world’s largest economy as early as 2023. The Forum, held on 6th September, brought together business leaders and academic experts to discuss globalisation relating to China and the world economy and future trends.
In his speech Professor Yao outlined his optimistic view on the Chinese economy, its future and risks faced today.
Bullish on China
Since joining the WTO in 2001, China’s economic growth has exceeded 10% per annum. After the global crisis, it has remained a leading growth economy and because of this it has also driven the fast growth of other emerging economies
In the last 2 years, whilst the speed of growth has slowed both for China and other emerging economies, there has been good news in a recovery of developed economies. The question everybody is asking is: does every economy have its day? If so, which economy is next? And when will the ‘golden era’ of growth end for emerging economies?
Prof. Yao stated his faith in China’s economy as well as other emerging economies since China drives a lot of their growth. He believes China can reach 7-8% economic growth or even higher in the coming decade. Whilstmany believe the slow-down is structural and China’s growth will fall to 6% or even lower, Prof. Yao is optimistic.
He is optimistic for two reasons:
First, rather than a danger to China, recovery in developed economies is a good sign as this will create demand. A knock-on effect of China’s rise is to drive other emerging economies’ growth since a growing China will create demand from these economies.
Second, for the handful of economies that escaped the ‘middle-income trap’ after World War Two, there were certain common elements. Namely, the share of savings, investment and manufacturing were high, as were the levels of manufacturing exports. The level of education, healthcare and life expectancy were also high. China shares all of these elements.
Prediction for 2023
Prof. Yao’s predicted China’s economy will overtake that of the US by 2023 at a rate of 7% growth – at 8%, this could be as soon as 2020.
What will the economy look like in 2023? China’s total economy will be the sum of the 3rd to 6th largest economies. Average wage will reach middle to high levels and much like the US today, it will account for 19% of world economy.
Prof. Yao highlighted three major changes.
Structurally, China will still be a major manufacturing economy but at the same time, it will become a major consumer economy, with import levels set to increase rapidly. Taking a simple example, he predicts new car sales will reach 40 million or more – currently the figure 20 million with a growth rate of 7% per year in 10 years it will exceed 40 million. Need structural change. Given its current path, China will become a major consumer economy regardless of policies.
Secondly, dependence on foreign sources will come to an end. China is no longer solely an export based economy –from 2001-08 the contribution of exports to the economy was 30%. Now it’s around 10%. Inthe future total exports will be lower than 20% which is a still very low number, particularly for such a large country.
Thirdly, China will experience a major structural change – manufacturing’s share as an employer will peak then fall, as fast as by 2017-18.The service sector will take up this slack and becomes a major contributor to economy. However, there is a risk to the economy if the manufacturing slows and the service sector cannot absorb the slack fast enough.
Current Risks for China’s Economy
According to Prof. Yao, the biggest risk is in the financial sector. Though not an expert in the field, he believes the financial sector is the most underdeveloped and least reformed sector.
Prof. Yao believes that the issue is not opening up to outside markets (i.e. interest rate market liberalisation which, through shadow banking has effectively happened) but rather to focus domestically.
The issue is financing for the populace. The significant and growing shadow banking system highlights this problem. Many people and companies with money simply do not go through official channels to borrow. Even with high borrowing rates of 10-20% - compared with the 6% official benchmark rate - many SMEs are getting funding from shadow banks.
Furthermore, shadow banking is unregulated. Any shock to the lending sector, such as the money shortage in June will hit shadow banks first. If this makes up a large amount of the economy, this is a massive hidden danger in the Chinese economy.
