Rising China

By Lawrence Yun, Chief Economist

The Olympics start this Friday, and China is under intense scrutiny. From environmental hazards to the degree of free press it allows, China will be carefully watched to see if it is ready to take the next step in advancing into the modern world.

Economically, as we are all aware, the country has been steaming ahead - perhaps even too fast, considering all the traffic and lung congestion problems. Depending upon the measurement used, China is now the second or the third largest economy in the world. The previous ranking had consistently placed the U.S. on the top with Japan and Germany - the two countries that suffered defeat in the Second World War and yet staged economic come-backs - at a distant second and third, respectively. With Japan and Germany both growing at less than 2 percent per year, they are no threat to the U.S. economic supremacy currently. Yet China's economy is expanding at a 10 percent or better rate, and if such pace is sustainable for several more years, it is only a matter of time before China overtakes the U.S.

Consider a simple extrapolation. The U.S. produces $14.3 trillion in output yearly according to the latest GDP measure. The long-term U.S. economy growth rate has been right around 3 percent per year. This makes sense since the U.S. population and the labor force grows by 1 percent each year and then we can add an additional 2 percent from the usual rising worker productivity.

China, after the exchange conversion, produces currently about $3.5 trillion annually. What happens if the U.S. grows by 3 percent while China expands by 10 percent for the foreseeable future as it has been for the past decade? Consider the below table, which shows economic output assuming those growth rates. By 2030, China surpasses the U.S. in economic output. Because of a much larger population in China compared to the U.S., the average standard of living will still be much lower in China. However, in terms of money available for national defense spending or for foreign influence, China can stare directly into American eyes.

 

	U.S. (3% growth per year)	China (10% growth per year)
2008	14.3	3.5
2009	14.7	3.9
2010	15.2	4.2
2011	15.6	4.7
2012	16.1	5.1
2013	16.6	5.6
2014	17.1	6.2
2015	17.6	6.8
2016	18.1	7.5
2017	18.7	8.3
2018	19.2	9.1
2019	19.8	10.0
2020	20.4	11.0
2021	21.0	12.1
2022	21.6	13.3
2023	22.3	14.6
2024	22.9	16.1
2025	23.6	17.7
2026	24.3	19.5
2027	25.1	21.4
2028	25.8	23.5
2029	26.6	25.9
2030	27.4	28.5

 

The table above presents a very simple extrapolation of past trends; however, we all know that past performance is no guarantee of future performance. So any changes to either country's growth -- faster productivity gains in the U.S., for example -- will shift the convergence point. If the U.S. grew at 4 percent, rather than 3 percent, while China slows to 7 percent, then the convergence date is pushed further to another generation in 2058. Marginal changes in productivity gains can have huge cumulative impacts.

U.S. grew by 2.2 percent in 2007 and is projected to grow by 1.6 percent this year. China grew by 11.4 percent in 2007 and is on pace to grow by 10.4 percent this year.

What will really happen is anyone's guess. It may be that the catch-up period will take over 100 years. Maybe it doesn't matter or mean a darn. Right now, China can grow fast because of the "catch-up" phenomenon from simply adopting copy-cat technology. However, I do not believe that a government directed economy can ever become a leader in innovation. In this sense, I do not ever expect China to match the U.S. in intellectual and entrepreneurial prowess. Once China truly grows up and lays the foundation for freedom in both economic and political arenas, however, then China may indeed be in a position to out-create America.

Yet that condition should be of little concern to Americans. As any American who has traveled to Japan or Germany will attest, our former enemies are good people who bring no worries or threats to the table today as they live and prosper in a democratically free country. Norway or Luxembourg, with the highest per capita income other than the U.S., are also no cause for alarm. It's good that these economies and people are prospering. The same can be said of China. Once a country becomes truly democratic, then the world benefits as a result of its rising economic status.

China will never reach the top under an authoritarian rule. The China that may reach the top is the one that will have become democratic with economic freedom for all. That China is a cause for celebration and not a concern.

In the meantime, Realtors® should position themselves for increased home sales from buyers from China over time. Our latest survey of international home buyers showed China becoming an ever more important segment of foreign buyers. Canadians overtook the British in foreign representation for home purchases in the U.S., but the Chinese are right behind.

For the latest on economic activity in China via the New York Times, read more > 

 

This is one in a series of commentaries by the Research staff of the National Association of REALTORS®. Read more commentaries >

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