Somehow I doubt these predictions are going to bear out. History always repeats itself. In the 1980s it was Japan that was going to crush the American economy. For the last twenty or so years the Japanese economy has been flat (it's still the 3rd biggest in the world however).
Japan tried to boost the economy with massive expenditures in it's infrastructure, to no avail. Compare that to China's approach of building high speed rail networks that get cancelled, and to build huge 'cathedrals in the desert' - cities that are overpriced by the government, who refuse to let the price to be dictated by the market (which is what would happen in a true capitalist system). The result is that most locals are priced out of the market. The reason that the cities are being built in the first place is to drive growth figures. Not having any oversight may result in some dramatic revelations about China's supposed growth in the coming years.
Japan has never had more than one half the population of the US. For Japan to have become a larger economy it would have required the average Japanese citizen to be around twice as productive as the average US citizen. They're productive, but not that much.
China has four times the population of the US. They're already the world's second largest economy based on the development of about 350-400 million people in the eastern section of the country alone, and they still have another ~800 million to go spread through the rest of the country. While there are significant obstacles to further developing countries the size of China and India, they have untapped potential left that Japan didn't.
I believe the insight the author was after here was not a general comparison of Japan to China, rather that China's "growth" has a component to it which is artificial.
That artificial growth comes from reporting GDP on building things that nobody uses (like Cities). Conversely, like a large private corporation which doesn't have to reveal costs in any general accounting rules kind of way, China has the ability to create a view of their economy which is 'untrue.'
So put another way, the author posits that in a market economy the creation of a new city would be done by actors who were themselves creating more economic output as a result of productivity gains from having city infrastructure. Thus economists see new building as a leading indicator of economic growth. However if you simply spend a billion dollars to build a high rise office tower without any tenants or even a prospect of leasing it out, the 'leading indicator' aspect of that data point is completely wrong. The building will sit there empty, generating no economic growth whatsoever. There are hints that China is manipulating its figures in just that way.
The bigger challenge for China is that in the eastern part of the country the standard of living is growing much more rapidly than it is for people living in the western half of the country. The last time that happened Mao Tse Tung used it to his advantage to overthrow the incumbent government.
"...not a general comparison of Japan to China, rather that China's "growth" has a component to it which is artificial." - yes, exactly.
The example of the cities being built is just a symptom of the unsound economic decisions being made by the authorities in China. The cities aren't being built to satisfy demand, but rather to keep the unemployment rate artificially low. In a western-style democracy, those cities would never be built as there would be no demand for the apartment at the prices being offered. A company who made such investments would go out of business sooner or later. No such qualms in a centrally-planned economy.
Also, I'm watching this video at the moment by a guy called Jim Rogers. He makes some interesting points about why the Chinese economy may be over-hyped. Examples he uses include locals digging a new canal using picks and shovels instead of modern heavy machinery - the purpose of the exercise is to keep them employed. He also talks about what he calls the disturbingly consistent nature of the offical GDP growth rate, which seems too good to be true.
EDIT: I realise that this all makes it sound like I'm totally down on China. I'm not - I don't have skin in the game either way. To me, it just seems too good to be true.
" ... a symptom of the unsound economic decisions being made by the authorities in China."
I would caution you to be careful about how you define 'soundness'. If China is doing these things, then it would be unsound to apply modelling weights to those events that were similar to the weights you would apply in a free market. Whereas the appropriateness, or inappropriateness, of the actions the Chinese government has taken with respect to its economy can only be evaluated in terms of the goals of the government with respect to its economy.
If the goal is full unemployment as a means of satisfying citizens desire to work, spending GDP on works projects can certainly achieve that goal. It would be unsound on the other hand to sit on the capital and allow unrest to foment in the general population. Economics is simply about the allocation of resources, it doesn't really judge those decisions until you have all of the decisions, the goals, and the results.
For example, many argued that it was 'unsound' to for the Federal Government to create TARP at the time it was created. However, the US economy has bumped and creaked but it has kept operating which was the goal. So now a couple of years past the decision, and knowing the goal, and evaluating the result, the decisions seem if not sound at least reasonable.
Presumably the Chinese have studied the Soviet handling of the economy and won't make the exact same mistakes they did. One notable difference is that the Soviet economy had a tremendous difficulty making competitive products for export on the world market, that does not seem to be the case for China so far.
History does indeed have a tendency to repeat itself, and if you go a little further back than the eighties you'll se that the way empires usually fall is by overreaching, and trying to control and colonise beyond their ability. In the end they implode.
Any facts/figures and comparisons to elaborate on this statement? I can see some arguments for this, but at the same time, the technologies we have these days might give this "overreach" some scaling power, so the US might not actually be overreaching...
If you are saying that no economy will ever overtake US...that obviously seems far fetched. If you are saying it might happen, but not in 2016, then you have obviously not provided a sound argument as to why you believe so. Just because somebody predicted Japan overtaking US incorrectly in the past- is not an argument to justify your claim.
China and Japan are nothing alike, so the entire argument here is moot.
Additionally, the average Chinese person is beyond capitalistic. China is hyper-capitalist, if anything. And no other country needs to look after 1.3B people, so China is essentially the first experiment in government for a population of that size.
China's going to become the world's largest economy -- there's essentially no doubt about this. Americans need to get used to not being #1 anymore. I know it's hard to swallow. :)
The world is going to look very, very different in 10 years.
"China and Japan are nothing alike...." they are alike in the sense that both were/are supposed to overshadow the American economy at different points in time. That is the only comparison intended.
Yes, Chinese people are certainly extremely capitalistic - no doubt. However, there is some serious issues to be sorted out to allow China to continue to grow.
There is no oversight on their unelected government - who knows the level of corruption, groupthink, nepotism etc. that goes on. This is bound to be a big obstacle sooner or later. Democracy has many flaws, but one of it's main advantages is that when the ordinary citizen can see that the government is acting in a manner against the best interest of the people, then at least they have the option to correct that.
Secondly, there appears to be a major housing bubble underway. If history has anything to teach us, it's that the faster a bubble inflates, all the more rapid it's contraction. We will more than likely see a correction, perhaps a recession in China in the coming decade. Real estate cannot be continually be bought up by speculators in the hope that prices keep rising forever - and the culture in China is not to rent out your investment property (i.e. your second or third apartment you bought to speculate with)! This is clearly unsustainable. They are gambling that real estate values always rise, and this is clearly bubble territory.
"China's going to become the world's largest economy -- there's essentially no doubt about this."
I think it will also - but perhaps not as fast as you think. It could take decades. The GDP growth figures the Chinese government put are look suspicious, just to point out one problem. What you could see happening is China overtaking the US in the next few years - then a recession hits and the economy contracts rapidly. Or the US partially writes down it's massive debts, and the Chinese panic because they are holding a huge mountain of partially/wholly worthless US sovereign debt. This means the Chinese cannot continue using the interest from US debt to fund the construction of massive capital infrastructure projects - also leading to a recession. Maybe WWIII. Who knows. Predictions are fun.
"Americans need to get used to not being #1 anymore" Not yet they don't. Who knows what will happen. Btw, I'm not even American (or Chinese) so I'm not saying this in a defensive manner. :)
"The world is going to look very, very different in 10 years." - this a truism!
Remember that China holds a lot of our debt. You will not see much public chest beating from China over this because of that fact. Both are equally vested in each others success as the other. China does not want value of the US bonds to plummet and US needs a stable manufacturing partner. At least for the foreseeable future, this economic and political two-step will continue.
However this does present serious doubts about the irrational exuberance in the strength of our markets for long term. It is hard to gauge China and its intentions. I am not saying that US has moral supremacy over China, but that China seems to be doing now what US used to do, for its own stability sake, twenty years ago. It is preparing to be the economic behemoth, despite the troubles it face in real estate and regionally.
The next twenty years should be pretty interesting.
Edit: I wanted to add a reference to this paper out of the Pentagon from two Pentagon top level staffers who assert that we should reduce our military spending and reinvest it in our youth. A very prescient analysis of where United States is heading, in the world. I wanted to add it as its own HN submission, but was not sure if it would be well received. Here is the link to the pdf: http://www.wilsoncenter.org/events/docs/A%20National%20Strat...
Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.
So we won't be the top any longer, but we'll still be enormously dominant. So? Competition drives innovation.
All the "America is doomed" folks act as if America is going to crumble to pieces simply because we are no longer the only gorilla in the room.
The danger comes when China has enough money to equal the US in military strength and decides it wants as much influence in World politics as America does.
The rest of the World doesn't need that complication.
I'm not convinced military power is actually that useful in the modern world. The US spends more on its military than the rest of the world combined, and yet it has trouble maintaining control in the poorest countries on Earth.
I'd personally be more concerned about China's economic power, but I suspect that there's a limit to how efficient China's economy can be whilst maintaining its totalitarian state.
The US spends more on its military than the rest of the world combined, and yet it has trouble maintaining control in the poorest countries on Earth.
That's largely for ethical reasons though. The US is obsessed with minimising civilian casualties. If the US were as ruthless as the great empires of the past then there'd be no problem maintaining control. Trouble in this town? Destroy it!
On the other hand, imperialism itself isn't all that useful in the modern world. Why did the Europeans go to all the trouble of setting up all those foreign empires? Why, so they could trade with the locals! Nowadays anyone can trade with anyone, and there's really no need to have political control over India just to trade with Indians.
That's largely for ethical reasons though. The US is obsessed with minimising civilian casualties.
That's certainly part of it, and I imagine that China cares far less about civilians than the US does.
But I think it's also because properly motivated individuals can cause far more damage than they could do in the past. There's a lot more technology to take advantage of, and many more targets to, well, target.
Nowadays anyone can trade with anyone, and there's really no need to have political control over India just to trade with Indians.
I think there was a degree of "take" as well as "trade", but in general I think you're right. In the past it was easy to profit from conquest, but nowadays it isn't really cost-effective. I don't think there's been a war fought so far this century that hasn't been a huge economic loss for all involved.
> Nowadays anyone can trade with anyone, and there's really no need to have political control
You're forgetting just one small thing - oil. It's still vitally necessary to the US (and everyone else). And if OPEC is left all-powerful then they can turn off the spigot at any time for any reason. Obviously Iraq is one way of getting around OPEC's power - badly misguided IMO, but undeniably successful in the narrow goal of securing a large non-OPEC source of middle eastern oil.
The broader point, though, would be that without some kind of global naval "police" then anyone finding themselves in the position to block trade might decide to. The US navy has traditionally enforced, at least by implication, the "freedom to trade" you speak of. I wish they would stick to this rather noble goal!
The Chinese have not had a tradition of colonialism. They're just not as obsessed with controlling the world as the west is. They are assertive over neighboring areas that have been arguably part of China for a long time like Tibet, Taiwan, Macau and Hong Kong but that's pretty negligible compared to the global domination aspirations of the Soviets, the Axis powers or Colonial European powers.
I think the situation is a lot different than in the cold war. The economies of the U.S. and China are so deeply connected that neither can afford to get into a major conflict with the other.
This is basically already happening, albeit mostly in places Americans don't "care" about. China has been quietly buying up most of Africa for the last decade, for instance.
We're not going to have another Cold War. For one thing, the American and Chinese economies are interdependent. For another, they'd both require multilateral support to act militarily in any significant capacity.
There are _huge_ economic, cultural, and military benefits to being the sole superpower that don't exist for country number two.
These benefits are, in essence, virtuous cycles that give the superpower a advantages on the world stage just by virtue of already being in first place. Think of it like compound interest, or a really big ball in Katamari Damacy, only for geopolitical power. That is, the US can arrange things in its favor to make it more powerful just because it's already quite powerful and no other country is.
As an example, the United States Dollar is the de-facto reserve currency for the rest of the world. That means that the US can purchase things without having to first go through (expensive) currency exchange, giving the US an economic advantage. The reserve currency status is also a major factor that also allows the US to borrow money pretty much at will.
Similar arguments can be made about cultural, military, diplomatic, and other power.
That means that countries aspiring to be the superpower have the deck stacked against them. So when, despite this, China overtakes the US, the US will have an awful lot of catching up to do. It's not fighting for food in the streets, but it would be a fairly serious blow to the US.
That means that the US can purchase things without having to first go through (expensive) currency exchange,...
Expensive? The Bid/Ask spread for EUR-USD is (at the moment I write this) 1.4582-1.4584. Hedging your forex risk can be expensive, but exchange is not.
Countries don't need to accumulate USD to participate in the oil trade [1], only liquidity providers do. If you live in China, and want to buy oil to produce widgets sold in Europe, you hold RMB and need to accept payment in EUR. So you trade RMB for USD, buy your oil, later on trade widgets for EUR, and then trade EUR for RMB (if you want dividends) or USD (to reinvest). The person selling the oil is probably going to trade the USD in for Rial's, Pesos or Loonies.
(The market maker captures 0.0002 USD in compensation for the adverse selection risk he takes on.)
The particular dollars being used for these purchases tend to be reused. They flow from the market maker to China, China to Saudi Arabia, and Saudi Arabia back to the market maker. This facilitates the real trade (oil + french wine in exchange for widgets), but is merely a bookkeeping mechanism.
The only person who needs to hold USD is the market maker. They need to hold enough reserves so that normal variation (e.g., today 5 people buy USD, tomorrow only 3 sell) doesn't deplete their supply. I don't know that much about commodities markets, but this probably is a small fraction of all dollars out there.
None of this has anything to do with T-Bills. US bonds have low interest rates because the US government is believed to be highly unlikely to default.
[1] Many countries do accumulate dollars for other purposes. For example, they might accumulate a reserve of stable currencies as a hedge against hyperinflation. Or, as in the case of China, market manipulation.
"...because the US government is believed to be highly unlikely to default."
And that belief stems largely from the status of the US as the sole superpower (at least for now). That's the point I was trying to make. I just didn't do a very good job of it.
I probably should have just picked an example of the US exercising diplomatic power, because that's much more intuitive to me than currency markets are.
>> "...because the US government is believed to be highly unlikely to default."
> And that belief stems largely from the status of the US as the sole superpower (at least for now). That's the point I was trying to make. I just didn't do a very good job of it.
US currency got its current "highly unlikely to default" status before it was the sole superpower so it's unclear how that status "stems" from being the sole superpower.
International trade tends to drift to the most stable currency's which is why things are moving the the EURO. Then again the EU is the worlds largest economy so there could be some truth in your assumptions.
Is the Euro considered stable? The articles I've been reading predict that the Euro-zone can't last too much longer as the debt crisis spreads from Greece to Portugal to Spain to... other places that the Germans can't afford to keep bailing out.
> It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t.
Kind of tongue-in-cheek - but that's a lesson I learned from playing Civilization. I know it's just a game, yadda yadda, but sometimes I do wonder how much of it translates into reality. E.g., if this was a game of Civ, China's domination would be pretty much ensured at this point: they have so many "cities" that their "production" output and "science" output will overtake anyone else's in short order.
In fact, that's how I prefer to play the game often: just build minimal defenses to make sure my cities are not conquered, and invest in growth as much as possible. Sooner or later, I'm the 800 kg gorilla of the whole Civ map.
From what I remember, the overhead of high city counts in IV can be prohibitively high. It makes more sense to scale vertically rather than horizontally. Unless, of course, you employ the State Property civic (apt!). Interestingly, China has been switching to the Free Market civic for the last couple of decades... More trade routes and more incentive to support corporations, but higher overhead for the huge city count. There's a reason why you go through revolution when you change civics.
I think the difference in the real world is one of quality. Quantitatively we may have the same or less number of factories or scientists, but the quality of our science and research is so much better I think it would be very hard for China to compete if things turned hot.
I keep hearing this repeated, and it's completely false. Even if the Chinese educational system only turns out rote memorizing robots incapable of the kind of creative, breakthrough leaps of discovery the West prides itself on and will never evolve due to cultural momentum and restraints (which I don't buy either but that's a whole nother argument), being economically dominant will enable China to build world-class research facilities and import world-class talent.
The US benefited from such a scientific talent immigration trend after WWII. The European theoretical physics community is benefiting similarly from LHC and the short-sighted cancellation of SSC. Any area of research that requires massive, long-term, blue-sky funding will be dominated by governments willing and able to provide it, and will attract the best talent from all over the world.
The major problems China will face in this instance will be the language barrier and reticence of some scientists to work for a more authoritarian, censoring government. The former is easily solved, the latter is problematic but not insurmountable - even scientists have their price and plenty would convince themselves to work under such a regime in the exact same way Google did (change it for the better by 'engaging' it), especially when the alternative is a stagnant career and dead-end research due to lack of funding elsewhere.
This conceit that many in the US and West have that the quality of our science and research is innate and unimpeachable is both ignorant and complacent. Where there's a will there's a way, and China certainly has the will.
> This conceit that many in the US and West have that the quality of our science and research is innate and unimpeachable is both ignorant and complacent.
Back when Hua Tuo in China was using anesthesia to perform surgery (the period described in the Romance of the Three Kingdoms, and pictured in a movie called Red Cliff by John Woo - awesome epic BTW), the West was living in huts.
I have no doubt China could build high quality centers of science and import high quality researchers - my only argument was that until this happens the sheer number of scientists in China is not a good way to measure their science production (it's just not apples-to-apples like in a Civ game).
"According to the IMF forecast, whomever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy."
Technically this has already happened, as the EU has a larger combined GDP than the US.
It's also not too surprising. For it's land area, the US is very sparsely populated, and 350m people are not going to have the same economic purchasing power as 1000m people, assuming the latter group can catch up in terms of infrastructure and technology with the former group.
The EU is a single market, and economic policies are governed to some degree by Brussels. I guess it's open to interpretation, but most sources I've seen describe the EU as a single economy, including the CIA world factbook.
They are only economical sovereign within strict limits. Greece might be able to tell you a bit about recently having to implement unpopular economic policies demanded by EU.
Why is this story here? It should be posted to Digg and Reddit, home to all the people awaiting the Ron Paul Revolution and are posting stories about peak oil and the need to return to the gold standard.
Unless, of course, the content of this article is somehow going to influence your business plans or YC application or your Ruby or JavaScript code. (No, I didn't think so.)
Oh yes, lets parade out yet another rising Chinese menace story.
Are we counting the cities worth of empty condos in the Chinese GDP? How exactly did the IMF arrive at these numbers? Is there external confirmation of government stats?
There are definite signs that there's a bubble waiting to pop in China, just as it did in the US, so i view even analyses by the IMF with some skepticism if they're based on government reporting, given that the government of China has both the means and the incentive to present itself as a growing economic power.
How about we hold off on the sound and fury until 2016, mmkay?
Right now, oil and commodities are transacted in US dollars so countries have to stock-pile dollars. When China becomes the dominant economy, this won't probably won't be the case for long.
We would remain, however, the most technologically advanced nation. Plus, GDP per capita would remain far higher. The majority of economists consider GDP per capita the most important thing when determining the wealth of a nation.
Unlike most other commenters here, I like this article and the general premise. I would be surprised if GDP in China increased so rapidly without also impacting PPP multiples, though. The article was a little light on this angle, but I would mentally adjust their number out to take into account the likely fact that increased GDP in China will continue to drive cost of living up. This pushes out the date a bit.
Yes, America has the worst economic system there is except for all the others that have been tried.
China? You GOT to be kidding! They are run by a one party dictatorship. They run essentially a centrally directed, command economy. They are still so poor that on average they have a tough time even getting enough rice for their people.
So, starting from where they are, they can get a fantastic rate of growth basically borrowing science, technology, and finance from America. BUT: Once they quit crawling, get up on all fours, and start walking, then they will face the fact that they have some serious problems: (1) Total suckage for a constitution. (2) Similarly for their political and legal systems and human rights, e.g., little things like freedom of the press. (3) Next to nothing in 'democratic traditions'. (4) A lot of filthy air and water. (5) A population with a quite old average age.
So, once they are standing, their people will want to do things about (1)-(5). As a country, they will struggle. The struggles may become violent. On "One fine day" (I know, Japan, not China), they will get (1)-(4) solved; solving (5) will be harder.
Then they will be about where America was in, say, 1950. As they move ahead, actually to do better than America they will have to do well with things that are new, with pushing the envelope, with making progress on new ground. Then they will begin to see the enormous advantages of political freedom, freedom to cut new ground in our research universities, free enterprise, freedom of the press, freedom in art, guarantees of freedom from an oppressive government, etc. They will still have the problem of a population with too old average age and a bad ratio of people to land and natural resources.
Net, bet on the economy in China continuing to grow rapidly for some years, but don't bet on China actually beating America in any significant sense this century.
Japan tried to boost the economy with massive expenditures in it's infrastructure, to no avail. Compare that to China's approach of building high speed rail networks that get cancelled, and to build huge 'cathedrals in the desert' - cities that are overpriced by the government, who refuse to let the price to be dictated by the market (which is what would happen in a true capitalist system). The result is that most locals are priced out of the market. The reason that the cities are being built in the first place is to drive growth figures. Not having any oversight may result in some dramatic revelations about China's supposed growth in the coming years.
http://news.bbc.co.uk/2/hi/8691083.stm
http://www.bbc.co.uk/news/business-11748644
http://www.sbs.com.au/dateline/story/about/id/601007/n/China...
Related HN discussion:
http://news.ycombinator.com/item?id=2386584
EDIT: Added link
EDIT 2: Typos