Monday, April 25, 2011
China's economy to surpass the USA by 2016? Maybe, but . . .
. . . "there's many a slip twixt the cup and the lip", as the old proverb notes.
The International Monetary Fund stated a couple of weeks ago that the economy of China would surpass that of the USA by 2016, if current trends continue. It's certainly possible (and I'd say it's eventually inevitable): but there are some humongous roadblocks ahead for China. It has to sort out its enormous property bubble (which I wrote about yesterday), and deal with massive, institutionalized corruption, nepotism and inefficiency, just for a start.
The primary problem is that China's economy is currently utterly dependent on exports. Its own population isn't (yet) a big enough market to absorb most of its production. The country's been running at a huge current account surplus, exporting much more than it imports (which has, in turn, allowed it to make available highly competitive financing to its exporters, getting them even more business overseas). However, as financial recession tightens its grip on many of its export markets, China's current account surplus is shrinking, and might vanish altogether if the European and US economies deteriorate further. If that happens, it might take decades to recover - particularly because protectionism is likely to rear its head in opposition to free trade (as it always seems to do during times of economic hardship). That might close (or at least restrict access to) many of the markets on which China depends.
I'll be watching this situation with intense interest over the next few years. For all the world's major economies, it's going to be a wild ride . . .