Even optimists underestimated China's growth
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China was at the center of attention at this year's Davos World Economic Forum. The annual survey of CEO's by PwC, published ahead of the forum, found 39 percent believe China is the world economy's leading growth driver - compared to 21 percent naming the US. Developing markets in general were seen as growing more rapidly than developed economies. This trend is in line with the famous BRIC (Brazil, Russia, India, China) hypothesis developed by Goldman Sach's former chief economist Jim O'Neill.
O'Neill coined the term BRIC in 2001 when he projected the rapid growth of these economies. In 2003, Goldman Sachs prediction that China's economy would be larger than that of the US by 2041 was greeted with incredulity.
But it is not generally realized that Goldmans made modest assumptions. Its prediction was based projecting that China's GDP would increase at 8.1 percent a year in nominal dollar terms. In fact from 2000-2010, the most recent 10 year period for which data is available , China's annual nominal dollar GDP growth was 17.3 percent. As O'Neill noted in 2009, replying to critics: 'What many... observers of our BRIC projections never realized is that we used extremely conservative assumptions.'
Looking back, the original Goldman Sachs predictions now seem quaintly conservative. In 2001 it was only predicting: 'If the 2001/2002 outlook were to be repeated for the next 10 years, then by 2011 China will actually be as big as Germany on a current PPP basis.' In 2011 China's GDP is in fact larger than every country in the world except the US.
Given these trends, Goldman Sachs regularly revised upwards its projections for China's growth. In 2008 they brought forward the date China would overtake the US to 2027.
This is not intended as a criticism of Goldman Sachs' BRIC view. On the contrary, Jim O'Neill's was a brilliant case of getting the fundamental trends right. Goldman Sachs was on the right playing field and critics of its views on BRIC were shown to be quite wrong. If, in 2001, Goldman Sachs had projected China's economy would be larger than the US by 2027 few would have taken them seriously. But far from Goldman Sachs being too optimistic regarding the potential growth of China's economy they underestimated its growth.
Times have changed. Excessively optimistic projections regarding China's growth relative to the US have become rather the fashion. Arvind Subramanian of the Peterson Institute of International Economics argues that in parity purchasing power (PPP) terms, China has already overtaken the US – a view that has not received much support. The respected consultancy The Conference Board, estimates China's GDP, again in PPP terms, may overtake the US in 2012 – again a view not generally endorsed. The conservative IMF estimates in its latest World Economic Outlook that China's GDP, again in PPP terms, will be larger than that of the US sometime after 2015.
China's media, in contrast, has tended to take a very cautious approach to the issue - insisting comparisons only be made in current exchange rate terms and comparing optimistic projections of US growth with pessimistic predictions regarding China's. This echoes the Chinese media's approach to comparisons with Japan. Calculations made in terms of PPP by the IMF showed that China overtook Japan to become the world's second largest economy in 2001. China, however, only acknowledged that it was the world's second largest economy in 2010, when it overtook Japan in current exchange rate terms.
Research carried out by the present author in the research group "China in the International Financial Crisis" at Antai College of Economics and Management, Shanghai Jiao Tong University, over the last two years, points to China's GDP overtaking that of the US in 2019. This is the midpoint of a range from 2017, if the most optimistic assumptions are made, and 2021 if the most pessimistic assumptions are made.
Similar conclusions have been arrived at by The Economist, which now projects China overtaking the US in 2019, PwC, which conclude China's GDP should overtake the US before 2020 and Standard Chartered bank - which also predicts China will overtake the US by 2020.
No one can put precise dates on such processes, but the fundamental qualitative reality might simply be put that 'in approximately ten years China's economy will be approximately the same size as the US'. That, of course represents a gigantic change in world economic history – although it must not be forgotten that, even at that point, China's GDP per capita will still only be one quarter that of the US
Goldman Sachs has not revised its own BRIC forecasts since 2008. Even then, as we have seen, its assumptions tended to underestimate China's growth rate - and since then the US has lost momentum due to the international financial crisis, while China has not. It is fairly certain that when Goldman Sachs next revises its forecast it will bring forward the date it expects China's economy to match America's.
Those following the debates at Davos are right to recall that BRIC was a brilliant insight by Jim O'Neill and Goldman Sachs. But the facts show that even they underestimated the speed of China's economic development.
