Betting on China's growth

China will be the world's largest economy by 2018, at least according The Economist, but it's an aggressive prediction that would require the country's nominal GDP growth to outpace that of the US by 13 per cent a year.

I recently read in The Guardian an article by enthusiastic orientalist Martin Jacques in which he says that The Economist has just predicted that China’s GDP, measured in nominal dollars, will will be the world’s largest by 2018. Earlier estimates, he says, had China becoming the largest economy in the world by 2027.

I have always been a little sceptical about the 2027 claim, not that it is implausible, let alone impossible. It is just that given how much we would have to assume about the sustainability of Chinese growth, about the likelihood of current GDP numbers not having been vastly inflated by an over-investment boom, and about the instable range of political outcomes, it seemed to me to be a prediction about as valuable as the world-beating predictions about the USSR in the 1960s or Japan in the 1980s.

Still, this 2018 prediction deserves, I think, more than a little questioning – it requires that nominal Chinese GDP growth in dollars outpace nominal US GDP growth by 13 per cent a year. I know that in the past The Economist has tended to be a little less sceptical than some others have been about the sources and components of the Chinese growth miracle (not always – different writers at The Economist seem to have very divergent opinions on the subject), but this is a pretty aggressive prediction, more in line with what I would expect from an investment bank, or from a consulting company that helps foreigners access the Chinese consumer market.

I believe some people from The Economist do read my blogs from time to time and so I am wondering whether we could set up a friendly bet – not for too large stakes, please, since my resources are limited, but just so that we can both keep up a sporting interest in the economic news over the next few years. I would like to bet that by the end of 2018 China will not be the largest economy in the world.

If I win, perhaps The Economist could invite a very cool underground Chinese band of my choice to perform at their next big conference, whereas if I lose I could buy four-year subscriptions (student rates, please) to a group of Peking University freshmen. Everybody would end up feeling pretty pleased with themselves no matter who wins, right? So?

Michael Pettis is a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management. He blogs at China Financial Markets.

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