China: Why the US will remain the world’s largest economy for now

China: Why the US will remain the world’s largest economy for now

China Why the US will remain the worlds largest economy

Asia Technonomics

In the weekly column, we take turns writing about innovation and economic trends in Asia.

(Photo: Klawe Rzeczy)

On Sunday, China welcomes the New Year, the Year of the Rabbit. The rabbit is said to represent long life, peace, prosperity and hope. In the face of the pandemic, the war in Ukraine and fears of a recession, the West is also hopeful that the rabbit will not disappoint. In the New Year, the Chinese hope, above all, for the end of the corona chaos and the recovery of the economy, which has been sick recently.

According to official data, the world’s second-largest economy grew by three percent in 2022. It is the second-worst reading since the late 1970s, when reform and opening-up policies laid the groundwork for China’s strong rise. Everything should get better in the new year. Many analysts raised the growth prospects in recent days and weeks.

But the government’s unprecedented abrupt about-turn in its corona policy has once again made one thing very clear: anyone who thinks they know how things are going in China is wrong. It is well known that predictions are difficult, especially when they concern the future. This applies even more to completely non-transparent autocratic states like the People’s Republic. But not even the near-omnipotent state leadership has managed to reach the self-imposed growth target of around 5.5% for 2022.

The initial euphoria over the decision to open up the country, which has been virtually closed for three years, could quickly dissipate, especially given the sometimes chaotic conditions. This hampers, at best, even short-term prospects. Long-term forecasts are even more adventurous.

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US investment bank Goldman Sachs recently had to pull back. In 2011, then-chief economist and BRIC inventor Jim O’Neill predicted that China would overtake the US as the world’s largest economy by 2025. In a new study, tight-lipped financial pioneers corrected the date by ten years old.

Experts doubt that China will overtake the US

Connoisseurs of China also consider this unrealistic. Goldman Sachs will have to postpone the date and eventually “abandon forecasting altogether”, believes Michael Pettis, professor of finance at the renowned Peking University.

He has long pointed to imbalances in China’s economy and the extent to which its growth depends on debt-financed government investment. Furthermore, the once inexhaustible supply of cheap labor, which has been a major contributor to China’s past growth, is shrinking faster than expected.

Experts at analyst firm China Beige Book (CBB) were also surprised that the gold men only now corrected their predictions. It has probably been clear to the investment house for a long time.

But it can be hard to admit that the weaker growth “contradicts the big advertising promises” that Chinese consumers are the engine of world growth, CBB analysts fret.

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The latter illustrates another problem with predictions about the development of the People’s Republic: it is not just the lack of transparency in political decision-making in Beijing that makes predictions difficult. The various (commercial) interests of the respective forecasters also sometimes cloud the outlook.

On the other hand, there is no doubt that the Chinese government will continue to do everything it can to catch up with the United States economically, technologically, and militarily. At least that is the stated goal of state and party leader Xi Jinping. The US, on the other hand, will do everything to ensure that China does not reach this goal so quickly – and remains the hare and the hedgehog for the time being in the global race.

In the Asia Techonomics column, Nicole Bastian, Dana Heide, Sabine Gusbeth, Martin K├Âlling and Mathias Peer take turns reporting on the most important technological and economic trends in the world’s most dynamic region.

More: China experts see many risks for world’s second-largest economy