China to Overtake the U.S. as World’s Largest Economy this Year

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In a recently published study, the World Bank’s International Comparison Program (ICP) has predicted that the Chinese economy will likely overtake the U.S. by the end of 2014.

This prediction is based on figures that take into account purchasing power parity (PPP) and not nominal GDP figures. The discovery came after PPP figures for each economy were updated for the first time since 2005. From the results we can see that money goes much further in developing countries than was thought before.

The ICP found that, in 2011, China’s GDP was 87 percent of U.S. GDP. (China’s GDP, amended for PPP, was US$13.5 trillion; U.S. GDP was US$15.5 trillion.) In the 2005 report, China’s GDP was only 43 percent of U.S. GDP.

The PPP measure of GDP is helpful because it bypasses the problems of exchange rate volatility and gives a clearer comparison of the standard of living in each country. Therefore, while China still has a lower nominal GDP, the ICP calculation reflects what people in each economy can afford.

In nominal terms, U.S. GDP stood at US$16.2 trillion and China’s GDP was US$8.3 trillion in 2012, according to the International Monetary Fund. However, China has almost caught up with the U.S. in terms of what its population can consume. With Chinese GDP expected to grow at 24 percent between 2011 and 2014 and U.S. GDP to grow at 7.5 percent in the same period, China will overtake the U.S. by the end of this year – the world will have a new economy at the top for the first time since 1872.

The IMF and China itself predict that the Middle Kingdom’s nominal GDP will overtake that of the U.S.’s in 2019.

The report found that China held the world’s largest share of investment expenditure at 27 percent. This was far ahead of the U.S., which took a share of 13 percent of global investment expenditure. India followed with seven percent and Indonesia had three percent of total global investment in 2011. Combined, China and India account for about 80 percent of investment expenditures in the Asia-Pacific region.

The ASEAN region had a combined PPP GDP of US$5.2 trillion in 2011, approximately 5.8 percent of world GDP. Among the economic bloc’s countries, Indonesia had the highest GDP of US$2.1 trillion in PPP terms, according to the ICP report. This, compared to a nominal GDP in Indonesia of US$846 billion, shows a large difference in nominal and PPP GDP. The proportional difference between PPP and nominal GDP is similar in the other ASEAN countries as well – for example, Thailand’s GDP based on PPP is US$899 billion and its GDP based on exchange rate is US$364.7 billion. These results suggest that the level of economic activity in the region is higher than previous studies have stated.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email asia@dezshira.com or visit www.dezshira.com.

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