Most Americans cannot imagine China being the #1 economy, since they are constantly fed propaganda about America’s greatness and China’s imminent collapse. But the shocking fact is that China can very well surpass the U.S. by 2025. Here’s the math. I will try to explain it in a way that anyone can understand.
First, a quick clarification. When you hear the official GDP growth numbers, they refer to the “real” GDP growth, which is nominal GDP growth minus the inflation.
US GDP: Let’s assume that the US GDP growth for 2020-2025 is the same as the last five years.
Since 2020 is not over yet, we will roughly use IMF’s prediction that the real US GDP will shrink by 6.6%. I will say that the nominal GDP will shrink by 5%. In 2019, US GDP was $21.4 trillion. That means, US GDP this year will be $20.33 trillion.
The US GDP grew from $18.22 to $20.33 in the last five years. That’s an 11.5% growth. Generously assuming the same growth for the next five years, US GDP will be $20.33 x 1.115 = $22.7 trillion by 2025.
Thus, US GDP in 2025 = $22.7 trillion
(The math is generous, because the US is drowning in debt — which will be very likely $30 trillion by the end of 2020. A lot of bad things can happen in the US in the next five years).
China’s GDP: China is the only major country that’s expected to grow this year. In Q2 2020, China’s nominal GDP grew 5.5%! Let’s assume 4% growth this year (which means a real GDP growth of less than 2%). With a GDP of $14.4 trillion in 2019, China will end this year with $15 trillion.
Now, between 2015 and 2020, China’s GDP grew 36.7% (from $11t to $15t). Let’s assume a SLOWER growth rate of 27% for the next five years.
That means, China’s GDP will be $15 x 1.27 = $19 trillion in 2025.
Wait! 19 is less than 22.7!!
Yes, in this case, the chart would like this:
Yes, but here’s the catch. Assume that Chinese Yuan appreciates 20% over the next five years. Thus, the GDP will get a 20% boost, when you convert Yuan to US dollar. And, 20% of 19 = 3.8
Thus, China’s GDP in 2025 = $19t + $3.8t = $22.8 trillion!
China beats the US.
With stronger Yuan, the chart would look like this:
But … can Yuan appreciate? Isn’t China’s economy export oriented? And is the Yuan worth anything?
First of all, given how China is growing the economy during COVID19 pandemic and the US is fumbling, it’s no wonder that many experts are saying that Chinese Yuan is the best major currency right now.
But there are also many long-term trends that portend the rise of Yuan.
For starters, China has changed a lot. Now, exports are only 18% of GDP. And don’t forget that imports are 15% of GDP. So, stronger Yuan means cheaper oil, coal, iron ore, semiconductor etc., which is a good thing for the world’s largest importer of raw materials and chips.
Also, China is becoming a more consumption-oriented economy, where a stronger currency will be beneficial for the world’s largest middle class.
For decades, the US has been complaining that China has artificially kept the Yuan low. Well, now the US can’t complain anymore.
Just in the last couple of months, the Yuan has appreciated more than 7% against USD. And Goldman Sachs predicts that the Yuan will appreciate 4% in the next year. Thus, it can very well repeat the performance for the next five years.
Furthermore, foreign investors are gobbling up Chinese bonds, which will increase the value of Yuan (more demand = more value). Chinese bonds offer 4x as much yield as the US bonds (2.9% to 0.7% for 10-year bonds). As of Aug 2020, foreign investors held ¥2.46 trillion ($360 billion) worth of Chinese Yuan-denominated bonds.
Chinese Yuan is also far more accepted around the world than Americans are led to believe. Already, China is conducting 37% of its cross-border transactions in RMB (Yuan). US dollar’s share in China’s trade has dropped from 92% to 56% in the last few years. In Russia-China trade, US dollar’s share is now less than 50%.
In another striking example, the world’s largest iron ore companies in Australia and Brazil are accepting Yuan as payments! The Brazilian iron ore giant, Vale, is even making these payments through blockchain technology built by China. (These are all signs of the end of dollar hegemony).
PBOC, China’s central bank, has said that internationalization of Yuan is the plan. This is the dawn of a new era that will almost be as significant as China opening up in 1978.
China has also created an alternative to SWIFT, the US-dominated system for global transactions. Known as CIPS — Cross-border Interbank Payment System — the Chinese invention already has about 1000 institutions around the world as members.
Last but not the least, China will soon introduce its digital Yuan (“DCEP”) to the world. It’s already being used within China. This will be the beginning of true internationalization of Yuan and a possible challenge to US dollar’s hegemony. Many countries would gladly use DCEP to avoid the probing eyes and sanctions of the US.
Thus, with reasonable economic growth and a strong Yuan, China can surpass the US by 2025. Don’t say you weren’t warned!