GDP

The Math of How China Surpasses the US by 2023 (Not a typo)

Five months ago, I wrote that China will surpass the U.S. in GDP by 2025. Since then, a lot has changed. China’s economy is accelerating much faster, Chinese Yuan has skyrocketed, and the developed world has stumbled seriously. This article will show how China can catch up with the U.S. in nominal GDP (in US dollars) within three years. There’s a lot of math, but nothing too complex.

China’s GDP in Yuan

First, let’s figure out China’s GDP in Yuan over the next four years — four, including 2020. According to Fitch ratings, China’s real (inflation-adjusted) GDP will grow by 2.3% this year. And Chinese economists are predicting that China will grow by 10% next year. To be conservative, I will assume 6% in 2022 and 5.5% in 2023, which are in line with China’s pre-COVID19 growth. And, will assume a conservative 2% inflation rate. (The nominal growth rate = real growth rate + inflation). So, here’s the chart for China’s GDP from 2020 until 2023:

Appreciation of Yuan

China’s Yuan or RMB has been on a tear this year. Why? Thanks to robust growth in Chinese economy and relatively higher bond yields, foreigners have poured in $150 billion into Chinese stocks and bonds this year. Shanghai’s stock market is up 27% and Shenzhen’s tech-heavy ChiNext is up almost 60% this year.

Shanghai stock exchange took the #1 spot in the world for total number of IPO’s in 2020. Overall, Chinese startups raised record $130 billion this year, accounting for 37% of global IPO.

China is rapidly opening up its $45 trillion financial sector, and everyone from Goldman Sachs to JP Morgan and BlackRock to Vanguard have eagerly opened up branches in China to capture lucrative opportunities in asset management, stock market, bond market, futures etc.

Furthermore, China is following a very prudent policy by NOT printing crazy amount of money, by NOT reducing interest rates to zero, and by NOT bailing out zombie stocks — basically not doing the insane things that the US, EU and Japan are doing. People’s Bank of China (PBOC) and Beijing officials are focusing on “develeraging” — i.e. reducing debt —and even letting some state-owned enterprises (SOE) default on bond payments and face the consequences. Communist China has sound money, while capitalists in the West are lost in voodoo economics.

Finally, in spite of all the hysterical talk about decoupling, foreign direct investment (FDI) into China is on track to set another record this year. Consider that almost 19,000 new foreign firms were set up in China in the first seven months of the year!

No wonder that Yuan appreciated whopping 9% against the US dollar between May and late December. The exchange rate (CNY – USD) went from $1 = ¥7.18 to $1 = ¥6.54.

Meanwhile, China’s exports was record high at $268 billion in November, which resulted in an enviable $75 billion trade surplus that month. With the rest of the world still paralyzed by coronavirus, the stronger Renminbi (RMB) hasn’t affected the demand for Chinese goods.

Also, financial experts are predicting that Yuan will strengthen up to ¥6 per USD by the end of next year. That would be more than 7% appreciation next year. After that, I assumed a conservative 4% for the next two years. Note that China will introduce its digital currency (DCEP or DC/EP) in 2022. This will accelerate internationalization of Yuan, which will increase RMB’s global demand and value. So, here’s what it looks like:

By the way, the Chinese government wants Yuan to become strong. This is an important step in China becoming a developed nation and it also dovetails into Xi Jinping’s new so-called “dual circulation” strategy. Basically, the CCP/CPC wants Chinese people to become richer and consume more, which also means less reliance on American customers.

China’s GDP in $:

Okay, now let’s combine the two charts above and see how China’s GDP looks in US dollars:

BTW, if you think that the net GDP growth of 20% next year is impossible, consider that China’s GDP grew at 18% and 28% in 2010 and 2008, respectively.

US GDP Forecast

Now, let’s see how the US GDP will look over the next four years. The numbers for 2020 and 2021 are based on predictions of IMF and OECD, which say that the U.S. economy in 2021 will be barely above that in 2019.

After 2021, I assumed what were normal rates before the pandemic. Thus, here’s the US GDP chart:

China Surpassing the United States of America in 2023

Okay, now combine the GDP charts for China and the USA, this is what you get:

Mainstream experts are all predicting that China will overtake the U.S. by 2030; and some really brave ones say that it could happen by 2028 or 2029. And when China reaches the top by 2023, these “experts” will tell you that nobody could have seen it coming!