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

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 stand for long life, peace, prosperity and hope. In view of the pandemic, the war in Ukraine and fears of a recession, the West also has hope that the rabbit will not disappoint. At the New Year, the Chinese hope above all for an end to the corona chaos and for the economy, which has been ailing recently, to recover.

According to official figures, 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 foundation for China’s steep rise. Everything is supposed to get better in the new year. Many analysts have raised the growth prospects in the past few days and weeks.

But the unprecedented abrupt about-face by the government 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 forecasts are difficult, especially when they concern the future. This applies all the more to completely non-transparent, autocratic states like the People’s Republic. But not even the quasi-omnipotent state leadership managed to achieve the self-imposed growth target of around 5.5 percent for 2022.

The initial euphoria about the decision to open up the country, which has been largely sealed off for three years, could quickly dissipate, not least in view of the sometimes chaotic conditions. This makes even short-term prospects difficult at best. Long-term forecasts are all the more adventurous.

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The US investment bank Goldman Sachs recently had to back down. 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, the financial pioneers tight-lipped corrected the date by ten years.

Experts doubt that China will overtake the US

China connoisseurs also consider that unrealistic. Goldman Sachs will have to postpone the date and eventually “drop the forecast completely,” believes Michael Pettis, finance professor at the renowned Peking University.

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

The specialists at the analysis company China Beige Book (CBB) were also surprised that the gold men only now corrected their forecast. It was probably clear to the investment house for a long time.

But it may be difficult to admit that the weaker growth “contradicts lofty advertising promises” that Chinese consumers are the world’s growth engine, CBB analysts chafed.

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The latter illustrates another problem with forecasts about the development of the People’s Republic: it is not only the non-transparent political decision-making in Beijing that makes forecasts difficult. The diverse (business) interests of the respective forecasters also sometimes cloud the outlook.

On the other hand, there is little 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 declared aim of state and party leader Xi Jinping. The USA, on the other hand, will do everything to ensure that China does not reach this goal so quickly – and remain the hare and hedgehog for the time being in the global race.

In the Asia Techonomics column, Nicole Bastian, Dana Heide, Sabine Gusbeth, Martin Kölling 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 the second largest economy in the world

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