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123 Economics of USA vs. China

The current rise of economic, financial and demographic conditions in China have become the most significant historical event of the 21st century. Though China used to be the dominant global economy until the beginning of the 19th century, international leadership then passed to a few European countries that based their growth on the adoption of industrialization. What used to be the gains of Europe have now lapsed with WWII. Only the USA remained until the late 1970's as the global leader of the international economy. China may now surpass USA as the leader of global finance.

The leading indicator of economic power is the GDP.  There are many ways how to calculate that, but the most accepted measure are dollars defined in terms purchasing power parity (PPP), as enumerated by the International Monetary Fund (IMF). The IMS is the source of all data used analyses that will follow.

At the end of the 1Q 2018 the China GDP exceeded the USA GDP:


The GDP crossover occurred in 2014, with a steep rise in China GDP growth continuing afterwards,

One cannot extrapolate the recent trends of the Chinese GDP, but our best projections suggest that China  may operate with a GDP that is a multiple of projected USA levels by 2035, which is the target date that has been set by China leadership as a goal for matching the US in every respect.

The most noteworthy trend shown in the above graph is the radical change in the Chinese GDP after 2004, when an upsurge in their economy started taking place. Another major shift took place when the growth rate of the USA GDP growth displayed a decline in 2007, with growth continuing at prior historical rates.

There are many variables that can explain the respective levels of growth of China and US GDP.  We prefer to concentrate on the pivotal influence in levels of the financial debt. A developing country will maintain relatively low levels of debt relative to their earnings whereas high levels of debt will reveal the presence of disinvestment without using funds for economic innovation. The following graph shows that the USA gross debt, as a % of its GDP, now is more than double of the China gross debt as their % of GDP:


What is remarkable is the spurt in USA gross debt after 2007 when cash injections into the banking systems were used to compensate for excessive investments in housing by home purchasers. A prosperous USA increased its debt instead of investing money to improve the economy for managing migration to a post-industrial society.

The key indicator of the differences between the USA and China is the difference in the savings rate:

                                               USA savings drifted from 23% of GDP to the current 18%, whereas the Chinese allocation to savings rose from 32% to 52% while making major investments in creating a world-class manufacturing capacity that dominated the global market for manufacturing goods. The China savings rate then declined to 42% of GDP to reflect their gradual shift to a service economy, which requires less capital.
There are differences, however, in the allocation of gross savings to an economy. China savings, extracted from a low-wage workforce, were used for building modern infrastructure and capital intensive structures, whereas the USA investments were largely channelled to consumer goods and the expansion of financial services.

Summary:

A comparison of USA and China economic indicators shows a divergence in policy as well in the deployment of resources. China is funding its growth from huge savings obtained from its workforce and aims for global economic dominance.  Meanwhile the USA is  channelling its funds to continue supporting a consumption-based economy. 

At this time it is too early to predict how each of these competing scenarios will evolve.  At this time (2018) it is difficult to predict the future. Whether China will become a dominant economic power or if the USA economy will sink under its debt cannot be predicted from evolving trends. 







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