The expansion of China’s economy over the past 30 years has been nothing short of spectacular.
The country’s dollar-denominated GDP increased from roughly $400 billion in the early 1990s to over $18 trillion today.
Looking it another way, during the early 1990s, the value of China’s GDP amounted to less than 10% of US GDP. That ratio rose steadily in subsequent years, peaking at 75% in 2021. But that ratio fell back to around 70% last year, as surging inflation lifted US nominal GDP and the renminbi declined against the dollar.
Dollar-Denominated GDP (Nominal) |
China Dollar-Denominated GDP (Share of US) |
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. *2022 is estimate. Source: Citi Research, Bureau of Economic Analysis, China National Bureau of Statistics |
© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. *2022 is estimate. Source: Citi Research, Bureau of Economic Analysis, China National Bureau of Statistics |
The full Citi Research note examines the question of when Chinese GDP will overtake US GDP. Given China’s rapid and sustained economic momentum, Citi Research’s analysts see that overtaking as inevitable. But with China’s much larger population, this will still imply a substantially lower per-capita income for China’s population. As such, Chinese GDP eventually surpassing US GDP represents a milestone in China’s process of catching up to the advanced economies, but is not a signal that China’s economic development is complete.
Consistent with these observations, we show that the timing of China’s overtaking will be determined by the pace of US and Chinese nominal GDP growth and moves in the bilateral exchange rate. For a range of plausible assumptions, we find that overtaking occurs during the 2030s, most likely in the middle of the decade.
Considering Some Key Parameters
The question of when China’s GDP will overtake US GDP depends on three key parameters. First, the pace of US nominal GDP growth. Second, the pace of China’s nominal GDP growth. And third, the evolution of the bilateral exchange rate between the two countries.
US nominal GDP growth, after peaking during the inflationary 1970s, gradually slowed to around 4% during the two decades before the coronavirus pandemic.
During the pandemic and its aftermath (2020-22), nominal GDP notched up but this was entirely on the back of higher inflation.
US Nominal GDP Growth |
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. *Average over the period. Forecasts for 2023-2027 are from the IMF. Source: Citi Research, Bureau of Economic Analysis, Haver Analytics |
Going forward, IMF WEO forecasts call for US nominal GDP growth to ease back to just under 4%. Inflation is seen to run a little above 2%, as the Fed fights to bring it down, while real GDP growth averages 1.6%. In the longer run, Citi Research analysts expect real GDP growth to trend somewhere between 1¾ and 2%. In any event, Citi Research analysts agree that nominal GDP growth at 4%, or just slightly lower, is the right benchmark for the US economy in the years ahead.
The following table shows the corresponding data for China. For the coming five years, the IMF expects Chinese real GDP to expand at an average 4½% pace. This slowing of growth from earlier decades reflects the economy’s ongoing maturation. The IMF sees Chinese nominal GDP growth averaging roughly 6½% over the next five years.
China Nominal GDP Growth (RMB) |
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. *Average over the period. Forecasts for 2023-2027 are from the IMF. Source: Citi Research, China National Bureau of Statistics, Haver Analytics |
Perhaps the most difficult question, however, is how the dollar-renminbi exchange rate will evolve.
Several factors point to potential renminbi appreciation going forward. First, the Chinese currency is now near the soft side of its 15-year trading range against the dollar—and China’s ongoing march to higher levels of productivity should bring increased competitiveness and, likely, a stronger currency. Second, exchange rate appreciation could help rebalance the economy away from external drivers of growth toward domestic demand and consumer spending. Third, geopolitical factors are likely to press for a stronger exchange rate as well. Finally, China’s current account surplus has re-emerged since the onset of the pandemic and has recently hovered at 2-3% of GDP. If sustained, this surplus would suggest some scope for renminbi appreciation. Even so, a significant portion of this surplus could be reversed with the authorities’ recent steps to reopen the economy and the resumption of outbound tourism.
Citi Research analysts go on to consider three paths for nominal GDP growth in the two countries and the bilateral exchange rate.
- Rapid Overtaking. In this scenario, the key factors align to support China’s rapid surpassing of US GDP. China’s real GDP growth is assumed to average 5% a year with 3% inflation of the GDP deflator, both higher than IMF projections. In tandem, US nominal GDP growth falls short of IMF projections, expanding at just 3% annually. In addition, the renminbi appreciates 2% a year, until it reaches 6/$ (in 2028).
- Middle Case. Nominal GDP growth in the two countries about matches IMF forecasts, with the Chinese economy seeing nominal GDP expansion of 7% and the US economy expanding 4%. The bilateral exchange rate shows volatility from year to year but cycles around 7 per dollar, its current level.
- Slow Case. This scenario is essentially the mirror image of rapid overtaking. Chinese nominal GDP grows at 6% and US nominal GDP grows at 4%. In addition, as the Chinese economy struggles with high debt levels and a disrupted real estate sector, the renminbi depreciates by 2% a year until it reaches 8 versus the dollar in 2031.
The chart below shows the ratio of Chinese-to-US GDP and suggests several conclusions. First, the paths generate starkly different implications for when Chinese GDP will overtake US GDP, with the results ranging from within five years if conditions are favorable for China to nearly 30 years if conditions are unfavorable.
Second, and as a corollary, a clear implication is that the operative question is indeed “when does overtaking occur”—not “will overtaking occur.” Even if Chinese performance is relatively soft, China is still likely to eventually catch up.
Third, along the middle case path, Chinese GDP surpasses US GDP in the mid-2030s, a little more than a decade hence.
Three Scenarios: China GDP as a Share of US GDP |
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© 2022 Citigroup Inc. No redistribution without Citigroup’s written permission. Source: Citi Research |
So across a range of parameters catch-up is likely to occur sometime during the 2030s, probably during the middle of the decade.
When it eventually does occur, it will be widely noted in the press and, likely, in the political discourse. It may be largely symbolic, but there may also be some geopolitical heft and prestige that accrues to the largest country in terms of GDP. For example, an economy’s overall size enters the IMF’s quota formula and helps determine voting shares. Also, certain activities—Olympic teams, space programs, and (most important) the military—are funded at the national level, and a larger economy means increased resources. In each of these endeavours, the world’s largest economy may reap non-linear influence, strength, and other benefits.
For more information on this subject, please see Global Economics - When Will China’s GDP Surpass US GDP? And for more detail on the outlook for the US economy this year including inflation, rates, and GDP forecasts, please see this report US Economics - Outlook 2023 – Worse than you think
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.
