Michael Pettis recently challenged The Economist to a bet. Pettis bet the Economist that China’s GDP will NOT surpass America’s in 2018.
Pettis believes China’s GDP growth will be less than 3% a year, while the Economist, thinks it will be above (more details below).

Mr Pettis is a finance professor at Peking University’s Guanghua School of Managemen.

AMERICA’S GDP of approximately $15 trillion is approximately double the size of China’s. The Economist provided an interactive chart where readers can decide for themselves when this historic event will occur.

Below are some important notes about China and America’s GDP. The Economist also makes an important note that exchange rates are an important factor in the calculation. Obviously the other important components are inflation and GDP growth per year.

Below are some stats from the Economist:

Over the past ten years, real GDP growth averaged 10.5% a year in China and 1.6% in America; inflation (as measured by the GDP deflator) averaged 4.3% and 2.2% respectively. Since Beijing scrapped its dollar peg in 2005, the yuan has risen by an annual average of just over 4%. Our best guess for the next decade is that annual GDP growth averages 7.75% in China and 2.5% in America, inflation rates average 4% and 1.5%, and the yuan appreciates by 3% a year. Plug in these numbers and China will overtake America in 2018. What do you think?

Chart from 2011:

Some footnotes from the Economist:

*The chart and the accompanying article were published before the full-year 2011 GDP figures were released. Using the official 2011 figures with the same assumptions suggests China will overtake America in 2019 not 2018.

**Our interactive chart is meant to be interactive. We’d be happier if people played around with it and came up with their own projections, rather than making too much fuss about ours. We wanted to keep the chart as simple as possible. As a consequence, it asks for average rates of growth, inflation, and exchange rate appreciation—but you cannot vary the rates over time. Obviously, in reality we would expect both the rate of growth and the rate of real exchange-rate appreciation to slow as China catches up with America. Our sister company, The Economist Intelligence Unit, which uses a more sophisticated model, foresees China overtaking America in 2021.

***People often forget about the importance of inflation and exchange-rate appreciation in these calculations. China’s real GDP grew by 10.6% a year over the last decade, but its nominal dollar GDP grew by 18%, thanks partly to the appreciation of the yuan against the dollar and partly to faster inflation in China than in America. One of the nice things about the interactive chart is that it helps people appreciate the significance of these two factors. Our default assumptions look perfectly reasonable by today’s standards (growth of 7.75% in China, 2.5% in America; yuan appreciation of 3% and inflation–as measured by the GDP deflator–of 4% in China and 1.5% in America). But in combination these assumptions deliver a very striking result.

It is very important to note that even if China overtakes the US in GDP, tomorrow or in ten years, a big asterisk remains. China has a population of 1.3 billion people, America has a population of slightly over 310 million. If China reaches GDP parity with the US in 2018, the US will still be much richer in terms of GDP per capita. If China currently had the GDP per capita of Belarus, it would be close to parity with the US. In fact, China would have to grow 5 fold before reaching the US in terms of GDP per capita (this is assuming ZERO US economic growth). Even if China grew 8% a year, that would take over 45 years.

According to Future of US China Trade, China’s GDP per capital will still be a 1/3 of the USA’s in 2030


Readers can use the graph from the chart above and make their own calculations. We also ask the following two questions, based on the topic of the article:

When Will China Overtake the US in TOTAL GDP

When Will China Overtake the US in GDP Per Capita