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China Heads Towards Number One

October 6, 2011
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I was interested to read a recent article in The Economist that predicted that China’s economy could overtake America’s within a decade

Backing its prediction, The Economist estimated China’s economic growth rate at 8% whilst the American economy would only grow at 2.5%.

Stating that “inflation tends to be higher in fast-growing emerging economies than in slow-growing rich ones” the newspaper projected 4% inflation rate in China compared to 2% in the US.

“The third factor is the exchange rate. To sustain its catch-up with America, China needs to rebalance its economy away from exports towards consumer spending, which will require a rise in its real exchange rate. Some of this will come from having a higher inflation rate than its trading partners. But China’s large current-account surplus and America’s big deficit also suggest that the yuan will have to become much stronger and the dollar much weaker. We have allowed for an extra 3% annual rise in the yuan against the dollar on top of the inflation gap of two percentage points. That implies a slight slowdown in the yuan’s recent appreciation.”

So if everything comes to pass, China’s economy will be bigger than America’s by 2020.

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