China’s Steps to Reach Number One as a World Economic Power

Today, the United States and China are in the middle of a trade war with the mutual imposition of tariffs, initially driven by the Donald Trump government, whose ultimate goal is to avoid the bulky trade deficit of what is the world’s first economy with China.

But there is another basic war that is being fought, and it is that of China trying to snatch the United States the first place in terms of world economic power and be the economic reference par excellence.

China has shown dynamism in recent years enviable even though today it shows the lowest growth for 28 years. To get an idea, in 1990, China was not in the ranking of the ten largest economies in the world, in 1992 it manages to enter and from that position, thanks to growth rates of around 10%, in 2010 it managed to snatch to Japan the second position in the global ranking.

China is already number one in GDP in purchasing power parity

In general terms, GDP tends to be referred to in order to assess the size of a country’s economy and, thus, reflect the weight of world trade. Without a doubt, based on the GDP measurement, the United States is the first world power with an economy of 21.3 billion dollars compared to China with 15.64 billion dollars.

But as we mentioned, China’s progress has been impeccable. If we analyze the period 1980 to 2010, in 25 of the 30 times the growth rate of China has been above 8 %. In these years, the United States has never reached these rates and, moreover, has seen negative growth rates in four years.

But, if we use the GDP in purchasing power parity (PPP) that allows us to correct the effect on the standard of living in each country for the acquisition of goods and services, China surpassed the United States’ first world position in 2014.

In this year, China’s GDP PPP reached 18.3 billion dollars while the US figure stood at 17.5 billion. And for this year, according to IMF estimates, the differences between the two countries would continue to widen: for China, 27.4 billion dollars, and the United States 21.4 billion.

Despite this economic weight, a deeper look would be to evaluate the valuation of GDP per capita in purchasing power parity that gives us a closer idea of ​​the living standards of their respective populations.

With this measurement, the United States would place its GDP per capita at PPP 62,640 dollars, while China would reach 18,210 dollars, a difference of more than three times that is compensated by a population close to 1,400 million inhabitants (the United States 327 million inhabitants ).

The steps to achieve your success

We have to go back to the early eighties. In those years, the traditional Chinese communist model was changing through economic reforms that gave way to privatization or the creation of “special economic zones.”

Various draft measures were promoted, such as the decollectivization of agriculture, the country’s opening to foreign investment, and the licensing of entrepreneurs to develop the free enterprise.

In the 1990s, the country had finally opened its doors to foreign direct investment, and, as of that moment, China built its economic growth mainly from exports of low-cost machinery and equipment.

The dragon woke up, and China was synonymous with opportunity. Cheap labor led to many companies opting to outsource production from the United States to China, where they were able to obtain significant savings in labor.

In the early 2000s, much of what the United States consumed was produced in China. This led to an even greater economic reform, and between 2001 and 2004, state enterprises decreased by 48%, and in 2005, the national private sector reached 50% of China’s total GDP (now stands at 60%).

The strength of the dollar pattern

Current estimates reflect that China will be able to snatch the first economic power medal from the United States on a global scale that has carried 140 years in 2030. However, the true strength of an economy is exercised by the currency itself involved in global transactions.

That is where China has a real problem if it wants to replace the United States as the world’s first power. Today, Chinese financial markets are not particularly transparent, and Chinese monetary policy is not perceived as a stable element.

The confidence on the dollar is such that, today, 61.7% of the world reserves of central banks other than the Federal Reserve hold are in dollars. On the contrary, the Chinese yuan or renminbi to refer to the currency only has a weight of 1.9% in global reserves.

But being the reference currency of global scale is still far away for China since it must first be placed as a reserve. That is to say that yuan is used for the pricing of more international contracts. For example, exports of many products such as oil have the price traditionally set in dollars.

This has its advantages … If they had the price in yuan, China would not have to worry about the evolution of the dollar, and the world’s central banks would be forced to keep the yuan as part of the foreign exchange reserves in their balance sheets.

In turn, this need for yuan would reduce the interest rates of bonds denominated in yuan, due to their greater demand thanks to the involvement of global transactions, finally reducing the borrowing costs of both the government and Chinese private companies.

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