China to Displace the US in GDP Size. Deal With It

Much will be made over the coming years of China’s rise to displace the United States as the world’s largest economy in purchasing-power parity terms. This is set to occur sometime around 2020. India, too, will surpass the United States in the coming years, and this is not just the view of crackpot analysts, but influential bodies such as the OECD.
 
All that these changes really represent are just bragging rights. China can possibly start to become the world’s largest economy during the next U.S. president’s first term of office that begins in 2017, but there is much positive news for the United States in this shift.  
 
Human capital – which both China and India have in abundance – creates a dynamic that dictates wealth measured by GDP. But while China’s economy may grow to be larger than that of the US, it also has nearly five times as many people. This means that, in per-capita wealth, the United States will still be ahead. The ability for the United States and its citizens to pay for the most up-to-date lifestyle-enhancing products isn’t going to go away.
 
Psychologically there may be some politicking to be done by the occasional anguished American politician. But no one else really cares about these particular headlines except China, whose leaders want to show off to their own nationals how good a job they are doing, and newspaper owners, who need to sell trivia dressed up as urgent economic headlines.
 
Overtaking America
In fact, China has already been overtaking the United States in many ways. Many of these trends show a China in desperate need of supplies – supplies that can be provided by other nations, including those in Asia, and the companies and entrepreneurs that live there.  
 
For example, China recently signed off a huge deal to buy over 1 million tons of rice annually from Thailand. In today’s casual use of huge figures, this didn’t garner much attention – except in Thailand, where it has been considered so large that some people have raised concerns. The real question to be asked, however, is why does China need to secure purchases of so much rice when it is also a major rice producer?
 
Here lies buried a growing Chinese problem. With so much industrialization going on, much of the nation’s agricultural lands are being seriously degraded by pollutants such as cadmium, lead and mercury. China may well be the largest producer of rice in the world, yet its rise from an agricultural-based society to an industrial-based society is causing problems and stresses.
 
China will get dirty before it becomes wealthy, just as both Europe and the United States did, and hence there are abundant opportunities to sell to China. Food is just one.
 
Another example of China becoming the world’s number one – again with huge significance, but something that also largely flew under the radar – is that China just surpassed the United States as the world’s largest importer of oil.
 
The United States is able to domestically produce 12.5 million barrels of oil a day whereas China can only produce 4.6 million. Furthermore, the United States is bringing down the amount of oil that it is actually using as it takes advantage of other energy sources; particularly the discovery of vast amounts of shale gas.
 
In China, consumption rates are rising, and fast. China’s middle class is projected to grow to a massive size over the next few years, and as its citizens become more affluent, the more goods and products they will want to consume. This has already translated into more cars on the road; China is already the world’s largest automobile market by units sold.
 
Just this past August, the Chinese car market grew by 11%, and that was a slow month. Further, the vehicles produced run almost entirely on oil, and many of the vehicles sold do not come even close to meeting Western emissions standards. The opportunities for clean energy, and for equipment that can detox China’s increasingly polluted landscape, are going to be there.
 
Infrastructure boom
Yet even the changes in agriculture and energy, huge as they may be, will not have as much impact on the average American (and other overseas) business as much as the infrastructure sector.
 
Again, China and India are taking over the top spots. The United States is currently the largest consumer of imported infrastructure for use in manufacturing facilities, as well as for developing domestic construction. According to HSBC’s October Global Connections Forecast, these number one positions will be toppled and replaced by China and India, respectively.
 
China needs to upgrade its manufacturing facilities, and this means the importation of production infrastructure – robotics, and better integrated technologies and systems. India, meanwhile, is embarking on a massive rebuild – everything from ports and airports to roads and rail.
 
At Dezan Shira & Associates during the 1990s and early 2000s, we serviced hundreds of both American and European businesses in China with their corporate establishment, operating licenses, taxes, accounting and profitability. They were in China to assist with everything from airports to architecture to oil and gas and from interior design, to baggage handling and automotives. Most are still there, although much of the construction hardware has now relocated from Shanghai to cities such as Mumbai.
 
Moreover, despite the general economic slowdown in the US, American exports to China have generally been on the rise. Last year saw a record-breaking US$110.5-billion worth of exports to the country. According to the US-China Business Council, American corporates grew their China businesses by about 10% in 2012.
 
This year’s economic data concerning American exports to China is, of course, not fully complete, but the numbers do show a trend very similar to that of 2012. US Department of Commerce data show that American exports to China range from US$8.7 billion to US$9.4 billion a month from January to August 2013. At US$73 billion, the eight-month total is already 13% larger than in the same period in 2012.
 
The good news about these figures is that they show a high degree of consistency – indicating that China is a persistent buyer of American products and services. This means that if your business is not in the China market, and you as an executive are looking at sustainable growth and revenues, China is where you really need to be.
 
Exports from the European Union to China rose 5.6% in 2012. If China’s largest trading partner (being the EU rather than the United States) is investing heavily in infrastructure in China, American businesses in China should consider following suit.
 
Conclusion
China is becoming number one in terms of GDP and in other consumable league tables. Companies in the United States, Europe and Asia can all begin to reap the benefits of servicing what is about to be the world’s largest economy.
 
If you’re already in China and doing well, then the additional card to play is the Indian one. India too will overtake the United States in terms of sheer GDP size in the coming years. Especially interesting for American companies is US Secretary of State John Kerry’s discussion on upgrading bilateral investment treaties with India.
 
Neither of these developments have ever been a threat. Instead, they are a tremendous opportunity for companies, especially those in America, to show what they do best – sell high quality innovative products to the world’s major economies. That should be a challenge to relish.
 
About the Author

Chris Devonshire-Ellis is the founding partner and principal of Dezan Shira & Associates, a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in China Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com. 

 

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