Can China ever overtake the USA as the largest economy in the world?
January 26, 2025 by ROHDIS Economics — Since China began its economic transformation in 1978, the world has watched in awe as the country recorded staggering GDP growth rates, averaging over 9% annually. From a GDP of USD 1.21 trillion in 2000, China’s economy has surged to an impressive USD 17.8 trillion by 2023 (World Bank Open Data), establishing it as the second-largest economy on the globe. However, the question many economists get asked is: Can China ever surpass the USA as the world’s largest economy, which currently stands at USD 27.72 trillion? (latest World Bank data for 2023)
Will China overtake the US economy in the next 10 years?To answer this question, let’s first break down the math. For China to eclipse the US economy in the next decade, it would need to maintain an average annual growth rate of over 6.5%, if the U.S. economy grows steadily at their past ten-year average of 2.5%. This is a tall order, considering China’s growth has already slowed—with the latest decade seeing a growth rate of about 6%, down from 10% in the prior decade. Compounding this challenge, the World Bank predicts a further dip in China’s growth to around 4.9% in 2024 and 4.5% in 2025.
Achieving sustained growth over 6.5% will be exceptionally challenging for several reasons:
Demographic challenges: The country is grappling with a declining working-age population as a consequence of its previous one-child policy. This demographic shift poses significant constraints on economic productivity and growth potential.While the policy has now been reversed, it will take many years for China to reverse its impact on the work force.
Diminishing returns on investment: China's rapid growth has predominantly been driven by massive infrastructure and industrial investments. However, as the economy matures, the returns on these investments are diminishing, leading to slower growth rates.
Rising labor costs: Economic growth improves income of both businesses and the workers. As wages rise, China is losing its competitive edge in labor-intensive manufacturing. The push towards high-value industries entails significant technological advancements and innovation—a journey that isn't without its hurdles.
Technological stagnation: Although China has made strides in various technological fields, limitations in developing cutting-edge innovations hinder its ability to maintain competitiveness and productivity growth.
Global economic turbulence: The world faces increasing uncertainties, from geopolitical tensions to looming recessions, which can heavily impact China’s export-focused economy.
Environmental issues: Addressing significant environmental concerns—from pollution to climate change—requires considerable investment and can impede short-term economic growth. Environemtal issues affect economic growth as they can reduce the available resources needed for production, increase production costs due to pollution mitigation measures and costs related to climate adaptations.
Debt levels: China’s burgeoning debt, particularly in the real estate sector, presents risks to financial stability, which could further inhibit near term growth.
Economic rebalancing: Transitioning from an investment and export-driven model to one that promotes domestic consumption is crucial for sustainable growth. However, this requires extensive reforms, which could be slow and politically challenging for China to implement.
What about in 20 years?With all these challenges in mind, it raises another question: can China feasibly overtake the USA in 20 years? For this scenario, China would need a relative growth rate of 2% above the US, suggesting it must sustain growth above 4.5% annually, again assuming the US maintains its past ten year average annual growth rate.
Historically, this target seems achievable, but navigating external relationships, especially regarding technological advancement, will be pivotal. With Western nations tightening tech restrictions for economic security reasons, China faces obstacles in innovating and adapting at the pace necessary to maintain its competitive edge. For example, European Union earlier in the month called on member countries to review outbound investments and assess risks to economic security as reported by ROHDIS.
Additionally, as artificial intelligence and automation technologies evolve, China’s advantages in labor-intensive manufacturing may diminish. For example, AI-powered robots and automation can perform many tasks previously done by low-cost Chinese labor, such as assembly, packaging, and simple manufacturing processes. This can reduce the need for large, low-skilled workforces, making production cheaper and more efficient in countries with higher wages but also advanced automation technologies.
This scenario could accelerate the need for China to pivot towards a more innovative and advanced economy, demanding significant investments in R&D and workforce development.
What if US growth slows down significantly? Will it help China?Considering the interconnectedness of global economies, a slowdown in US growth would likely reverberate through the world economy, impacting China profoundly. The US remains China’s largest export market, accounting for over 16% of its exports in 2022 (WITS Data). Problems in the US economy would swiftly become challenges for China, dampening its growth prospects.
In conclusion, while China has achieved remarkable economic feats over the past few decades, the dream of overtaking the US economy remains fraught with complexities. The odds favor a prolonged contest for economic supremacy, but the prospect of China becoming the largest economy in the next decade appears increasingly unlikely. Although the possibility remains on the table for the next 20 years, the challenges ahead cannot be underestimated. As the world continues to evolve, so too must China's strategies if it hopes to emerge victorious in the ever-competitive economic landscape.
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