Will China overtake the US as the World's largest economy by 2016?

China forecasted to overtake US by 2016

This was the title of an  Article by Simon Rabinovitch in the Financial time of March 22nd of 2013. When it comes to International trade and world Economies, China is the Country on everyone's lips. But what do you think? Is it that close? And if it is, would it be so bad? This article was just brought to my attention again in a business group forum. A lot of the responses to it were very antagonistic, not to say outright belligerent, as if it was a Them against US type of situation. This is business, it is always them against us, for a while and then them and us against the others, and so on. The Economies are fusing with one another more than ever and faster and faster as time advances. So will soon be us against us as we will all be swimming in the same pond. It is not a political or national matter but a matter of economics, worldwide, global market economics.

As usual, I'll engage here, what I never do professionally as a business strategist, or business development consultant. I will engage in predicting the future. After all, this is my blog, and the purpose of it is to share my opinions, conceptions and interpretations of what I see out there in the business world at large. So here it is...

If you look at it from a strategic point of view, they owe their fast growth to 4 main factors:

1. Their totalitarian communist regime allows them to control fully or influence greatly the means of Production and distribution of their country. 
2. Their infinite amount of extremely cheap labor (including child labor) coupled with their total disregard for Human Rights, environmental regulations, World trade and Fair Trade practice regulations gives them  a distinct advantage over any other nation in the world, except maybe India who can rival with them point to point (well almost, India is a wee bit more respectful of "Most" human rights and World Trade agreements).
3. The manipulation of their national currency with impunity by the Regime, keeps their prices even lower... (but sooner or later that pressure cooker is bound to blow).
4. Japan, the European Union and the US are the worlds 3 largest markets and are all addicted to their consumerism and the comfort it brings. Their consumers constantly need more products, faster and cheaper, only China can respond to those criteria... for the moment.

However, their very success is what is slowing them down. China has made one huge strategic mistake. It focused solely on Export, bet everything on foreign currency and foreign markets to shore up its fast growing economy that it neglected its own national market. China is the largest human (as opposed to corporate consumer) potential consumer, market, but for it to transform into the largest world economy it needs to raise the purchasing power of its average citizen, not just the citizens in the large Modern Metropoles of the East who live off the Foreign Investors and Foreign companies, (who have come to invest in the Chinese market in hopes to participate in the "future" feeding frenzy)...

Although the standard of living of the average Chinese citizen, particularly in rural and semi-rural area, has improved dramatically, over the past decade, it still has a very long way to go in order for that average citizen to be able to afford the traditional Western or even Domestic traditional consumer product. It will be a ways yet before you see 2 or more TV in each household, even the poorest (as it is in the US or the EU), 2 cars in each garage, a PC in each household, a mobile phone for each family member above 13 years of age...etc. The purchasing power is still too low, the currency keeps anything foreign too expensive (not to mention the tariffs), the household budget for food and shelter still represents more than 50% of the entire household Income for the largest segment of the population. The New Millionaires and Billionaires are scheming as fast as they can, to acquire assets abroad so they can emigrate with their families and "defect", even knowing that the Government will seize all their assets within the country. Some Billionaires are ready to sacrifice their lives as Billionaires in China, in order to live as Millionaires in the US, Japan or Europe.

However, their largest problem is not so much that their domestic market is not strong enough to sustain their growth in anyway shape or form within the next 2 decades.... No, it will eventually get there... maybe after a regime change, similar to what happened in the former Soviet Union but in a smoother fashion. No, their biggest problem is the source of their new-found wealth. The very markets to which they ship all their goods, the US, Japan and the EU have all hit a brick wall in their economic growth. As these economies slow and the purchasing power of the average Japanese, European and North American ( Us & Canada) disintegrates, they buy less and less goods (most of which come from China). Moreover, as the times become harsher, the average consumer who is also feeling the pinch as an employee or employer of these tough economic times, start to resent the trade practice of the Chinese. In this age of hyper-speed Information access, a voluntary choice is made to buy anything but Chinese.

Their strength comes from sucking the economic life out of our markets, what happens when we are so weak that we cannot or choose not to buy their products anymore as it is already happening? (their drastic decrease in growth from double digit to single digit practically from one year to the other). They are weakened as well since their domestic market is not ready yet to take over the consumption of all the goods produced to keep feeding  their economic expansion.

So I would not be surprised if that dooms date of 2016 is pushed back a decade at least. Without the 4 major world markets actively buying them, they cannot sustain themselves even if they experience stagflation.  The growing middle class is essentially in the vast Urban Centers of the Eastern Seaboard. It is not large enough yet and has not yet reached critical mass to self-develop, economically speaking. The slightest decline in the Chinese economy will see that budding middle class hit the hardest, reverting right back to the poor and very poor, creating a domino effect on the entire Economy from which it will be very hard to recover.  Japan's Government has been injecting funds into their economy trying to jump-start it for the past decade and a half to no avail. The Nikkei Index who flirted with 40,000 still remains in the suburbs of 10,000 ten years later.

A lot can happen in 5 years, more even in 10. The only way to boost the Chinese Economy is to allow more free market  enterprising, particularly by deregulating and liberating the creation of free small enterprise with very low Government taxation. That is the most powerful weapon in the Chinese arsenal, as the Chines is intrinsically a merchant at heart. Like the Middle-Eastern Man, trade is in their soul. The Chinese Business Man is a risk taker, a Gambler, that risk taking intrepidity is the essential fuel of a humming economy with solid individual and Small enterprises at its core. The conundrum comes from the fact that liberty, freedom of enterprise and the taste of comfort is not only contagious, it is invigorating. It gives strength of character and  reinforces convictions. Those are traits who do not sit well with a Totalitarian communist regime. Once the Fox is out of the box, it is a lot tougher to stuff it back in. As the middle class grows and its standard of living rises along with it. The salaries will rise as well. The cost of labor will consequently be higher, beginning thus a leveling of the playing fields with the competing foreign markets.

I predict that Socialism will eventually morph into a more if not completely free market economy within 15 to 20 years (Or sooner if a major economic disaster ensues within the next 3 years). Once that happens, then yes, China WILL BE the worlds Largest Economy, but not necessarily the strongest yet. In the Next 3 decades the EU will be a Powerful Market with the newly joined Eastern European countries much stronger economically. So will Russia be. So China, Japan, North American, the EU and Russia will be the Top Economies jostling for top spot without a clear distant winner. Some Latin American Markets will be closing in from Behind, like Chile, Brazil, Colombia and Argentina. The African and South Pacific Markets with a very rare exceptions will bring up the rear.

Don't fear China, plan for it. It won't be so soon as the Doom Sayers prophecy, but only fools ignore it. China is a Sleeping Economic Giant.  Napoleon said: "Quand la Chine s'eveillera, le monde tremblera". "When China will wake, the world will quake". That's a prophecy I believe in, so prepare yourselves for it so you can take advantage of that market when it does become strong enough to play in the big tank with us hungry sharks..