China's Booming Economy Will Never Surpass U.S.: John Berry

John M. Berry is a columnist for Bloomberg News. The opinions expressed are his own.

Dec. 29 (Bloomberg) -- China's economy is growing so fast that estimates of its long-term prowess
are bordering on the absurd.

After Chinese statisticians recently sharply revised up their estimate of economic output in 2004 to
$1.93 trillion, some analysts said that in 35 years it would overtake the U.S. economy.

No way, no how. The U.S. simply has too big a lead, with gross domestic product last year at $11.73
trillion.

Even if China's GDP were to grow indefinitely at 11 percent a year -- 9 percent real growth plus 2
percent inflation -- and the U.S. experienced 5.5 percent growth -- 3.5 percent real and 2 percent
inflation -- it would take the Chinese 40 years to catch up in terms of nominal GDP.

Sustainable nominal GDP growth of 5.5 percent annually is well within the capability of the U.S.
Eleven percent growth, about what Chinese authorities expect in 2006, isn't remotely possible in the
long run.

One reason China's economic growth looks so formidable is the sheer size of its population, just
over 1.3 billion as of the middle of this year, compared with slightly fewer than 300 million in the
U.S., according to the U.S. Census Bureau.

Yet that comparison is misleading in calculating the availability of workers to fuel economic
growth.

Population Growth

Partly as the result of continued immigration, legal and illegal, U.S. population is increasing by
0.92 percent a year, according to census estimates. With no net immigration and with its
government's harsh rule of one child per family, China's population is expanding at a much smaller
0.58 percent rate.

Surprisingly, given the enormous difference in current populations, Census Bureau projections show
that between now and 2050, the U.S. population will rise by 124 million while the Chinese population
will increase slightly less, by only 118 million.

If those projections prove accurate, the Chinese likely would have no great advantage in terms of a
burgeoning labor force as an ingredient for economic growth.

China does have an advantage in the rapid movement of workers from rural agriculture into higher
productivity jobs in industry and services. On the other hand, it is a process that can only occur
once, just as it was largely completed in the U.S. more than half a century ago.

The other principal source of China's economic growth is its extraordinarily high share of GDP going
to investment.

Investment and GDP

``China's investment-to-GDP ratio is still rising -- we estimate it at 47 percent in 2005 -- and
this has resulted in a significant build-up of production capacity in many industries,'' Lehman
Brothers economists told their clients on Dec. 19, just before the GDP revisions were published.

``So far, production has stayed strong, but there are symptoms of oversupply: Profit margins are
being squeezed, and the trade surplus has ballooned, partly because of excess local supply being
exported.

``There is an urgent need to rebalance GDP from investment to consumption, otherwise weaker foreign
demand, or rising protectionism, could slow exports and bring China's oversupply to a head, forcing
a major cutback in production,'' the Lehman economists said.

Some industries, such as steel and cement, are already plagued by overcapacity. And the People's
Bank of China, the country's central bank, expressed concern that investment could rise further in
2006 as local governments push new projects.

Protectionist Measures

The threat of protectionist measures is probably greatest in the U.S., which in the first 10 months
of this year had a $167 billion trade deficit with China, about $36 billion more than in the same
period last year. This country's next largest deficit is $69 billion, with Japan.

The possibility of such protection action -- a 27.5 percent tariff on Chinese goods has been
proposed -- will remain as long as China refuses to let its currency float more freely against the
U.S. dollar.

Meanwhile, as Chinese incomes rise, so will consumption as a share of GDP, with a more or less
corresponding decline in the investment share. Once the Chinese capital stock begins to rise more
slowly, so will GDP.

Aside from these reasons to question the sustainability of continued annual increases of 11 percent
in Chinese nominal GDP, there is the overriding issue of authoritarian rule by the Chinese Communist
Party.

Internal Unrest

China's Public Security Ministry reported there were 74,000 protest incidents involving some 3.76
million people in 2004. Jerome Cohen, an adjunct senior fellow for Asia at the Council on Foreign
Relations, said in a posting on the Council's Web site that the number of protests over such things
as land confiscations, pollution, taxation, corruption and religion probably has doubled this year.

The protests don't immediately threaten Communist Party rule ``because there's no coordination
between them,'' said another Council Asia senior fellow, Adam Segal. On the other hand, the Chinese
government seems unlikely to address the underlying grievances, so the unrest will continue and
grow, the Web site article said.

At some point, the Communist Party may well lose control of the country, and a major disruption of
the economy would be likely if that were to happen.

Prospects for U.S. growth generally look good, even though eventually the country is going to have
to deal with its low savings rate and huge current account deficit.

China will remain a formidable economic competitor. Nevertheless, of necessity its growth will slow
before too many more years pass and the U.S. economy will remain the largest in the world.

To contact the writer of this column:
John M. Berry in Washington at  jberry5@bloomberg.net
Last Updated: December 28, 2005 17:45 EST

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