In this Business Analysis post we take a look at China. Will they overtake the USA as number one economy in the world, and if so how will this impact those doing business in China…
The United States of America has been holding the status of superpower since World War 2. The US economy is the largest national economy in the world which contributes more than 20% of the world’s total goods. The US has maintained its economic trade with its allies so strongly that no one could ever think that someone will replace the US. But time has changed, there is one country in East Asia that is showing the signs that it will take the status of the largest economy in the world. We are talking, of course, about China, the largest manufacturing country in the world. It is the fastest-growing economy in the world and holds more than 1.3 billion people. The success behind China’s fast-rising economy is its manpower. China has used its massive population as assets rather than a liability. It was predicted that in 2035, China will overtake the US economy and become the largest economy but one historical event occurred which favours China’s side. Covid 19 has changed the shape of the world, the US is the most affected country by this pandemic. In 2020, China was the only country in the world with an increase in GDP. China’s actions against the coronavirus pandemic have cleared its way to becoming the world’s largest economy before the end of 2030, according to a new report by the UK think tank. The coronavirus pandemic and its economic fallout in the world especially in the US will help China rise above the US to become the world’s largest economy. China’s economy is now expected to overtake the US economy by 2028, the UK think tank stated in its report.
So What Has Has Covid Got To Do With Business In China?
“We expect the United States’ share of global GDP to decrease from 2021 onwards, and for the country to be overtaken by China as the world’s largest economy,” the Centre for Economics and Business Research announced in the report. “We now expect this to happen in 2028, five years earlier than in the former edition of the WELT,” pointing to the think tank’s World Economic League Table, which ranks countries’ economic performance. China was ‘skilful’ with the pandemic as its policies didn’t let the country go down. The quick action against the virus has been attributed to the difference between Beijing and Washington’s response to the coronavirus pandemic. The report hailed China’s “skilful management of the pandemic,” were an immediate lockdown that kept the numbers of infections slow and under control. On the other hand, the president of the US at that time took coronavirus as the ordinary flu. Many have said that it is that initial irresponsibility which resulted in more than 500 thousand deaths in the US and millions are left unemployed.
Of course, who knows what China really did and didn’t do. The truth is somewhat murky, and no one, not an individual, government, company or news agency will get the real truth out of China regarding Covid and their response. Upon looking at the USA and China on paper, one would naturally state China did much better. The true fact of the matter might be that the USA is just far more transparent.
The US is facing its lowest GDP since the Great Depression. To control the infection rate of the virus, the government of China shut down more than half of its economy in February 2020 and unemployment goes for a record high of 6.2% leading to GDP contracted by 6.8% in the first quarter. The outbreak decreases after several weeks, and the economy recovered to increase in the second quarter. Meanwhile, the coronavirus spread widely in the US making it the worst nation to be affected by Covid 19. The US has more than 30 million cases and it’s left with the worst conditions. The US has been experiencing its historical events since the election of former president Donald Trump. The report further said that the US would also see a strong post-pandemic rebound in the upcoming year, but its growth would slow down to 1.9% and 1.6% over the years. On the other hand, China is expected for an average growth rate of 5.7% a year from 2021 till 2025. Between 2026 and 2030, it is expected to slow down to 4.5% a year but until that time it would easily become the largest economy in the world.
The U.S. announced that gross domestic product in 2020 declined by 2.3% to $20.93 trillion in dollar terms. In contrast, China stated its GDP increased by 2.3% last year to 101.6 trillion yuan. That’s about $14.7 trillion, based on an average exchange rate of 6.5 yuan per U.S. dollar. “This difference in growth is consistent with our belief that the pandemic has a much larger impact on the US economy than China’s economy,” said Rob Subbaraman. “We believe that on reasonable growth forecasts the size of China’s economy in USD terms will overtake the US economy in 2028.” If the Chinese currency strengthens further to around 6 yuan per U.S. dollar, China could exceed the U.S. two years earlier than predicted — in 2026, Subbaraman said.
Can China Actually Do It? Others Have Failed
The Chinese economy is not only benefitting from having managed the Covid-19 pandemic situation early but also from dynamic policymaking, targeting industries like advanced manufacturing. There is no debate in whether China will overtake the US economically and some say even militarily. Getting the number one spot will be tough, staying there will be harder still. China is still ruled by a one-party system that is the Communist Party. Back in 1950, when the Soviet Union (USSR) competed with the US to claim superpower status during the Cold War period, it somewhat matched America’s power in leading alliances and military power. However, at the height of its power, the Soviet Union was never a complete competition for US domination culturally or economically. Like the Soviet Union in the past, Germany, Russia, and Britain also tried to compete with the US but they were either roundly beaten, or absorbed into the ever-successful alliance machine manifesting itself most strongly as NATO. In 1980, Japan was thought to overtake the US economy because at that time Japan was making massive progress in technology and product manufacturing. But we all know how that goes, due to Japan’s geographical position, population, and other cultural problems it hit various walls and thus the US secures its position once again. China can overtake the US but it will be facing some problems along the way. First, it has several geopolitical and cultural difficulties to overcome before it can reach global superpower status similar to the US. But the average Chinese person will remain far poorer in financial terms than the average American even after China becomes the world’s biggest economy, given that China’s population is four times bigger.
If China overtake the US how will it affect westerners doing business in China?
Doing business in China is a powerful move for western companies. Many companies and organizations have planted their firms in China rather than India and there are a lot of reasons for that. China stock markets are placed highest by returns in 2020 such as Shenzhen Stock Exchange, up 36% and Shanghai placed in the world’s top 10, and A-shares’ total market capitalization not including HK, Taiwan and Chinese companies listed outside China has exceeded RMB 70 trillion (USD 12 trillion), and currently the second largest after the U.S. The active and liquid trading in the Chinese stock markets is an enormous motivator for foreign stockbrokers and financial institutions to initiate broader and comprehensive research coverage. On the contrary, and partly attributed to the global pandemic, the progress isn’t in tandem with the energy of China’s stock markets. Despite all the large-scale figures, the current foreign ownership in A-shares is less than 4%, a far cry from the U.S. of about 20%, and other developed equity markets worldwide with an average exceeding 20%; a noteworthy market would be the laissez-faire HKEx of over 70%. Assuming 10% in proportion could translate into USD 1.1 trillion of foreign investment in its stock market.
After China overtakes the US economy the individual and western companies may face tariffs and other bans from the Chinese government. If they do eventually overtake the US there is a high possibility that foreign companies may pull out of China because of problems with the Chinese government or some other external problem. The opportunities in China are vast, but pulling out may not be easy. And the most common reason that foreign companies will fail is that they didn’t approach the market correctly. When it comes to western companies, China is among the most competitive markets in the world. You will see domestic firms competing with foreign firms from all over the globe. And Western companies aren’t likely to stay in the market. These companies are held to a much higher standard for compliance in regulatory areas such as human resources, their tax dealings, and employee rights. It means Chinese businesses get away with more. On the other hand, Chinese companies who will be doing business in China will enjoy benefits and far fewer restrictive tax policies. Too many Western companies think they can simply take their business model from their home countries and force it onto the Chinese market but the situation will not be the same when the US is second to China. Western companies in China may face the same economic challenges that Chinese firms do, like rising labour costs and difficulty raising capital in the future. But while competition and regulation are increasing in the market, surveys show that Chinese companies in China continue to be very confident of making a profit there. And they can even think about it; a good reason is that China will offer its own country’s companies a long-term opportunity and favours.
Service Delivered By The Dragon
China’s economic growth will no longer be the same. China’s transition to a service-based economy presents a tremendous opportunity for Western firms. This is an area that Western companies do particularly well. Doing business in China has been very beneficial for western companies, they have a 40-year head start on China, which is really just launching its service economy. Until recently, China had shut out non-Chinese service companies entirely for no reason. But they’re beginning to open up in areas like training, pharmaceuticals, insurance, financial services, cars production, entertainment and health-care systems and delivery. In the future, the Chinese government will favour Chinese companies rather than western firms. This may cause a very bad effect on people who are doing business in China.
Unfortunately, too many Western companies have invested in the Chinese market and have put their business model from their home countries into play abroad without ever thinking about the future outcome. Successful companies in China will be the hardest hit if the Chinese government takes action against them in the future. These companies have spent a lot of their money in understanding the Chinese consumer and the dynamic Chinese market. Although these all are speculations maybe after overtaking the US economy Chinese government may not interfere with the Western companies as much as they do currently. We all know China depends on foreign investment, its economy depends on manufacturing not importing. These foreign companies have worked very well in the Chinese market, they had made even billions of dollars in the coronavirus pandemic. These companies are quick and flexible, they’re prepared to invest serious capital and they have the patience to stay for the long haul because they know good results will come. China will not risk losing these companies as they make up a high percentage of its annual GDP.
China has been working for over a decade to make its currency, the renminbi (RMB), more attractive to western firms and companies. The effort started with its de-pegging from the US dollar in 2005 and leading to a “managed float” regime. After overtaking the US economy Chinese currency can become expensive making it hard for western companies to buy and invest in the currency. At the moment, many western companies do business in China because they get high profits due to Chinese currency but after the Chinese economy taking over these companies may observe high-value currency, and take a hit in doing so.
A Symbyotic Business Relationship?
China and the US both need each other economically to maintain their GDP. China is a very important trading partner for the US and it can’t afford to lose Chinese goods. In fact, Americans who don’t even do business in China may experience some changes in their field after China taking over the US’s number one spot. For example, suppose you’re an American and you are working in a multinational company that imports raw materials and goods from China at cheap prices but when China take the number one spot from the US economy and Chinese currency become stronger and worth more than it does now, it will be a challenge for your company to maintain its original wealth and status like before. The same applies if you own a business in America. Many American businesses import their products and goods from China but when the Chinese currency booms and the dollar value decreases against it the financial impact will be felt by many.
American corporations like Nike and Apple manufacture several of their products in China at cheap prices and then export to the United States and elsewhere. Many country’s leaders are seeing this economic flip on the horizon and are encouraging their homeland’s companies to move all their manufacturing and business porcesses from China to home. This is touted as a great move because the Chinese government is not always reliable and are untrusted by many. There are a lot of experts out there who doubt Chinese GDP figures. If you were ever wondering how businesses could be in danger in China, a look at AliBaba sets the record straight. After speaking out against the Chinese leadership, Jack Ma, the owner, went missing for months…
The Real Conclusion
We can expect that China will take over the US economy. When? Who knows. Sooner or later but unless something drastic happens (what, like Covid? Originating in China itself? That didn’t do much) the flip is written in the stars. But even after nailing the number one spot, China won’t get the same recognition as the USA has had all these years. The western companies who will be doing business in China at that time may face some export problems and tariffs from the authorities. There is a high possibility that the Chinese government will favour its own homeland companies rather than western companies. We can only wait to see how things will go but if you think your business will be affected there’s no harm in getting a plan together now, right?
For more Business Analysis, all designed to give you leverage in whatever you do, check out our Analysis Page