China as World's Biggest Economy? Not So Fast

CNBC

China's fast-growing economy has been forecast to overtake the U.S. as the world's biggest economy as early as 2016, but economists say this is unlikely to happen as structural reforms slow the pace of growth and a stronger Chinese yuan dampens exporter competitiveness.

In March, a report by the Organization for Economic Cooperation and Development (OECD) said China was on track for a fourth straight decade of fast growth and will overtake the U.S. as the world's largest economy in 2016, after adjusting for price differences.

Yet, economists have started to question whether China can over take the U.S. as the world's No. 1 economy.

One of the main reasons they give is that China is trying to rebalance its economy from one that is driven by investment and exports to a more consumption driven one which could further slow growth.

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Plus the appreciation of the Chinese yuan means China no longer enjoys the same competitive advantage overseas as it did a few years ago. The yuan has strengthened roughly 10 percent over the past three years.

And finally, the U.S. economy is likely to gain momentum of its own in the years ahead thanks to developments such as a boom in U.S. natural gas production.

"In 2014 or even by the end of this year, we're expecting a pretty strong rebound in the U.S. with annual growth of 3-4 percent, while China is on a structural slowdown," said Lombard Street Research Economist Freya Beamish. "If China makes the right reforms, to rebalance its economy, which is the good scenario, then China would only be growing by an annual rate of up to 5 percent."

"If you look at the decade as whole 2010-2020, then that's not a particularly fast rate of catch-up," she added.

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China, which has grown at an average rate of 10 percent annually over the past three decades, overtook Japan as the world's Number 2 economy in 2010 and its rapid economic development has stunned the world.

Still, in a bid to move to a more sustainable long-term growth path, Beijing is encouraging domestic consumption to play a greater role in driving growth.

China's economy unexpectedly slowed in the first three months of this year, growing 7.7 percent from a year earlier compared with a 7.9 percent rise in the previous three months on slower industrial output and investment.

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Major Crossroads

Analysts said that just because China's economy had grown rapidly in the past, that did not mean it would continue to do the same in the future.

"China is at a major economic crossroads, and faces a very challenging adjustment in its economic growth model," said Patrick Chovanec, chief strategist at Silvercrest Asset Management in New York.

"The worst mistake you could make for any economy -- not just China -- is to simply extrapolate past trends into the future. History rarely follows straight lines," he said.

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Vishnu Varathan, a market economist at Mizuho Corporate Bank in Singapore added: "I'm also wary of straight-line projections for economies. One reason, with regards to China, is that the economy is slowing down to a new normal, while the U.S. is getting a boost from an energy revival."

"The U.S. also has dynamic demographics because of immigration, while China has an aging population," he added.

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Playing economic catch-up also takes a long time, even for China which has come a long way quickly, analysts said.

"China has come quite some way, but is still miles away from where it would like to be and where it could be in terms of productivity and levels of GDP per capita, which is about 13-14 percent of what it is in the U.S. -so it still has a massive amount of catching up to do," said Louis Kuijis, chief China economist at Royal Bank of Scotland.

(Read More: Special Report: Inside China )



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