Transformation central to China’s growth

There is still a long way to go before China catches up with the United States in terms of growth quality. The government’s dedication to transformation is based on Chinese leaders’ awareness of the practical situation. If China continues its strong stimulus plan, it will fall further behind the US, despite temporary fast growth on paper, says article in the 21st Century Business Herald. Excerpt:

According to the International Monetary Fund’s estimate of purchasing power parity (PPP), the US economy this year is worth $17.4 trillion and China’s $17.6 trillion, meaning China overtook the US as the world’s largest economy. The IMF even specified the exact date, Sept 29, when the latest exchange rate was issued for the calculation.

The IMF predicts the Chinese economy will surpass the US by 0.12 percent this year and 20 percent in 2019. In 2005 the Chinese economy was less than half that of the US.

The IMF issued its Outlook for the World Economy on Tuesday, based on PPP calculations. The seven largest emerging market economies’ total gross domestic product (GDP) is larger than the G7, seven old industrial economies of the West.

Although PPP is not a precise method reflecting the real size of an economy, the IMF wants to show a trend that China will overtake the US as the world’s largest economy, and that emerging market economies will surpass the old developed countries.

There is obviously uncertainty in the prediction. The slowdown of the old developed economies resulted from the 2008 financial crisis. They are struggling to balance bailout measures and structural reforms.

There are three reasons behind the emerging market economies’ high-speed growth: the quantitative easing policies of the Federal Reserve make money flow to new markets; these economies’ huge stimulus package at home, and China’s stimulus plan increased the emerging market economies’ export.

The US economy is recovering. Emerging market economies face difficult transformation challenges. The economic imbalance caused by strong stimulus appears in many sectors. Both domestic demand and export are dropping. That the Federal Reserve will eventually increase the interest rate will influence emerging market economies too.

Those economies, including China, must take the initiative to restructure. This is a painful process, but, if completed, will lay a solid foundation for growth in the long term.