U.S. No Longer No.1

By The Time Obama Leaves Office, U.S. No Longer No. 1

 By 2016, the United States will no longer be the world’s No. 1 economy. That title will be handed over to none other than the current No. 2: China.

The Organisation for Economic Cooperation and Development in Paris said in report published this week that China was on course to surpass the U.S. economy in just three short years.

That’s about the time President Barack Obama will end his second term.  The next president will potentially be the first one since World War II that didn’t govern the world’s most powerful economy.  Most forecasts, however, have China’s economy at No. 1 in 2020.

“From a long-range perspective, China has now overtaken the Euro area and is on course to become the world’s largest economy around 2016, after allowing for price differences,” OECD said in its China report released this week.

China still has a lot of growing to do.  By comparison, it’s per capita income is three and a half times less than that of the U.S., and even less than Brazil.  But most economists forecast that China’s rapid urbanization — now at 50% and seen rising to 70% within five years — coupled with higher incomes will change the way China operates.  As it is, China is moving from an export driven economy to a more Western one that is geared to its local consumers.

Its new leadership has made social programs a focus of its five year plan as well.  China, for all its wealth in the Eastern cities, is still a poor country.  And an aging one.  China will spend billions building out its social safety net over the next few years, improving the livelihood of retiring and elderly Chinese.

The country is also focusing more on high tech, value-added production.  Green energy is a strategic focal point of the country’s 12th five year plan and that means investments in new sectors — from electric cars to lithium batteries, to alternative energies designed to eradicate China’s pollution problem.  All of this investment is seen as a further catalyst for rapid growth in China.  In theory, new social policies should be able to spread the wealth in this nation of 1.3 billion.

There’s no hard landing coming in China, the OECD attests.

The organization predicted China’s 2013 GDP to come in at 8.5% compared to 2012 growth of 7.5%.

“The gradual pick-up in activity provides a strong background for the ambitious reforms China needs to put in place to continue on the road to prosperity,” OECD Secretary- General Angel Gurria was quoted saying in a story by Xinhua news agency.

China vs United States

While the Chinese urban population in cities like Shanghai enjoy a standard of living similar to affluent Westerners, rural China remains poor to low income.  There is also a widening income gap in China. Studies of China’s inequality almost universally report that the gap between urban and rural household incomes in China is large, has increased over time, and contributes substantially to overall inequality. According to most estimates, mean per capita income in urban China is more than triple that in rural areas, giving China one of the highest urban-rural income ratios in the world.  China’s economy may be bigger than that of the U.S. by 2016, but the political task to balance the haves with the have nots will be tougher there than it is here.

China’s per capita income has ballooned over the last five years.  In 2005 it was $4,102. By 2010, it hit $7,519, according to the OECD.  Last year, the CIA World Factbook  put China’s per capita income at $9,100.  U.S. per capita income has also risen, but being a developed economy, and one that has faced one of its worst recession ever in 2008, Americans’ share of economic output in 2005 was $42,414 and rose to $46,588 five years later.

Despite the continued narrative of China as world’s leading economy, its stock market has underperformed the S&P 500.  Investors prefer the U.S.  Year-to-date, the iShares FTSE China (FXI) exchange traded fund is down 8.67% while State Street‘s SPDR S&P 500 (SPY) is up 9.25%.  FTSE China doesn’t look any better stretched out over longer periods either.

FXI vs SPY


xxxxxxxxxxxx           6 mos             1 yr               5 yr
FXI                        6.24%            0.11%       -12.71%
SPY                       6.66%            11.39%      17.80%

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