China’s economic heft sinks for first time in three decades

(Bloomberg) - For most of us, weight loss is a positive. For an economy, not so much. New analysis showing that China’s global heft has declined for the first time since 1994 illustrates why its chances of overtaking the US economy are increasingly in doubt.

While the International Monetary Fund and others regularly cite China as the world’s biggest contributor to growth, that’s been shown to be a misleading gauge.

For one thing, such statements use “real” GDP figures—that is, adjusted for inflation. But we live in a nominal world, one where prices aren't discounted by inflation but are the actual numbers on paychecks and store tags. Corporate sales are nominal. Government spending and tax revenue is nominal. You cannot make a “real” loan. You cannot pay debt back with “real” dollars.

And in the nominal world, the US remains the most consequential economy. JPMorgan Chase & Co. economists have updated their global assessments to take account of final figures for 2022, and they show America weighing in at 28.4% of the planet’s gross domestic product. China came in at 20%.

This year, too, the US will outperform China, thanks in part to a decline in the yuan but also the resilient American consumer. As the two geo-strategic competitors battle for influence across the globe, American economic bulk will be a handy card.

JPMorgan’s team noted that it’s rare for China’s share of global GDP to shrink. Last year marked the first drop since 1994, when Beijing adopted a new exchange-rate regime that saw the dollar value of its output shrink.

All the more striking is that China’s weight declined during a year when emerging markets as a whole expanded—and that in the face of the most aggressive series of interest-rate hikes by the US Federal Reserve in decades.

Typically, the onset of Fed tightening cycles would see major currency depreciation in developing nations, spurring them into growth-destroying rate hikes of their own. The last time the Fed was as aggressive as last year was the early 1980s, and that episode triggered a devastating debt crisis in Latin America.

This time around, major developing nations including Brazil had acted early against inflation on their own, supporting their currencies when the Fed kicked into action.

Performance by the emerging market group as a whole “was particularly impressive last year, overcoming its usual sensitivity to global shocks,” JPMorgan global economists Joseph Lupton and Bennett Parrish wrote in a report this week.

As for China, it “was held back by strict adherence to its zero Covid policy, resulting in a lack of immunity via infection and lockdowns that stifled activity,” Lupton and Parrish wrote. Add to that a severe property market downturn caused by efforts to reduce leverage and overbuilding.

That downturn stretched into 2023, and Beijing only in recent months has shifted gears to support developers. Falling property values meantime have hammered confidence among China’s middle-class consumers. While President Xi Jinping and his lieutenants have taken a raft of steps to reinvigorate the private sector—including this week when Xi visited finance-and-tech hub Shanghai for the first time since 2020— the impact remains to be seen.

Full-year numbers for 2023 won’t be available for months. But looking at the third quarter, it’s clear China fell further behind the US. Its nominal GDP was up less than 3.5% from a year before in yuan terms. In dollars, it shrank notably, thanks to the yuan’s retreat this year.

By contrast, US GDP last quarter was over 6% bigger than a year before. While some of that is thanks to inflation, it also owes to contributions from continued consumer spending and a manufacturing renaissance.

Nevertheless, beyond its current challenges, China has plenty of catch up potential. This is especially the case given its much lower per-capita income level relative to advanced economies.

But it also has a declining population that will weigh on its growth. By contrast, the US—thanks especially to its traditional openness (albeit unwilling these days in some political quarters) to immigration—is set to have an expanding one for decades to come. That raises the prospect that, even if China eventually does surpass the US, it may fall back over time.

Bloomberg Economics accounted for that in September, in concluding that China was no longer likely to become the world’s biggest economy “on any consistent basis.”

If that proves correct, it leaves the US with major bragging rights in the new emerging cold war—something that seemed impossible just a few years back.