Will China Surpass the U.S. as the Economic Superpower in Seven Years?

Using International Monetary Fund's 2009 list, their GDPs in U.S. dollars are:

• USA: $14.2 trillion
• China: $4.9 trillion

In order for China to out produce the U.S., it needs to produce three times more than it does right now.

Growth rates also figure into the picture. China is developing much more rapidly that the U.S. While our economy is in a recession now, 17-year estimates for GDP per capita annualized growth is 4.17% for the U.S. verses 12.13% for China.

Running these two numbers into the future, China will overtake the U.S. in 2025. Now, I'm not the first person to run numbers like this to calculate when China will overtake the U.S. I expect these numbers are pretty accurate estimates, but I don't trust all the numbers that come from China. Even something as simple as the age of Olympic competitors can be complicated.

But this does not tell the whole story. China does not run on dollars; it runs on yuans, and that rate does change. The yuan has been mostly pegged to the U.S. dollar since 1994. Recently, under pressure from Washington, China loosened the exchange rate, but it is still far from free. Right now one U.S. dollar is worth 6.79 Chinese yuan.

To explain this in simple terms, if you have Chinese for lunch in America it might cost you $7, but if you fly to China, that lunch costs you 10 yuan ($1.47). While certainly the lunches are a little different, they are equivalent, but one is counted as four times more "productive" that the other. This is a result of the exchange rates, and exchange rates do change.

One tool economists use to calculate what exchange rates would be without manipulation is called purchasing power parity. And the International Monetary Fund estimated that in 2008 the dollar would be equal to 3.8 yuan (or renminbi) if it were allowed to float freely. That would basically represent an 80% increase in the value of the yuan and all Chinese production. Assuming that China and the U.S. continue to grow at current rates and the yuan is allowed to appreciate 80% against the dollar; China will surpass the U.S. as the economic superpower in 2017. That is only seven years from now. Now that is something to think about.

Do you think we should be worried?

Recent travels have taken Kevin Kersten to China, where he was impressed by what he saw.