China's economy about to overtake US

CHINA is about to overtake the United States as the world's biggest economy, creating profound changes in the balance of global power.

In forecasts inserted quietly on its website in recent days, the International Monetary Fund has projected that, by 2016, China will overtake the US in real economic output - the first time in the modern era that any country has done so.

Economic historian Angus Maddison estimated that the Soviet Union at its peak produced only a third as many goods and services as the US; Japan's economy at its peak was still less than half the size of the US economy.

China's ascension has been startlingly different, in speed and size. If it grows at anything like the 10 per cent rate it has averaged since 1980, its economy will be far bigger than that of the US within a generation.

Australian National University professor of strategic studies Hugh White said the looming end of US economic dominance marked a turning point for the world, and had serious implications for Australia.

''For us, it is the end of a very long cycle in which both our great allies, first Britain, then the United States, have been the strongest economy in the world and the greatest military power,'' Professor White said.

''For the first time, the greatest economic power in the world will not be our close ally.

''One issue is whether we will have to accommodate an ambitious, growing China that behaves reasonably well, or face an aggressive China that operates without such constraints. Another is how the US responds to China's growing military strength.''

Professor White said that while the US had confronted more-hostile enemies before - Nazi Germany and the Soviet Union - it had never had to contend with a rival that matched it in economic strength.

He said this would pose a ''very tough strategic choice'' for Australia as to whether or not to back the US in a conflict.

China's growth has been unprecedented. In 1980, when its economic reforms were just starting, the IMF estimates the US produced more than 10 times as many goods and services. Even 10 years ago, when China overtook Japan to become the world's second-biggest economy, the US still produced three times as much.

But since then China's share of global output has doubled, while that of the US has shrunk rapidly. From 25 per cent of global output in 1986, the US share has shrunk to less than 20 per cent and a projected 17.8 per cent by 2016.

China produced just 2.2 per cent of the world's output in 1980, but this rose to 7 per cent by 2000, 14 per cent now, and is projected to top 18 per cent by 2016.

By 2016, the IMF estimates, China will be producing more in a fortnight than it did in a year when the reforms began. Over that period, its output would have risen to 30 times its starting level; US output would have risen to 2.7 times its 1980 level.

The US would still be the world's biggest market. If China keeps its currency heavily undervalued, as it is now, the IMF projects that, in nominal terms, by 2016 the US economy will still be two-thirds larger than China's.

But this gap would simply reflect currency values. Factor in relative prices, and China's real output of goods and services would be the world's biggest.

The IMF assumes that China will grow at 9.5 per cent a year over the coming decade, a tad slower than previously, while US

growth would accelerate from an average of 2.1 per cent over the noughties to 2.75 per cent in the new decade.

Australia is assumed to average growth of 3.25 per cent, and more or less maintain its place in the world economy, which has changed remarkably little over the past century.

On Professor Maddison's estimates, Australia in 1913 produced 1.02 per cent of the world's output. On the IMF's figures, this edged up to 1.34 per cent in 1981, is 1.19 per cent now, and will shrink further to 1.11 per cent by 2016.

This reflects the rapid growth not only of China, but developing countries as a whole. In 1990 they produced just 31 per cent of the world's output, but by 2010 this had risen to almost 48 per cent, and by 2013 most of the globe's output would come from low- and middle-income countries.

India's growth is projected to continue at more than 8 per cent a year. It is on track to overtake Japan next year to become the world's third-biggest economy in real output.

The relative weight of Japan and the European Union is declining rapidly. On IMF projections, by 2016 Japan would account for just 5 per cent of global output, down from 10 per cent a generation earlier, while China and the US would have overtaken the EU's output.

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