China's ascension to top economy delayed again

Summary

China's rise to the world's largest economy is again delayed. We now estimate China overtakes the U.S. to become the largest economy in the world in 2049, pushed out from a prior estimate of early 2040s. Despite last year's resilience, the delay is a product of deteriorating underlying fundamentals that determine potential growth. China's population is smaller and older, deflation pressures are persistent, and rising private and public sector leverage re-introduces "hard landing" risks in China.

At the same time, fundamentals in the U.S. are on an improving trajectory and diverging from underlying trends in China. Just as worsening fundamentals will keep China stuck in second place for a longer period of time, improvements across potential growth indicators should set a solid foundation for long-term U.S. economic growth. "Hard landing" risks in China are not as apparent in the U.S., which also keeps downside risks centered in China.

Embedded in our 2049 estimate is also the view that the Chinese renminbi will strengthen going forward. We continue to believe Chinese authorities have fundamentally shifted the way FX policy is considered and set with a preference for financial stability as opposed to currency weakness. FX policy can change as domestic and external conditions change, and while our renminbi assumption is more constructive relative to FX forwards, should the renminbi trend in line with forward pricing, China's ascension to the top of the economic pedestal could come earlier than we expect, despite imbalances and structural impediments to sustainably high growth rates.

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