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China May Surpass U.S. by 2020 in `Super Cycle,' Standard Chartered Says

China will overtake the U.S. to become the world’s largest economy by 2020, helped by faster expansion and an appreciation of its currency, according to Standard Chartered Plc.

“We believe that the world is in a ‘super-cycle’ of sustained high growth,” economists led by Gerard Lyons said in a report published today. “The scale of change over the next 20 years will be enormous.”

China’s economy will be twice as large as the U.S.’s by 2030 and account for 24 percent of global output, up from 9 percent today, Lyons said in the 152-page Super-Cycle Report. India will surpass Japan to be the third-biggest economy in the next decade, according to the report. Goldman Sachs Group Inc. estimates China will overtake the U.S. by 2027.

The world may be experiencing its third “super-cycle,” which is defined as “a period of historically high global growth, lasting a generation or more, driven by increasing trade, high rates of investment, urbanization and technological innovation, characterized by the emergence of large, new economies, first seen in high catch-up growth rates across the emerging world,” Standard Chartered said.

Output in China, the largest maker of mobile phones, computers and vehicles, surpassed Japan for the second straight quarter in the three months through September, Japan’s government said today. The Chinese economy overtook the U.K. as the fourth largest in 2005 and tipped Germany from third place in 2007.

Photographer: Nelson Ching/Bloomberg

Standard Chartered Chief Economist Gerard Lyons said China's economy will be twice as large as the U.S.'s by 2030. Close

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Photographer: Nelson Ching/Bloomberg

Standard Chartered Chief Economist Gerard Lyons said China's economy will be twice as large as the U.S.'s by 2030.

Faster Growth

China has expanded by an average 10.3 percent a year over the past decade compared with an average 1.8 percent for the U.S. Standard Chartered estimates growth will slow to an annual 8 percent pace by the middle of the decade, easing to 5 percent from 2027 to 2030.

The U.S. economy, by contrast, still faces another year or two of “sluggish growth,” forecast at 1.9 percent in 2011, before returning to its long-term trend rate of expansion of 2.5 percent in three to four years, Nicholas Kwan, Hong Kong-based regional head of Asia research at Standard Chartered, said in a telephone interview.

China’s comparatively faster expansion, together with an expected 25 percent appreciation of the yuan, should be enough for its nominal gross domestic product to exceed that of the U.S. by the end of the decade, Kwan said.

Risks, Challenges

Still, the scenario faces risks on both the U.S. and Chinese sides, Kwan said.

“For China we have to consider to what extent the economy can keep growing without serious disruption, while the U.S. is facing different challenges as a mature economy struggling to recover from an unprecedented crisis,” he said.

China could fall ‘abruptly off the fast track’’ as the Soviet Union and Latin America did in the 1970s and Indonesia and Thailand experienced in the 1990s, Standard Chartered’s report said.

The economy is “unbalanced” and faces considerable risks, including a widening of imbalances, asset bubbles, overcapacity and rising bad loans which could lead to a serious decline, the report says. A 10 percent decline in investment in China would make it very difficult to achieve any GDP growth at all, the report estimates.

Stable Currencies

Previous “super-cycles” of growth happened from 1870 to 1913, and after World War II until the early 1970s, Standard Chartered said today. The current cycle began in 2000, it said.

“If we are right about this being another super-cycle, it does not mean that growth is strong and continuous over the whole period,” Standard Chartered said. “The first super- cycle, for instance had bouts of high inflation and of deflation. Much will depend on monetary policies adopted across the globe.”

Previous growth super-cycles were characterized by stable currencies where there were exchange rates linked to gold or silver, monetary unions and the Bretton Woods agreement, Standard Chartered said. Current concerns over “currency wars” highlight the challenges with the present system, the bank said.

“The possibility of some formal move towards currency stability at a global level cannot be ruled out,” according to the report. “However, in the present context, it seems hard to predict. Greater currency intervention may be plausible, and over time, one should expect to see more countries managing their currencies against a basket of currencies of the countries with which they trade. Managed floats and currency baskets may become more of a norm for currency policy.”

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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