China GDP: why red-hot inflation could slow Beijing's bid to unseat the US as world's No 1 economy
China's economy is likely to lag further behind the United States in dollar terms this year due to red-hot inflation, and the country should be "mentally prepared" for Western hype, a leading Chinese economist has said.
Although China's annual growth rate is forecast to better that of the US, the US$5 trillion gap in economic output between the two countries might expand based on spot dollar calculations, according to David Li Daokui, a professor at Tsinghua University and a former adviser to China's central bank.
American gross domestic product (GDP) will be magnified by a much higher inflation rate, coupled with a weaker Chinese yuan against the dollar following the Federal Reserve's rate hikes, Li said. The nominal economic gap might hit headlines in the Western world.
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"We need to be mentally prepared," he said at a forum held by the Chongyang Institute for Financial Studies at Renmin University on Sunday.
China has enjoyed decades of high-speed growth and its rapid economic ascent is a source of pride for many in the country.
But an economic slowdown fuelled by trade disputes, geopolitical tensions and Beijing's own policies - including its zero-Covid strategy and regulatory clampdowns on the property sector - could slow its path to surpassing the US as the world's No 1 economy.
Some analysts have said that China's worse-than-expected 0.4 per cent economic growth in the second quarter showed the country's post-Covid recovery was less impressive than its geopolitical rival.
Former World Bank chief economist Justin Lin Yifu, who is now an adviser to the Chinese government, said in May that China had surpassed the US in terms of purchasing power parity in 2014, and the country's economic output was bound to be twice that of the US one day.
In January, a day after China published its 2021 GDP growth figure of 8.1 per cent, former vice-foreign minister Le Yucheng said the country was "not interested" in becoming the world's largest economy or global hegemony.
Even if talk grows louder about the widening GDP gap, China does not have to be too worried, said Li.
"After all, the economic growth of a country is calculated by itself, [we] should calculate on the basis of purchasing power parity instead of spot dollars. China's fundamentals are still good," he said.
Western economies have this year been suffering from their fastest growing inflation in decades, raising fears about a looming global recession as more monetary tightening is expected from policymakers.
The year-round average inflation rate in the US is forecast to be above 8 per cent - much higher than that of China, said Li.
He said China should brace for a scenario in which Western nations will go through a long period of high inflation and low growth.
However, that scenario, known as stagflation, could come with some advantages for China. Liu Yuanchun, president of the Shanghai University of Finance and Economics, said last month it would make it more difficult for the US and EU to decouple from China's industrial and supply chains as a result.
According to Li, because developed Western countries are generally debtors, they could have more tolerance for high levels of inflation, which could devalue their debt.
The economist deemed the current crop of central bank leaders in the US, Europe and Japan as more inclined to maintain a certain level of economic growth over taming inflation the way the former US Federal Reserve chair Paul Volcker did 40 years ago, citing their personalities and academic backgrounds.
The "very simple" monetary and fiscal stimulus adopted by Western economies to cope with the impact of the pandemic was to blame for current overheating, he said.
The yuan is unlikely to depreciate sharply against the US dollar this year given China's robust trade surplus and falling deficit in service trade, Li said.
But the economy faced challenges, notably from the economic shock of recent coronavirus outbreaks, he said.
"The operation of our economy is relatively difficult, we must be matter-of-fact," he said.
Echoing comments from other economists recently, he called for more expansive monetary policy to address liquidity problems for property developers and ensure economic stability in the short term.
While he noted efforts to boost investment in infrastructure and new energy industries, Li was critical of some regulatory actions on internet giants that had not boosted innovation, but rather settled old scores.
"The enthusiasm of many private entrepreneurs has been hurt, therefore, we should try every means to restore their confidence in investment and development," he said.
He also called for further reform to encourage local authorities to take a more active role in market activities.
This article originally appeared on the South China Morning Post (SCMP).
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