The More Important US-China Economic Race

By Derek Scissors of AEI.

"A great deal of attention is paid to whether China will catch the US in gross domestic product (GDP). Many observers recently discovered long-term Chinese economic problems and realized China may never catch up. This understates the American advantage. GDP is an activity indicator, while the value of that activity can be captured by national wealth. And the US continues to pull away from China in wealth.

GDP is overused. GDP per capita is a strange, often inaccurate proxy for individual income, which can be measured directly. The global application of purchasing power parity to countries’ GDP, in particular China’s, is fraudulent. GDP itself represents production fairly well but can be inflated by waste, especially in a non-market economy able to subsidize “strategic” industries despite long-term and large-scale overcapacity.

Wasted production doesn’t show up in wealth. Further, wealth can’t be durably inflated. Credit Suisse has for some years compiled net household wealth numbers for many countries. Net household wealth is not the same as net national wealth but the two are strongly correlated for the US and it makes obvious sense for the correlation to hold in most economies.

Credit Suisse this week published end-2021 data. It puts net Chinese household wealth at $85.1 trillion. The American figure is $145.8 trillion. In 2011, the figures were $30.9 trillion and $65.8 trillion, respectively. The US household wealth lead over China has expanded by $25 trillion over the past decade. Ten trillion here, ten trillion there, and pretty soon you’re talking real money.

Qualifiers:

• China’s wealth as a percentage of America’s has risen. But countries don’t draw on wealth ratios, they draw on the actual money represented in the wealth gap.
• Despite the pandemic, Credit Suisse has a surprisingly optimistic view of 2020-2021. Chinese wealth rose $15 trillion over those two years, American wealth $31 trillion. Still, the US gain is almost the same as that provided by the Federal Reserve for household net worth.
• Credit Suisse has understandable difficulties with China, and errs on the optimistic side. The first estimate of 2011 household wealth was $20.2 trillion, apparently a 50 percent mistake. Later years were also revised higher and that could happen to 2021.

The next step is to attempt to translate household into national wealth. The Fed does this for the US, generating a net national wealth figure of $136.2 trillion. It’s considerably harder with China because state-owned enterprises and other government assets are more prominent and by their nature are hard to value. It’s highly likely that the absolute US wealth advantage shrinks when moving beyond households.

But the trend remains in America’s favor, because of debt. The Fed corrects for debt in the US numbers while Credit Suisse does so for Chinese households. What remains is Chinese public sector assets, which are unlikely to grow rapidly in value, as that’s not their purpose. What has grown rapidly, recently, are Chinese public sector obligations. 

The Bank of International Settlements measures outstanding credit, in aggregate and by sector. The aggregates are partly incorporated into net household wealth but reinforce the pro-US trend. In 2011, outstanding credit to non-financial sectors in China stood at 178 percent of GDP. In 2021, the figure was 287 percent. The US equivalents are 253 percent and 281 percent. The US was more leveraged prior to 2011; China has charged “ahead” since.

In particular, Chinese government debt climbed by 39 percentage points of GDP from 2011-2021 while American government debt climbed 27 percentage points. Outstanding credit to the corporate sector rose 36 points in China versus 15 in the US. With these debt results, it is highly unlikely ex-household net wealth alters a widening American lead.

Debt also plays a causal role. The sustainability of wealth creation in both countries is threatened by the debt burden, but the threat is presently greater for China because the debt spike has been sharper. Future leadership in GDP is unclear, at least until the Chinese population starts dramatically shrinking. Durable American leadership in national wealth is assured, and has grown."