Is China set to become the world’s largest economy in 2015?

© 2015 Prof. Farok J. Contractor, Rutgers University

The business press has been excitedly predicting the day when the Chinese economy will surpass that of the US in size. Just when this will happen has been a matter for debate—estimates have ranged from 2016 to 2025. In order to compare a nation’s economic size to that of other countries, economists first calculate the size of the country’s economy in the local currency and then convert it into a common currency (e.g., the US dollar). But the exchange rate used to convert from the local currency into the dollar equivalent makes all the difference. Conventional wisdom is that the Chinese yuan is still undervalued at the end-2014 official exchange rate of 6.2 RMB (renminbi yuan) per dollar. Using the official actual exchange rate, China’s economy (at $9.92 trillion in 2014) is still much smaller than that of the US, estimated at $16.92 trillion. See Table 1 below. … CONTINUED ON ARCHIVE