World Economy

China Officially Overtakes US as World’s Largest Economy

China Officially Overtakes US  as World’s Largest EconomyChina Officially Overtakes US  as World’s Largest Economy

The United States no longer boasts the world's largest economy. China, the world's most populous country, has overtaken America to claim the title of world's number one economic powerhouse, according to the International Monetary Fund (IMF) report.

By the year end, China's economic output will reach $17.6 trillion – the US will slide down to second with a mere $17.4 trillion.

Just over a decade ago, in 2000, the Americans produced three-times as much as the Chinese, MarketWatch noted. The Chinese economy was one-tenth the size of the US in 1980, according to the Financial Times (FT).

China's growth means it now accounts for 16.5 percent of the world's economy, according to the financial news site. The US is holding down 16.3 percent.

The IMF made the calculations by measuring purchasing-power parity (PPP), which does not account for fluctuations in exchange rates when measuring economies.

Similar goods cost the same in both Shanghai and New York, as far as PPP is concerned.

Monumental Shift

Experts have predicted this monumental shift in economic power for years. It was never a question of if, but rather when.

The US sat atop the world economic perch since 1872, when it passed Great Britain. The Brits only held the title for a handful of years, though, according to FT.

Who did Great Britain surpass to claim the temporary perch? China, of course. The Chinese had the world's largest economy as late as 1870, an economic historian told the paper.

Despite the inevitability of the world's most populous country assuming the top of the economic food chain, China's ascension carries a rather large caveat.

The per-person Gross Domestic Product (GDP) is less than one-quarter that of the US, according to FT. It is still far from being the world's wealthiest nation. That distinction remains American.

Persistent Cool Down

A deluge of China data over the coming week is likely to show a persistent cool down, adding pressure on authorities to ramp up stimulus measures after unexpectedly cutting interest rates last month.

Growth in industrial output, exports and investment all slowed in November as export and domestic demand softened, while the property market — seen as the biggest risk to the economy — likely remained weak despite some signs of bottoming out.

Fixed-asset investment, an important driver of growth, likely grew at its slowest pace in nearly 13 years between January and November, rising 15.7 percent in that period from a year ago, a Reuters poll of 18 economists showed.

That would mark a deceleration from 15.9 percent in January-October and would be a level not seen since December 2001, as the sagging housing market and tighter credit conditions weigh on the broader economy.

“Although sales of real estate have improved, cash flow of real estate companies worsened... We can't see rise in real estate investment in the short term," China Merchants Securities said in a research note.

“Investment in the manufacturing sector may only improve in the first quarter of next year.”

After saying for months that China does not need any big economic stimulus, the People's Bank of China (PBOC) surprised financial markets by lowering rates on Nov 21 to shore up growth and help firms pay off mountains of debt.

Analysts see more moves in coming months if the economy continues to stumble, with many expecting both more rate cuts and reductions in banks' reserve requirement ratios (RRR).

The rate cut may spark some renewed interest in the home mortgages — if China's increasingly risk-averse banks pass it along — but analysts say high inventories will likely weigh on the housing market and related industries well into 2015.