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June 27, 2017

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G-2: China joins the US on the world superpower stage

In 1941 Life magazine titled the cover story of its Feb. 17 issue "The American Century," declaring that the 20th century belonged to the United States, as it had become the dominant power in the world. An American government ad from after World War II on display at the National Museum of History in Washington D.C. vividly illustrates the American way of life: a typical Caucasian family, the husband standing proudly in front of a grand house, while his wife, wearing an apron, stands in the kitchen in front of a four-burner cooking range, and their baby sleeps in its own nursery.

As we approach 2011, it becomes increasingly evident that the 21st century will belong to China as much as the United States. Political observers speak of a new world order with two major players, also dubbed the Group of Two (G-2). The U.S. is waning as the world's lone super power, and China is asserting its rising influence.

The financial crisis of 2008 dealt the U.S. a massive blow. Contrary to original expectations, full recovery of the U.S. economy did not take a mere 18 months, but might take as much as six years. Should economic growth fail to reach 4 percent, unemployment is bound to become a persistent problem. In contrast, China's greatest concern is an overheating economy that cannot be reined in.

Released in mid-November, "The Super-Cycle Report" by Standard Chartered chief economist Gerard Lyons boldly predicts that by 2020 China's nominal GDP will surpass that of the U.S. This is seven years earlier than another forecast by U.S.-based investment banking firm Goldman Sachs. Just this year, China surpassed Japan to become the world's second largest economy.

As Nicholas Kwan, Standard Chartered's head of research on East Asian economies, points out, the U.S. economy is currently still three times larger than the Chinese economy. But at an annual real growth rate of 10 percent, the Chinese economy will double in size within seven years. This means that China could outstrip the U.S. within 14 years, if growth is the only factor taken into consideration.

Standard Chartered forecasts that China will post an average growth of 7 percent for the coming two decades and then gradually slow down to 5 percent. The Chinese currency, the renminbi, will appreciate from its current rate of 6.6 to 1 U.S. dollar, to 5.8 to 1 in the coming decade, which adds up to an appreciation of 14 percent. During the same period inflation will lie between 2 percent and 3 percent in China. If inflation and the renminbi exchange rate are included in the projections, then China could catch up with the U.S. even as early as 2020.

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