Michael Pettis has challenged us to a bet.
For those of you who don’t know him, Mr Pettis is a finance professor at Peking Universitys Guanghua School of Management and a frequent blogger. He would like to bet that Chinas dollar GDP (calculated at market exchange rates) will NOT surpass Americas in 2018. That is the year that China’s economy will overtake America’s if you stick with the default assumptions in our most recent* interactive chart, which allows you to plug in your own guesstimates** of future growth and inflation in the two countries, as well as the exchange rate between them.***
When he is not fretting about Chinas economy, Mr Pettis runs his own record label in Beijing (Maybe Mars). If we lose the bet, hed like us to invite one of his indie-rock bands to perform at an Economist conference. If we win, he has to give us a record deal (not really).
Free Exchange is happy to accept the bet, one blog with another. We would also love to see a band like Ourself Beside Me, Birdstriking or The Offset: Spectacles playing at an Economist conference. But were reluctant to commit our hard-working colleagues in the conferences division to the logistical challenges that might entail, so we were hoping we could keep it simple: how about a bottle of scotch (or baijiu) to the winner and well see what we can do about the band closer to the time?
Wed also like to propose a counter bet. Mr Pettis reckons Chinas average growth in this decade will barely break 3%. He is definitely smarter than your average bear, but that prediction looks aggressively pessimistic to us. Wed like to bet that growth will break 3%. (Lets say we win if it exceeds 3.5% on average in constant yuan over the decade.)
*The chart and the accompanying article were published before the full-year 2011 GDP figures were released. Using the official 2011 figures with the same assumptions suggests China will overtake America in 2019 not 2018.
**Our interactive chart is meant to be interactive. Wed be happier if people played around with it and came up with their own projections, rather than making too much fuss about ours. We wanted to keep the chart as simple as possible. As a consequence, it asks for average rates of growth, inflation, and exchange rate appreciation but you cannot vary the rates over time. Obviously, in reality we would expect both the rate of growth and the rate of real exchange-rate appreciation to slow as China catches up with America. Our sister company, The Economist Intelligence Unit, which uses a more sophisticated model, foresees China overtaking America in 2021.
***People often forget about the importance of inflation and exchange-rate appreciation in these calculations. Chinas real GDP grew by 10.6% a year over the last decade, but its nominal dollar GDP grew by 18%, thanks partly to the appreciation of the yuan against the dollar and partly to faster inflation in China than in America. One of the nice things about the interactive chart is that it helps people appreciate the significance of these two factors. Our default assumptions look perfectly reasonable by today’s standards (growth of 7.75% in China, 2.5% in America; yuan appreciation of 3% and inflation–as measured by the GDP deflator–of 4% in China and 1.5% in America). But in combination these assumptions deliver a very striking result.