The United States is the largest economy in the world, but it's not always been that way

Photo: Behrouz Mehri/AFP/Getty Images

The United States is currently the largest economy in the world, with the eurozone the largest economic bloc.

It wasn’t always that way.

As the excellent chart below reveals, going back a little over 2000 years, China and India were the economic behemoths of the world, accounting for over half of global GDP, according to estimates offered by the Maddison Group.

Source: ANZ

While China is currently on track to replace the United States as the world’s largest economy, to Raymond Yeung, chief China economist at ANZ, there are still plenty of economic hurdles for Chinese president Xi Jinping to overcome in the years ahead.

“Supply-side structural reforms will continue to be president Xi’s main economic policy priority after the 19th National Congress of the Communist Party of China (NCCPC)” he says, referring to the twice-a-decade political gathering that begins next week.

“Deleveraging, capacity reduction, and property destocking seem to have gained some early success. China’s growth and debt risks appear to have diminished. But there are still outstanding issues to be addressed, such as the rise of income inequality and reliance on the property sector,” he said.

In particular, Yeung says that Xi also needs to shift China’s economy from a credit-intensive, property-led growth model to one that supports sustainable growth.

That will be no easy feat, as alluded to today by the Reserve Bank of Australia (RBA) in its semi-annual Financial Stability Review.

“Given the already high level of risk that has built up in [China’s] financial system, the authorities are likely to face a trade-off between strong regulatory action that could trigger financial and economic disruption and a more cautious approach that may allow a further build-up of risks,” it says.

While the RBA admits that Chinese regulators have started to address risks associated with China’s high and increasing debt levels, it says that its commitment to addressing these risks “could be tested if economic growth targets are threatened”.

“Chinese authorities have increased their focus on financial stability risks, and they retain a wide range of economic and financial policy tools to address them,” the RBA says.

“But the more that leverage and risky lending grow, the more likely that China’s economic transition will include a significant financial disruption of some form.”

The NCCPC is scheduled to begin on Wednesday, October 18. The world will be watching.

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