How Long Will it Take for China to Meet or Beat the U.S.?

Is China on the cusp of economic dominance? HSBC reduced its forecast for China's gross domestic product, indicating that the nation could be in for some near-term trouble. The forecast reduction came after export growth experienced a significant decline in May. Despite these setbacks, Chinese economist Hu Angang has published a new book, China 2030, in which he argues that China's GDP will become the biggest in the world, topping the combined GDP of the United States and Europe in just 17 years. Could that really happen? Is China inching closer to economic supremacy? "I think all things being equal -- meaning there's no big events coming along (no wars, no pickups in bond markets where something bad happens, there's no major currency devaluations that occur), so everything [remains] constant -- I think it could take at least 10 years for China to have the ability to really, on a percentage basis, have a functioning reserve currency," Chris Martenson, Ph.D., an economic researcher who tracks economic trends on Wall Street, told Benzinga. "Maybe there'd be 10 percent of global reserves, 15 percent. To get to parity would take a long time. They would have to build up an external flow of funds that would rival the United States. There's currently about $7 trillion outstanding in the U.S., so how long would it take China before they had $7 trillion floating around… Gosh, what is that, probably 80 percent of their current GDP? To have equal outstanding numbers, it would probably take 20 years." China could also gain resources from nations that are not on friendly terms with the United States. "That's the second way that you can become an effective reserve currency is to start conducting bilateral trade within the currencies that are involved," said Martenson. "They've already opened that up with Venezuela, with Australia, with Russia, with certain other trading partners in Asia. They were well on their way to having that very open with Japan before the Senkaku island blowup. I'm not sure where that really stands now because their trade is just so volatile between those two countries and it has mostly plummeted." Martenson said that while China is starting to get "more and more of those arrangements up," they are "not as useful as having a reserve currency, which are freely exchangeable within a cross-central bank." "Those are arrangements that work very well with Venezuela, back and forth," said Martenson. "You both have to have something the other one wants. It's basically international barter, if you will. But it helps and it's starting to create inroads, and it demonstrates that China is a useful and stable trading partner, and that they have useful things and conduct themselves well. So they're building an important currency, which is trust that they're a good trading partner. So I think that's a good first step if you want to move down the road to becoming a full-on reserve currency." China might be making progress, but Martenson doubts that there won't be any hiccups over the next 10 to 20 years. "In particular, we look at the levels of explicit and implicit deficits and debts that exist within countries," said Martenson. "So you have to include all the outstanding debts plus all the outstanding liabilities and use the net present value calculation to figure out where they are. "The United States is in the hole for at least $100 trillion at the federal level. And that's taking in all assets and liabilities. There's really no good way to resolve that. China doesn't have anything like that because they don't have any social promises that are remotely equal. Europe has a similar situation. Japan has a similar situation." Those social promises have created hardships for each of those nations, as well as Europe, that "have to get resolved at some point," Martenson added. "That's where I think China has the upper hand in the story because they're not similarly saddled," he said. He noted that China has a brand-new infrastructure and that it has yet to make promises it can't keep. "On the downside, they're not anywhere close to energy independent," said Martenson. "There is energy [dependency] on other nations out there. They've got some decent shale reserves but it remains to be seen how long it will take for them to tap those. The United States has a nominal leg up over Europe in that regard, for sure, in terms of our energy production." Louis Bedigian is the Senior Tech Analyst and Features Writer of Benzinga. You can reach him at 248-636-1322 or louis(at)benzingapro(dot)com. Follow him @LouisBedigianBZ