Won't you be my number two? Me, and number one are through. There won't be too much to do. Just smile when I feel blue. -Joe Jackson, Be My Number Two.
President Donald Trump’s meeting with President Xi Jinping in Beijing this week puts U.S.-China economic competition back in focus for investors and policymakers. Behind the immediate headlines is a question that has shaped the past two decades: Can China close the economic gap with the United States?
A Golden Week examines China’s post-COVID-19 slowdown and whether the long-expected overtaking of the U.S. economy would arrive on schedule. Since then, the reversal has become easier to see in nominal U.S. dollar terms.
For much of the pre-pandemic period, China appeared to be steadily narrowing the gross domestic product (GDP) gap. In nominal dollar terms, China grew from a small fraction of the U.S. economy in the 1990s to nearly 74% at its peak in 2022. Today, China stands at roughly 63% of U.S. GDP, leaving a gap of nearly $12 trillion.
This pullback was not driven by weaker relative real growth. Since the 2022 peak, China’s real GDP performance relative to the U.S. would have lifted its share by about 5.5 percentage points. The offset came from prices and currency. Weaker China GDP-deflator growth relative to the U.S. subtracted roughly 9.8 percentage points, while renminbi depreciation against the dollar subtracted another 6.6 percentage points.
Real GDP measures inflation-adjusted output, while nominal GDP measures the current dollar size of an economy. Higher domestic inflation boosted U.S. nominal GDP relative to China’s, while China’s softer price backdrop weighed on its nominal growth. A weaker renminbi further reduced China’s GDP relative to that of the U.S. when measured in dollars.
Nominal GDP matters for markets and policy. Revenues, tax receipts, debt burdens, asset values, defense-spending capacity and global purchasing power are measured in current dollars. A larger nominal economy can generally support a larger nominal debt stock, all else equal, because national income and government revenue are also measured in nominal terms. Debt sustainability also depends on interest rates, fiscal balances, domestic savings, investor confidence and currency structure, but economic scale remains part of the equation.
China remains the world’s second largest economy in nominal dollar terms and a central force in global trade, commodities, manufacturing, technology supply chains and geopolitics. Persistent inflation differentials would make it more difficult for China to catch up in nominal terms, though the long-running question of whether China eventually overtakes the U.S. remains open.
For investors, the debate is no longer just about the timing of China’s rise to the top of the nominal GDP table. Perhaps the better question is, What would have to change for nominal-dollar convergence to resume at all?
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
