China Is Expected to Surpass the U.S. As the World's Strongest Economy within Two Years

What's going on with China and why should we care?

Well, according to the Conference Board, a prestigious global, independent business membership and research association, within two years China will surpass the United States as the World's strongest economy as measured by Gross National Product or GDP and when taking purchasing power parity or PPP into account. 

I know that's a lot of information to take in. But that's the way professional economists talk. How about this? Right now, the U.S.GDP is about $15 trillion and China's is about $5 trillion. Going by current expected growth figures where China's economy is anticipated to grow at ten times the rate of the U.S. it would take China's economy another decade to pass the U.S. economy.

Now, when we apply to purchasing-power parity differential things are different. PPP takes into account the goods and services a country's currency actually buys at home. And there's a huge difference between prices of the same goods in China versus the U.S. So when economists measure the real purchasing power that people have in each country, the Conference Board predicts China could have a larger economy than the U.S. by 2012.

Looking further ahead, China could account for almost one quarter of the global economy in 2020, compared to 15% for the U.S. and 13% for Western Europe, or the 15 original European Union countries that include Germany and France. India, meantime, is expected to have 8% of the world's output in ten years.

Why does any of it matter to you? Consider this. China already has enormous power over our economy. Take Wednesday. A Chinese rating agency downgraded U.S. debt and in a separate move China ordered its major banks to park more cash at the central bank. The immediate reaction? Both the European and U.S. stock markets fell. The U.S. market recovered somewhat later following better than expected jobless claims but the point had been made. When China talks, American and European markets listen.

Both moves came just after China reported its second largest monthly trade surplus this year and ahead of this week's summit of the so-called Group of 20 major economies meeting in Seoul. Analysts say the world's top economies are deeply divided over the best way to drive a global economic recovery. President Obama will be entering an arena fraught with talk over global currency and trade wars.

Any efforts to get China to strengthen the value of its currency died when Federal Reserve said it was going ahead with Quantitative Easing Two better known as "QE2" as a way to push down the value of the dollar. Some analysts are saying the move by the Fed is impacting every economy in the world and if we didn't have enough enemies before, we've now got almost every country against us.

The artificially low level of China's currency will be one of the main topics of discussion during the two-day gathering of leaders from 20 of the world's largest industrial and developing nations. There are growing concerns that China is preparing to tighten its monetary policy even further to slow its economic growth. It almost seems that China doesn't want to be the world's economic leader. I mean after all, look how well that's turned out for the U.S. The world hates us.