For its part, China will certainly remain a top-five economy, but it will not overtake the United States in terms of GDP per capita—a measure of wealth versus size. The two primary headwinds for China maintaining are the need to reform its banking system, and the pivot to a more consumer-driven society. Neither is simple to address on its own, never mind in tandem.
China’s banking system is laden with nonperforming loans. The extent of the issue is unknowable, due to the opacity of the institutions, but the suspicion is that the need to recapitalize and expunge the balance sheets is imminent and stark. Tackling, and ultimately solving, the issue will consume resources that would be better used to transition the economy from infrastructure building and investment to services.
By 2030, China may find itself in a similar position to where Japan is today—a significant global economic player going nowhere quickly while aging rapidly. Unlike Japan, China will be a particularly poor position to pause its growth, given that it will be at best a middle-income nation.
This so-called “middle-income trap†is unforgiving, but the middle-income trap is not a middle-income decline. It is rare for nations to fall back significantly, which is what it would take for China, or the United States, to fall out of the top five. Therefore, the battle for spots in the top five will be fought from third to fifth place, positions currently held by India, Japan and Germany. The captivating question is who will fall out, and who will rise to replace them.
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