China to outstrip US economy. So what?

The idea that the two countries are purely rivals is not consistent with the facts. What really matters is their ability to solve their internal problems.

When it comes to innovation the US remains a global leader, and products such as the iPad are extremely popular in China.

An IMF report predicts China will surpass the US as the largest economy in 2016. The report has elicited some dire reactions.

One commentator forecast the next US president will have the dubious honour of presiding over America's fall, with the tone containing alarming statements about the future of the global military and monetary order.

The projection has also triggered a debate about what measures are appropriate for such a comparison, for example GDP against purchasing power parity, or national compared with per capita.

Reaction should be tempered in the same way one learns to handle a birthday after passing a certain age. It is simply a demarcation point in a longer continuous process. Overreacting to being a year older hardly constitutes a sensible response to the inevitable process of ageing.

Sensible analysis should address how the roles of the US and China have been changing over past decades and will continue to change over the coming decades. This will likely prove a far more useful exercise than fixating on the relative sizes of the two economies.

The idea that the two countries are purely rivals, with China chasing the US to be the world's dominant economic power, is not consistent with the facts.

It is hard to imagine China pursuing its cheap export growth policy or the US being able to enjoy its debt-fuelled consumption binge unless each co-operated with the other.

To cast them purely as rivals misses essential truths of the relationship. They need each other; they are economic "frienemies", not enemies.

There are factors that counter those who would dismiss the US. For example, with respect to per capita income it seems likely the US will remain ahead of China for decades.

What does it mean that the Chinese economy is bigger if the US remains the centre of the consumer universe?

As long as US consumers and businesses remain the world's largest target market, the relative size of the economies of the US and China would seem to be somewhat less important.

A similar conclusion is reached with respect to innovation. The US remains a global leader, and its products, such as the iPad, epitomise the must-have gadget among some of the most desirable consumers across the globe.

Productivity yields the same conclusion; it will probably be decades before productivity in China is comparable to that in the US.

Most importantly, the US retains a lead in entrepreneurship-related issues, with Americans being considerably more willing to take risks, readier to compete to win in business, and more confident that they can accomplish difficult tasks to succeed in business.

Perhaps reports of the demise of the US as a global economic power have been exaggerated.

I can continue on an opposite tack: the US has a seemingly insatiable addiction to current consumption that exceeds current income, an addiction that is being fed by loans from China.

The deficit spending of the Bush years has been followed by an incredibly expensive bailout of the financial system and outsize spending to stimulate economic growth.

Indeed, I would suggest the downgrading of US credit by Standard & Poor's is probably a more important event than some projected future moment when the Chinese economy becomes larger than that of the US.

It seems the sole reason the dollar remains the global currency is because it is the worst possible choice only until one considers the alternatives.

While the talking heads might suggest that we hold our breath waiting for China to begin to produce more than the US in terms of total economic activity, both countries are busy playing games with their currencies that do not enhance productivity, long-term economic growth, or sustainable global integration.

This is one of many reasons to be sceptical about the nature of the Chinese economic colossus, and the list is a long one. The sustainability of the Chinese economic miracle, not least in environmental terms, is an open issue.

The pollution from industrial activity, the inability to manage migration from the countryside to urban areas, the burden of overpopulation, and top-down planning co-ordinated by artificial controls are just the tip of the iceberg.

At the levels of companies and plants, rampant corruption, poor management controls, untrained labour, shoddy sourcing, and continuing quality scandals are a small sample of important issues.

But behind the continued economic growth lie some solid economic fundamentals: incredibly favourable balance of payments; large and continually growing foreign direct investment; and bilateral trade relations that are on the right side of global trends.

In the end, the relative influence of China and the US as the 21st century unfolds will be determined not by which economy is larger, although this is not irrelevant.

What will matter is the ability of the two countries to solve their internal problems, offer economically viable economic models to the world, and be a reliable trading partner.

If I were to point to one trend as the best signal of Chinese economic hegemony, it is current patterns of foreign direct investment in Africa. China has managed to use its foreign currency reserves and unique development model to become very influential in Africa.

In the process, the Chinese have demonstrated there is a viable alternative to the finance and free trade-based development models propagated by the western powers.

In doing so, they have cultivated valuable relationships with growing economies and demonstrated a deft touch in remaining on the right side of the huge shift of economic activity eastward and southward from the developed world.

Stephen Mezias is the academic director at the Abu Dhabi campus of Insead Business School