Why China will unseat US as world's largest economy by year's end

Forecasters said it was inevitable and now it’s official: China is overtaking the United States to become the world’s largest economy.

In its latest annual report on world economic activity, the International Monetary Fund said that China will have a larger gross domestic product than the US – some $17.6 trillion in overall output – during the 2014 calendar year.

The IMF comparison comes with an asterisk: China’s GDP is still smaller than America’s when measured in raw dollars, but its economy is larger when you account for “purchasing power” – the way a dollar can buy more at a restaurant or store in China than it can in the US.

This “purchasing power parity” method (PPP) has become a standard way of comparing nations’ economic performance.

The milestone for China, by this PPP measure, caps a period of rapid construction and industrialization and construction, centered especially in the nation’s coastal south.

With China having more than three times the population of the US, it was seen as only a matter of time before it overtook other nations to become the world's largest economy. But the gains for China are also a symbolic setback for the US – where a slower-than-hoped-for recovery from recession has coincided with widening income gaps between the rich and a stagnating middle class.

China has surpassed the US faster than many forecasters expected – a testament to China's shrewd capitalization on trade opportunities, as well as to the way steady growth in China has contrasted with America’s weak performance after the Great Recession of 2007 to 2009.

It will still be a while before China catches the US in the simple dollar value of its GDP. By that measure, without the purchasing-power adjustment, China’s GDP will total about $10.4 trillion this year, the IMF predicts, compared with America’s $17.4 trillion.

And Americans are still much better off, on average, than residents of China. The GDP per person in China will be $12,893 this year, the IMF estimates, compared with $54,678 in the US. (Both numbers are adjusted for purchasing power.)

Together, the two nations account for one-third of the world economy, driving much of global growth. China is poised to produce 16.5 percent of world GDP in 2014, compared with 16.3 percent for the US.

Economists by and large welcome China's gains as a sign that global economic development embracing long-poor regions. As China and India have developed, for example, income inequality between the rich and poor has fallen, when measured globally as if the world were one large nation.

That’s the case even though inequality has risen within key nations (including China). The rise of prosperous classes in China brings them closer to Western living standards, even as it widens the gap between them and China’s rural poor.

Still, that pattern of expanding prosperity for many in China hints at one reason the nation’s rise is also a source of controversy and concern. Some economists say those gains have come at the expense of US workers, and that this shift has been aided by US policymakers and businesses rushing to move factories and technology toward rising markets across the Pacific.

China's own economy is not without challenges, notably in the arenas of environmental sustainability and the social-welfare needs of a poor and increasingly aging population. A key step, identified as a vital but difficult goal by China's Communist Party leaders, is to transition toward growth that is fueled more by domestic consumption and not so much by uncertain export opportunities.