China is rehearsing for when it overtakes America

Hong Kong(CNN Business) China wants to lead the global recovery from the pandemic and become more influential on the world stage than ever before. It might just have the momentum — and the confidence — to pull that plan off.

The world's second largest economy shrugged off much of the fallout from the Covid-19 pandemic last year, and its ability to keep growing while the world crashed into recession could mean its GDP exceeds that of the United States later this decade, years earlier than expected.

"China emerged from the Covid-19 shock earlier than the rest of the world and authorities are already planning for the long term," wrote Françoise Huang, senior economist for Asia-Pacific at Euler Hermes, in a report last week titled, "The world is moving East, fast."

China just outpaced the United States in attracting foreign direct investment for the first time. And as 2020 was drawing to a close, it signed a trade agreement with the European Union with the aim of boosting growth and giving European companies greater access to its 1.4 billion consumers. Now, Beijing is starting the new year without one of its most aggressive political adversaries, former US President Donald Trump, breathing down its neck.

President Xi Jinping has already made it clear that he sees China taking pole position in the coming year and beyond.

During the World Economic Forum's virtual "Davos Agenda" event on Monday, Xi struck a confident tone as he rattled off the ways in which his nation has sent help to other countries and pushed the world to work together, reprising a message of the benefits of globalization he gave when he became the first Chinese leader to appear in Davos in 2017.

And he touted China's ability to propel the global economy by injecting "more momentum into growth."

China will "leverage its big-market advantages and the potential of domestic demand to provide more opportunities for cooperation between countries and the global economic recovery," Xi said.

Xi was certainly projecting confidence, said William Reinsch, a trade expert at the Center for Strategic and International Studies (CSIS) who served for 15 years as president of the National Foreign Trade Council.

But a host of geopolitical challenges — including clashes over Hong Kong and alleged human rights abuses in China's Xinjiang region — have exacerbated tensions with the West and may stymie efforts to foster multilateral cooperation.

"[Xi] is squandering China's global influence through increasingly provocative actions in Xinjiang, in Hong Kong, in the South China Sea, and with respect to Taiwan," Reinsch told CNN Business. "These actions are unacceptable to democracies, and I think we will continue to see them pulling away from China despite its attractiveness as a market," he added.

For now, at least, China's relative economic strength is hard to ignore. Top global funds such as Fidelity and Invesco have just committed hundreds of millions of dollars to a TikTok-like Chinese app, while American brands such as Costco, Tesla and Starbucks have been investing more aggressively there, too. The country was able to borrow at negative interest rates for the first time last year, drawing big investors from around the globe — including in Europe and the United States.

'Confidence in China'

Following allegations that it mishandled the initial crisis in Wuhan, China responded with an intense and unprecedented lockdown of the original epicenter that paralyzed city life for months. The strict measures appeared to work. While China is still battling some Covid-19 cases, its numbers aren't remotely near the levels recorded in Europe and the United States. Authorities were also able to reopen large sectors of the economy last year, even as other nations remained closed.

All told, harsh quarantine measures and additional actions intended to spur growth — the country also funded major infrastructure projects and offered cash handouts to citizens — helped China's economy expand 2.3% in 2020 while much of the world was mired in recession.

"In and out of lockdown ahead of everybody else, the Chinese economy powered ahead while much of the world was struggling to maintain balance," wrote Frederic Neumann, co-head of Asian economics research at HSBC, in a report last week.

Given China's rapid growth over the last few decades, many economists were already predicting that it would overtake the United States some time after 2030. But the country's ability to weather the pandemic is accelerating that trend.

"The skilful management of the pandemic and the hits to long term growth in the West mean that China's relative economic performance has improved," researchers at the Centre for Economics and Business wrote in a December report. They now expect China to over take the United States five years earlier than previously forecast.

Chinese state media — often seen as a barometer of sentiment among senior officials — has been touting the country's economic success. The Global Times, a state-run tabloid, on Sunday seized on the report from the United Nations Conference on Trade and Development that showed China receiving more foreign direct investment than the United States last year.

"China has faced the US-initiated trade war and the country's strategic containment against China. But China has generally withstood the test," The Global Time's editorial board wrote. "These all add to the outside world's confidence in China."

The investment trend will likely flip back as the United States and Europe recover, according to Dan Blumenthal, the director of Asian studies at American Enterprise Institute.

"[Foreign] companies will be squeezed out over time by Chinese competitors and China's panoply of anti-competitive practices," he said. "Still, given China's scale and ambition it is a formidable competitor to the US."

Challenges ahead

China isn't without its challenges.

Economists stress that there are still threats to the country's future growth. The International Monetary Fund said in December that China's recovery has relied heavily on government support, while private spending hasn't kept up. Others note that a slew of bankruptcies and loan defaults at state-run firms have strained debt markets.

"The policy response to the Covid-19 pandemic, while effective in the short-run, is pushing more resources to inefficient state firms and will add to China's debt burden," wrote Julian Evans-Pritchard, senior China economist at Capital Economics, in a research report last week.

Debt woes have followed China for years, casting a shadow over economic policy.

On Monday, a policymaker at the People's Bank of China expressed concern during a speech in Beijing that local governments were setting overly aggressive GDP targets. That heightened the risk of accumulating debt, given the relative ease with which the economy can be juiced by borrowing more money, said the official, Ma Jun.

Ma even suggested that Beijing should abandon nationwide GDP goals, and instead prioritize employment and controlling inflation.

There's another potential drag on China's growth in the years ahead. It has generally been trying to reduce its reliance on the West in recent years. (China's leading chipmaker, SMIC has been hobbled by recent US restrictions on its business, for example.)

That's related to a bigger concern for China. While President Joe Biden might strike a more nuanced tone with Beijing than Trump, they don't expect him to completely unwind the trade war, nor abandon efforts to reassert the United States as the world leader on economics and trade.

Biden "has prioritized combatting Covid and restoring growth to our economy, but he is at heart a multilateralist," said Reinsch of CSIS. "Once he has made progress on his domestic goals, he will turn his attention to global trade issues as well."

— Laura He contributed to this report.