The $1.9 trillion stimulus package could see the U.S. economy outpace China’s for the first time in 45 years

March 11, 2021, 6:28 AM UTC

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The U.S. Congress on Wednesday gave final approval to a massive $1.9 trillion COVID relief plan that will have far-reaching effects on millions of Americans. 

Expected to be signed by President Joe Biden on Friday, the bill that aims to revive a COVID-19 battered economy will send direct payments of up to $1,400 to qualifying Americans, extend weekly unemployment benefits, and provide support to low-income families through programs like an expanded child tax credit. Alicia García-Herrero, chief Asia-Pacific economist at Paris-based investment bank Natixis, believes there is another possible bonus to the bill: It may boost U.S. gross domestic product (GDP) growth to match or even outpace China’s in 2021, an economic milestone the U.S. hasn’t achieved in 45 years.

According to World Bank data, the U.S. last surpassed China’s growth rate in 1976, with annual GDP growth of 5.4% compared with China’s –1.6%.

U.S. GDP shrank by 3.5% in 2020 as the country’s uncontrolled COVID-19 outbreak shattered the economy. China, meanwhile, largely contained the virus and became the only major economy to report economic growth; its GDP increased 2.3%.

But now, the U.S. is pairing its $1.9 trillion stimulus plan with a successful vaccine rollout nationwide, which, García-Herrero says, is causing China to become “very nervous” about America’s economic rebound. The “humongous difference” between the two countries in 2020—“COVID response and GDP growth—suddenly vanishes,” she said.

“[China] just can’t figure having very similar growth rates [with the U.S.] in 2021,” García-Herrero said.

In an Eastworld Spotlight conversation with Fortune’s Clay Chandler, García-Herrero talks about China’s new five-year plan and the fierce economic competition between the U.S. and China. She also weighs in on Beijing’s attempt to stabilize its tanking stock market.

This interview has been edited for length and clarity.

Fortune: This week, China held its Two Sessions meetings. And we’re getting China’s 14th five-year economic development plan and a series of objectives, called the “long-range goals,” that extend out to 2035. What are the economic consequences of this planning that stand out most to you?

García-Herrero: The Two Sessions are changing in nature. Before it was all about [Premier] Li Keqiang’s speech and the targets for the year. Now it’s becoming more structural; it is really about where China is heading in the medium run. This time around [because of COVID], the growth target became more relevant than last year. But it wasn’t really about the target itself, but how low the target is and why. [It is about] how to manage China’s structural deceleration within that target. That is exactly why [the Chinese government] chose a low target to avoid a sudden reduction in 2022. China is thinking about the long term more than ever.

Rather than achieving a high growth rate, we are seeing an emphasis on “quality growth” in this plan. What is that about?

The quality growth comes from the fact that I think [China has] learned the lesson from the rest of the world…that income inequality is a big problem. There is a very, very poor Gini coefficient [in China], and they don’t want to go any further. Income distribution is key, and it’s very hard for them to work against it for a very simple reason: It is costly, because you need a much bigger welfare state. China today has about 10 percentage points of GDP in social expenditure—pensions, health, and so on. And it has been estimated that it needs to go all the way to 20 [percentage points] in the next 10 years. Then by 2035, close to 30. It’s a massive amount of resources. And [China’s] fiscal deficit, our estimates in consolidated terms, is about 18% of GDP this year. And even before COVID, close to 10%. So it’s just very, very hard for China to do what needs to be done to improve income distribution. That’s why I think it is kind of an aspirational goal. They don’t have any target, because if they do, I think they would miss it.

Whether it’s 6% or 8% GDP growth, we do know that China is going to overwhelmingly be the best growth story in the global economy. Next year, the U.S. presumably will start to bounce back. How do you see the other big economy in the world contributing?

It’s a great question. In 2021—this is unlikely but possible—the U.S. could grow more than China. Maybe there would be two instances [in which U.S. growth outpaces China’s]: 2021, and maybe in 2041. And let me explain what I mean by that.

2021: This is because of the $1.9 trillion stimulus plan [in the U.S.]. If we already had a growth rate [in the U.S.] of around 6%, according to our projections, now you’ll see people upgrading that to 7% or even higher, which is basically higher than Li Keqiang’s 6% target [for China]. I don’t think China will go beyond 6%. But it could be 7%, so it’s pretty similar. Frankly, China [is saying] the U.S. [has] “unsustainable growth…and that unsustainable stock market.” But if you ask me, [that’s because China] just can’t figure having very similar growth rates in 2021. That, added to the very successful vaccine rollout in the U.S., just makes [China] very nervous. I can understand that because the humongous difference of 2020 suddenly vanishes in all respects, whether it’s because of the COVID response or growth itself.

Why did I say 2041? Because that’s when China will literally stop growing. So you could imagine growth likely being below 2.5%—that’s the U.S. potential growth today. There will be a time where China will grow on par with the U.S., if not lower. But by that time, China will be bigger than the U.S. However, China per capita will be worse than the U.S. So these stories as to who will [win]…It’s not a football match, but the point is, we do not appreciate the changes in China. We need to come to the [realization] that China’s growth, down the road, will be much, much lower. And I think that’s why China is rushing in many, many ways.

Economists have different figures for when they think China in real terms—the Chinese GDP—will overtake the United States. Do you have a year when you think that will happen?

2028, [but] it depends. The U.S.’s $1.9 trillion [package] actually [prolongs] the time in which China will actually surpass the U.S. Because that stimulus package is not a one-year package, it is a 10-year [package]. That’s going to bring growth to the U.S. for quite some time. It will [also] depend on how much China needs to crack down on its financial risk. Already [China’s] doing a huge securitization program, whether it’s consumer loans, mortgage loans, of course, corporate loans before debt, to equity swaps, you name it. But they’re kind of running out of instruments because there’s so much to clean up, and that might drive down growth sooner than later.

The Chinese government has a lot of tools to manage the market, particularly this year, which is the 100th anniversary of the Communist Party. It would be unseemly for the market to tank in such an important year. Do you share that view? Or do you think that reads too much into how much Beijing actually cares about the market?

One thing is to prop up stocks in Hong Kong for reasons that we are already aware of. The other is to prop up stocks in China at a time when the stock market is probably three times as big [as when China] did it last time, which was 2015. But it’s just very hard now. They can do it for a while, but they can’t go against the wind. [The Chinese government] controls a number of state-owned brokerage houses and, of course, the main banks. But it’s just not sustainable to do that. [If] they want to do it for the full of 2021, then the collapse in 2022 will be enormous.

So if I was invested in China stocks, I would use this wonderful united front to get out at the best of all time. That’s all I would do. Because that market is too big to be propped up forever; it’s not going to work.

This interview is part of Eastworld Spotlight, a series of conversations on matters of business, tech, and finance with executives, experts, entrepreneurs, and investors in Asia. Subscribe to Fortune’s Eastworld newsletter to get them in your inbox.

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