China set to topple U.S. as biggest economy sooner after virus

China’s economic ascent is accelerating barely a year after its first coronavirus lockdowns, as its success in controlling Covid-19 allows it to boost its share of global trade and investment.

The world’s second-largest economy is set on Monday to report gross domestic product increased 2.1% in 2020, the only major economy to have avoided a contraction, according to a Bloomberg survey of economists.

That should ensure its share of the world economy rose at the fastest pace this century. Global output fell 4.2% last year, according to the World Bank, pushing China’s share of it to 14.5% at 2010 dollar prices—two years earlier than expected.

And it’s not just a blip that’ll reverse once other large economies begin to recover as vaccines are rolled out. Economists expect China’s GDP will expand 8.2% this year, continuing to outpace global peers including the U.S.

China is now on course to pass the U.S. as the biggest economy in 2028, said Homi Kharas, deputy director for the global economy and development program at the Brookings Institution, two years faster than he previously estimated.

After withstanding President Donald Trump’s trade war, China is deepening economic ties within Asia and Europe and looking to domestic consumption to power its next phase of growth. President Xi Jinping said this week that “time and the situation” were on the country’s side in a new year marked by domestic turmoil in the U.S.

If its local virus control success continues, the pandemic could help China “solidify its position in the global economy,” said Ka Zeng, director of Asian studies at the University of Arkansas. U.S. and European companies are likely to focus more on China due to the “potential for the country to be the only large source of growth in the post-pandemic world.”

The record jump in China’s global GDP share was just one among many milestones for its economy last year:

• The economy converged with the U.S. at the fastest pace on record. China’s GDP was 71.4% of U.S. levels in 2020, according to the International Monetary Fund, up 4.2% from the previous year
• The share of global trade increased as pandemic-related exports surged. Already the world’s top exporter, China’s shipments increased 3.6% in 2020, according to official data. Total world trade likely contracted 5.6%, according to estimates from the United Nations’ trade and development body UNCTAD
• China likely regained the title as the world’s top destination for foreign investment, which it lost to the U.S. in 2015. Foreign investment into China reached more than $129.5 billion through November 2020, slightly above the previous year. Globally, FDI flows are likely to have fallen 30-40% year-on-year in 2020, according to UNCTAD
• The Fortune Global 500 list of the world’s largest companies by revenue for the first time contained more companies based in China, including Hong Kong, than in the U.S.: 124 vs. 121
• Full-year movie box office receipts overtook the U.S. for the first time
• Sovereign debt was added to the FTSE Russell benchmark index, completing the country’s inclusion in all three top global bond indexes. Foreign investors bought 1.1 trillion yuan ($170 billion) of Chinese bonds in 2020

China’s enhanced role in a post-pandemic world increases the urgency of debate among the rest of the world about how to engage with Beijing. While the Trump administration has levied tariffs and curbed access to key technologies, other countries have sought closer trade and investment ties.

Fifteen Asian countries including China signed the Regional Comprehensive Economic Partnership pact in November, vowing to reduce trade barriers in the region. In December, the European Union agreed a comprehensive investment deal with China.

“Countries will have to deal with a bipolar world rather than a unipolar world,” said Bo Zhuang, chief China economist at TS Lombard.

China’s leaders usually downplay economic milestones, such as its economic output overtaking Japan’s in 2010, for fear of spooking those already wary of its ascent. Yet Beijing announced this year it would aim to double GDP from 2020 levels by 2035, a goal that implies a march to number one.

Still, there’s no guarantee that will happen. China proved pessimists wrong in 2020, but faces huge challenges ranging from worsening relations with the U.S. potentially limiting its access to technology, an over-reliance on debt-funded investment, and a rapidly aging population.

China’s role as factory to the world was enhanced last year as it pumped out face masks, medical equipment and work-from-home gear. While political leaders such as France’s Emmanuel Macron have vowed to manufacture more at home following the pandemic—echoing U.S. rhetoric about “decoupling” from China—any shift to diversify production will be gradual due to the high costs involved.

Multinational companies have another reason for sticking with or even adding to their investments in China: The fast-growing consumer market, which is already eclipsing the U.S. and Western Europe in some sectors.

China now accounts for one quarter of the global middle class, defined as the population spending $11 to $110 per person per day in 2011 purchasing power parity terms, a milestone that “wouldn’t have been reached for two more years if Covid-19 hadn’t happened,” said Kharas of the Brookings Institution.

Both General Motors Co and Volkswagen AG continued to sell more cars in China than in their home markets last year. Starbucks Corp. plans to open about 600 new stores this year, while Nike Inc. reported sales in China of $2 billion for the first time in the quarter ended November.

“We’ve watched wave after wave of the pandemic hit different markets,” Nike’s Chief Financial Officer Matthew Friend said on a December investor call. “And really, the only marketplace where we’ve seen continued sort of trajectory in terms of managing the virus has been China.”