The US has a chance to put China in the economic rearview mirror because of Xi's 'awkward regime shift,' BofA says

• China has long outpaced the US in economic growth. That could change next year, BofA said.
• China's shift toward a more, well, communist economy could slow its GDP growth to match the US in 2022.

President Xi Jinping's plans to overhaul China's economy could give the US a fighting chance in a race it's been losing for decades.

Since the late 1970s, China has consistently outpaced the US in economic growth. While the US remains a larger economy by gross domestic product, China is expected to become the world's largest economy in the early 2030s, according to International Monetary Fund estimates. By other measures, it already has.

Now Xi's own policy decisions could delay that ascension. The country's Communist Party has been pushing its "common prosperity" plan throughout the pandemic, intervening in its markets and the broader economy to combat wealth inequality. Related policies contributed to the halting of the largest IPO in history, the Evergrande debt crisis, and, most recently, the global energy crunch.

The pivot to a more communist economic model has made for an "awkward regime shift," Ethan Harris, global economist at Bank of America, said in a note to clients. Harris described this shift as both a "vast regulatory crackdown" of China's private sector and a "broader moralistic effort to reengineer Chinese culture from the top down." Just as China was set to overtake the American economy, it's ditching what came to be called "capitalism with Chinese characteristics" for something with much more government influence.

It's already hindering growth. China's economy will only grow 4% in 2022, according to the bank's latest forecast. That's the lowest estimate from economists surveyed by Bloomberg and implies a massive slowdown from the 7.7% growth expected by the bank in 2021.

It also gives the US time to strengthen its lead in the global economic race. Economists surveyed by Bloomberg expect US economic growth to reach 5.7% in 2021 and slow to 4% in 2022. That matches Bank of America's forecast, signaling that, for the first time since 1976, China won't outpace the US in GDP growth.

The country combated slowdowns past with major monetary easing and relief policies. The playbook helped shield China from the Great Recession and other global downturns.

The "tepid" response to this year's slowdown has left BofA's experts "surprised," the bank said. Economists led by Helen Qiao still expect the country to lift growth with quick easing in the fourth quarter, but its arrival would come later than usual.

The team also outlined a scenario where China's easing falls short. A lack of adequate support would power "major turmoil" in the country's property market and lead to economic growth of just 2.2% in 2022.

"With all these balls in the air the risk of shocks to the economy is high," they added.

The US will dodge the worst of the spillover

If China's boom slows as much as BofA expects, the fallout won't stay within China's borders.

A slowdown "could have major spillover effects for the rest of the world," BofA said. China is easily the world's largest consumer of metals, meaning weak growth in its property sector would slam commodity markets. Power shortages could hit countries with supply-chain links to China.

The US, however, is relatively safe. The American economy "has limited exposure" to Chinese demand, as exports to the country counted for just 0.8% of GDP last year, the bank said. Weak demand in China could also help heal global supply chains, and the US would "benefit disproportionately" from a fix, the team added.

Xi's push for "common prosperity" promises to bring a more equitable Chinese economy. Yet, over the next year, it gives the US the best odds in decades to solidify its spot on the global economic throne.