Years of guesstimates as to when China will surpass the United States and become the world’s largest economy came to a jolting halt last week when the Financial Times, using figures released by the World Bank’s International Comparison Program (ICP), concluded that it would happen this year, half a decade earlier than what was predicted by many economists previously.
This is in line with China’s breathtakingly rapid growth of the last few decades, setting records virtually every year.
Thus, in 2006, China overtook the United Kingdom to become the world’s fourth largest economy. In 2009, it overtook Germany to become the third largest and, without pausing for breath, it sailed past Japan in 2010 to become the second largest economy.
Now, it seems, this year China will become the world’s largest economy.
But there is a difference. When China overtook Britain, Germany and Japan, its GDP was measured using market exchange rates. If China surpasses the US this year, it will be measured with a different yardstick, called purchasing power parity.
This concept was developed because a dollar purchases different quantities of the same thing in different countries, reflecting differences in the cost of living.
The International Monetary Fund puts the size of the Chinese economy in 2013 at US$9.18 trillion, substantially smaller than that of the US, at US$16.80 trillion.
But if, let’s say, it costs US$9.18 in China to buy items that cost US$16.80 in the US, then in purchasing power terms, the two economies are virtually the same.
What happened was that on April 29, the ICP, using new methodology, adjusted its estimates for 2005 and put China’s GDP in 2011 at 87 percent of that of the US.
Since the growth rates of China and the US from 2011 to 2014 are known, it is an easy matter to calculate that, sometime this year, China’s economy will surpass that of the US.
But using market exchange rates, the Chinese economy is still less than two-thirds the size of the American economy. Still, the gap will inexorably narrow and, quite possibly within the next decade, the Chinese economy will be bigger than that of the US in real terms.
Of course, it is only natural that a country with four times the population of the US should have an economy that is bigger too. But for a long time politics had trumped economics in China. It was not until the late 1970s that the pent-up entrepreneurial spirit in China was released.
What is also of interest is China’s reaction to its new status. The ICP report says blandly that China’s National Bureau of Statistics had expressed reservations about the methodology and said it did not “endorse the results as official statistics”.
So the news that China will become the world’s largest economy went largely unreported in China.
A commentary in the Global Times newspaper, affiliated with the official People’s Daily, explains the Chinese reluctance to step into the limelight.
“China being the No. 1 economic power is like a double-edged sword,” it said. “On one hand, it will enhance the nation’s confidence but on the other hand it will pose great challenges to the improvement of people’s well-being. Whether the crowning will produce more positive results instead of social problems will be a huge test for the Chinese society.”
Certainly, even after China attains the status of the world’s largest economy, it will still be a developing country, possibly with millions of people living below the poverty line.
In fact, the IMF currently puts China squarely in the middle in its per capita ranking of 187 countries and dependencies in 2013. China is in 93rd place, with US$9,844 per capita in purchasing power parity terms, while the US is sixth, with US$53,101 per capita.
China’s reluctance to assume the spotlight is an acknowledgement of reality. Once it proclaims itself to be the world’s top economy, there will be considerable domestic pressure for the government to improve healthcare, pensions, housing and other services.
Internationally, many will look to China to discharge responsibilities currently assumed by the US. China is not ready for this.
Besides, this is not the first time that economic figures have been revised. In 2007, the World Bank discovered that things in China were more expensive than reflected in a 1980s survey. As a result, the Chinese economy suddenly shrank from US$10 trillion to about US$6 trillion.
Perhaps, with this experience in mind, China’s leaders consider it wiser to wait a few more years, until their economy is bigger than that of the US in exchange rate terms, before celebrating.
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