Will China’s Economy Be #1 by Dec. 31? (And Does it Matter?)
Will China’s Economy Be #1 by Dec. 31? (And Does it Matter?)
A ChinaFile Conversation
On April 30, data released by the United Nations International Comparison Program showed China’s estimated 2011 purchasing power parity (PPP) exchange rate was twenty percent higher than was estimated in 2005. What does this mean? China’s economy could become the largest in the world by the end of 2014, unseating the economy of the United States some five years ahead of earlier predictions by the International Monetary Fund. But does that matter? —The Editors
China as Number One? Using purchasing power parity (PPP) as a measure, the World Bank’s International Comparison Program says that by the end of 2014 China is going to surpass the United States as the largest economy.
When the Bank formally adopted the PPP methodology back in the early 1990s and thus elevated China’s ranking, there were two general strands of reactions in the Chinese media. One was that this represented Western recognition of China’s real bargaining power, against the backdrop of sanctions imposed in response to China’s handling of domestic instability in the summer of 1989. The other was that the new ranking might as well be a Western propaganda ploy to trick China and the Chinese people to be less hard-working and, by extension, China should instead double its efforts to grow its economy.
China’s leaders, throughout the 1990s, constantly championed the notion that China needed the rest of the world to continue to develop and, by the same token, the rest of the world needed China just as much. Translated into policy, China worked to join the World Trade Organization, applied, twice, to host the Olympics Games, and constantly used ‘linking up with the international track’ as a domestic slogan to drive home the necessity of reform.
Then, in 2010, China was pronounced to have passed Japan as the second largest world economy, measured in GDP. The Chinese media and society took the new ranking in greater strides. It was just another day. As a matter of fact, by then, millions more ordinary Chinese are traveling to the United States, Europe, Japan, as well as the rest of the world. Aggregate numbers hardly passed the test of the human eye: gaps in standards of living are only too visible to ignore.
This time around, it is more likely for the Chinese society to react to the new ranking by the World Bank as just another announcement. After all, just the choking smog that routinely blankets a third of the landmass of China is powerful enough to remind ourselves that China is still way behind in terms of the quality of daily life.
Some pundits, both Chinese and foreign, may begin to connect the new ranking with China’s status, role, and responsibility in the global and regional economic and political systems. But, it is hard to see those articulations resonate with choices on the ground. In this sense, China—both its government and people—has indeed matured.
This does not and indeed should not imply that the time has come for China to disembark itself from the international track. As Chinese government leaders like to repeat these days, reform has to be an agenda in a continuous tense, not the past perfect. For the reform agenda to be effectual, China just has to continue to internationalize.
I agree with Bill and Damien that this is a “who cares?” moment. It has been obvious for quite some time that China would soon overtake the U.S. in sheer economic size. If one doesn’t accept the current PPP conversion rate then just wait five or ten years and China will be bigger at market exchange rates. But basically, all that this shift tells us is that China has way more people than the U.S.— 4.2 times as many, to be exact. So, as soon as China stopped being fantastically poorer (per capita) than the U.S., and became simply a lot poorer, its total economy surpassed that of the U.S. (And still lags that of the European Union, which is arguably the world’s biggest economy, if one takes economic integration rather than political boundaries as the criterion.) Big deal.
Staying in the league-tables discussion for a moment, there are two major economic dimensions in which China still lags the U.S., Europe and Japan. The first is living standards. Even if we accept the current PPP measurement, per capita GDP in China is only ¼ that in the U.S., and the gap in average living standards is even greater, because in the US about ⅔ of GDP consists of household consumption whereas in China that figure is barely over ⅓. In other words, for a given amount of per-capita GDP (at market exchange rates), the average American household consumes twice as many goods and services as its Chinese counterpart. China has recorded a lot of economic growth by installing a huge amount of capital equipment, the fruits of which accrue mainly to the small number of capital-owners—many of them foreign companies. It still has a lot to do in spreading the benefits of growth more broadly to its citizenry.
The second is what generally goes under the name of “innovation”—that is, the ability to create new sources of economic growth and vitality. Some headlines have declared that China is now the world’s “top economic power.” This is simply false. It is the biggest national economy by volume. But the center of technological change in the world is still the U.S., and arguably the United States’ centrality in this role is even more pronounced now than it was ten or fifteen years ago. There is little evidence that China is anywhere close to becoming the engine-room of the global economy.
But fundamentally Damien is right that this “who’s on top?” discussion misses all that is truly interesting, namely how China and other countries manage social tensions, income distribution and other problems arising from high speed economic growth. Because of its sheer bulk, China is indeed wealthy and poor at the same time, and the responses to that paradox are a far more fascinating target of study than the mere size of the economy.