The best China News & Insight from the web in one place.

The PPP Dragon, China at No.1

Once the most prosperous nation on earth, the recent report from the International Monetary Fund suggests that we are witnessing a return to this status quo, with China’s purchasing power parity (PPP) adjusted GDP estimated for the year at $17.6 trillion, compared to $17.4 trillion from the US.


Economists have been forecasting for some time that China will become the world’s biggest economy on a GDP basis by mid century. The new PPP calculations do provide fodder for those predicting a Chinese century.



However, in China, there’s none of the triumphalism that might be expected from receiving such an accolade, and the muted response is telling. China may welcome the power, but it doesn’t want the responsibility of leading global discussions on pressing issues such as climate change or international financial regulation.


As far as the Communist Party of China is concerned, there’s more than enough to be doing at home without having to take the reins on fixing and managing the global system, as the U.S. has done, and Britain did before.


But the estimates again highlight the flaws of measuring economic size based on purchasing power parities. Economists argue that PPP measurements, which are designed to estimate prices in a given country regardless of exchange rates, are an inaccurate gauge of economic size, owing in part to problems with measuring prices from country to country and the infrequency with which they are measured. China adds a further level to the problems of calculating PPP figures by centrally controlling exchange rates to keep them artificially low, thus altering the accuracy of PPP figures.


A critical flaw in new report is its failure to include per capita calculations. China’s population of 1.3bn is over three times the size of America’s, thus China has a gross GDP greater than America’s, but its per capita GDP remains level with that of Albania. The Chinese government relies on per capita statistics to measure its economy, acknowledging that Chinese economic development is far from world-beating.


Indeed, China’s per capita GDP was just over $6,000 in 2012, according to World Bank statistics, nearly double the 2009 level and less than Asian peers such as Malaysia but well below the $51,749 of the U.S. In fact, China’s leaders worry that the economy is more likely headed in Malaysia’s direction than to become a direct challenger of the U.S. for global dominance.



Malaysia is often cited as one of a number of countries believed to have fallen into the “middle income trap”, when the dividends of an early push for industrialization fade and income levels languish below developed country rates.


As wages have surged and its population begins to age, China’s leadership is acutely aware of this risk. The “Decision” document which followed last November’s 3rd plenum is an ambitious blueprint for reform which is effectively designed to avoid this trap through deregulation and integrating China more fully with the global economy.


Even as the World Bank report has reinforced preconceptions about China’s supremacy and the end of American dominance, the Chinese economy has slowed sharply towards 7% from as much as 15% during the last decade, as its base becomes larger and as environmental and resource constraints bite.


A growing number of China speculators see growth continuing to slow this decade towards the low single digits, as an increasing share of economic resources are channelled towards servicing debt.


While China’s economic growth may be slowing, its national debt stands at just 24% of GDP, compared to the US national debt of 74% of GDP in June 2014. While China’s debt is growing, its credit situation remains far better than that of the US. This is another important factor for consideration when assessing economic success, and one that falls convincingly in China’s favour.


The Communist Party has long known that it must be careful not to overdo its economic triumphalism, given how much of the Communist Party’s legitimacy hangs on its ability to consistently raise standards of living amongst China’s populace. China remains very inward looking.


China’s economic rise, coupled with the humbling of the western economies after the global financial crisis, has seen a shift in how Beijing projects its power. It’s perhaps understandable that China’s leadership appears less interested and willing to countenance calls from the west on how to run its economy and its foreign policy. China’s development is incomplete by a wide margin, and that provides strict limits to its global assertiveness.


But China’s senior leadership believes that urbanization will continue to spur economic activity. China’s urbanization rate is now at around 53% -- in 2012, more Chinese people lived in urban areas than in rural for the first time in its history – and the government sees that rising to 60% by 2020 and towards U.S. levels at around 70% some time in the decades after.


Those goals envision nearly 240 million people moving into urban areas, or at least, living in upgraded rural areas, some time before the end of the next decade. With growth slowing and economic risks rising, urbanizing 240 million over the next decade or so promises to be considerably more difficult than the previous 240 million.


Faced with that considerable challenge, it’s unsurprising that Beijing is unwilling to believe the hype related to the latest PPP GDP figures, or to assume the role of a super economy.


Looking to history, the path of the US in becoming a global economic superpower has some comparable features to China’s current state. Despite nominally becoming the world’s largest economy at the end of the 19th century, the US maintained an insular, inward-facing path until the end of the Second World War. It was then that it used its economic advantage to assume the role of a global superpower through financing much of Europe’s post-war reconstruction. It would appear that China remains in this transition period. With each year it claims another accolade of its economic supremacy, but is as yet reluctant to take on a more political role.


The next decade will prove crucial in determining China’s future path. Will economic growth flounder or will we see the much hyped century of Chinese hegemony begin? Will China forge a divide between economic dominance and political supremacy, or will we see a new world order with China calling the shots of both economic and political power?




To comment please register or login

Please login here

Create new account / Forgot password?

Create new account

And a little about you

Forgot your password?

Enter the e-mail address you used to create your account and we will send you instructions for resetting your password.

* Please check your email to get the temporary password we've just assigned you

Edit Password

To continue reading this article please register below as a site user. Thank you

Create new account

And a little about you

If you are already a member, please login here