Will China’s Economy Be No. 1 by Dec. 31?

ChinaFile A conversation on China's economy, and on how much size matters.

On April 30, data released by what the Financial Times calls "the world's leading statistic agencies" showed that China's estimated 2011 purchasing power parity (PPP) exchange rate was higher than previously thought. The sexiest implication of this statistical tweak is that China's economy could become the world's largest by the end of 2014, unseating the United States five years ahead of earlier predictions by the International Monetary Fund. We asked contributors to explain what this means and why it does -- or doesn't -- matter. 

Zha Daojiong

When the World Bank formally adopted the PPP methodology back in the early 1990s and thus elevated China's ranking, there were two general 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 Beijing'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 Olympic 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 supposedly passed Japan as the second largest economy in the world, measured by GDP. Chinese media and society took the new ranking in greater strides. It was just another day. And this time around, it is more likely that Chinese society will react to the new ranking as just another announcement. After all, the choking smog that routinely blankets a third of China is powerful enough reminder to 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 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 mean 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 has to continue to internationalize.

William Adams

There are two really fundamental challenges to coming to terms with China's place in the global GDP rankings: ignorance and apathy. We don't know, and we don't care.

First our ignorance: GDP is really hard to measure. Just look at the huge revisions routinely made to GDP reports for the United States or the eurozone, where statistical agencies have better resources, and face less political interference, than their Chinese counterparts. The measurement issues affecting China's GDP reports are notorious: My favorite quip about them comes from Tom Orlik, Bloomberg's China economist, who told me he once heard a Chinese local government official say that the government measures the economy using fiscal revenue instead of GDP because "GDP is opinion, fiscal revenue is fact."

Ranking China's GDP against that of other countries is messier still, since it requires picking an exchange rate to convert this sketchily-measured aggregate into U.S. dollars. The U.N. International Comparison Project's estimate of the PPP exchange rate is the product of admirable and interesting research, but is still just one of many estimates. The research organization The Conference Board, where I used to work, was projecting in 2010 that, using their best estimate of a PPP exchange rate, China would overtake the U.S. as the world's largest economy in 2012.

Which takes us to the second challenge, our apathy. Using a market exchange rate to compare China's economy with that of the United States would make its economy around two thirds of the size of the economy of the United States. So what? China would still be superlative in many ways: the world's largest producer and consumer of steel, the largest consumer of energy, the largest importer of soybeans, and the largest emitter of greenhouse gases.

Regardless of whether China makes a smooth transition to domestically-oriented growth or makes a hard landing, its footprint is such that focusing on GDP, or growth, has become a distraction from more fundamental issues. Damien Ma and I collectively call these scarcity: insufficient natural resources to feed an investment- and energy-intensive economy; insufficient land to produce the food Chinese consumers demand; a shrinking labor supply that forces wages up, squeezes low-end manufacturers, and pushes the economy out of export-oriented industries. There is more insight to be gained from thinking about these issues than in wondering whether China becomes the world's largest economy today, five years from now, or five years ago.

Damien Ma

Let me piggyback on Bill's comments with a couple points. First, in hindsight, perhaps we should have titled our book the more tongue-in-cheek "China as No. 1: So What?" That a country four times the size of the United States would, short of cataclysmic economic fallout, someday grow into the world's largest economy should not elicit surprise -- it's basically a matter of when, not if. But whether China is still a $9 trillion economy in market exchange rate terms or closer to $14 trillion in PPP terms doesn't say anything about how to think about Chinese political economy. Aggregate GDP is but one indicator reflecting general welfare, but is far from sufficient to examine where China stands economically, socially, and politically.

Second, China has had a tremendously successful record in adding GDP every year for as long as I can remember. But when I talk to Chinese interlocutors, policymakers, and others, nobody seems particularly concerned about growth in and of itself. No one is obsessing over GDP figures, except maybe certain bureaucrats in the National Bureau of Statistics. And even the government itself is trying to slowly extricate itself from recent decades of GDP fetish. I suspect many Chinese will see this news and retort that "yeah, well, by per capita GDP we're still about one-sixth that the United States." This is one problem in looking at China, it can be both an enormous economy and an unbalanced country in terms of development. It's somewhat akin to the European Union -- both Poland and Germany can exist at the same time.

Third, instead of worrying themselves over GDP, the Chinese, both the public and officialdom, are preoccupied over all sorts of other sociopolitical issues. From accessing healthcare and higher education to safe milk and clean water (even core values), these are the central challenges that the "world's biggest economy" now has to urgently deal with. Bill and I referred to them collectively as various dimensions of scarcity -- some are policy-induced, some are secular trends -- that will determine how China actually develops, rather than whether it grows in GDP terms.

When a country gets wealthier and heftier economically, a different set of problems tend to arise that require a different set of policies. Richer countries have to deal with the costs of the "gangbuster growth" era and the dramatic social changes that have accompanied that growth. The tricky thing for China is that it is both wealthy and poor simultaneously, and it is being asked to grow and clean up at the same time.

Arthur R. Kroeber

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 10 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.)

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 roughly one-quarter that in the U.S., and the gap in average living standards is even greater, because in the United States about two-thirds of GDP consists of household consumption whereas in China that figure is barely over one-third. In other words, for a given amount of per-capita GDP (at market exchange rates), the average U.S. 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 -- 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 false. It is the biggest national economy by volume. But the center of technological change in the world is still the United States, and arguably the United States' centrality in this role is even more pronounced now than it was 10 or 15 years ago. There is little evidence that China is anywhere close to becoming the engine-room of the global economy.

But 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.

STR/AFP/Getty Images


Pivot to Asia: 'Why Keep up the Charade?'

ChinaFile A conversation on President Obama's trip to Tokyo.

On Wednesday, April 23, U.S. President Barack Obama is landing in Tokyo to begin a weeklong trip to four of China's neighbors --but not to China itself.

During Obama's stops in Tokyo, Seoul, Manila, and Kuala Lumpur, the specter of China will loom large. This will be especially pronounced in Tokyo, where the big unanswered question is how involved the United States would be if China seized the Diaoyus, the disputed islands in the East China Sea administered by Japan, which calls them the Senkakus. What should Obama say, publicly or privately, about China in Tokyo?


Yuki Tatsumi

During his visit to Tokyo later this week, Obama needs to strike a careful balance. His message in Tokyo needs to be twofold: He needs to reassure Japan, but he also needs to encourage Japan to look for any opening for high-level diplomatic engagement with China.

First and foremost, Obama needs to reassure Japan of the U.S. defense commitment. There has been rising concern in Japan about whether the United States can be relied upon to come to Japan's defense should the situation grow more aggravated, particularly around the Senkakus. The U.S. response to allegations of Syrian use of chemical weapons in 2013 and Russia's aggressive behavior in Crimea make many in Japan seriously concerned about U.S. capacity and willingness to act decisively were a similar situation to occur in the East China Sea. Furthermore, many in Japan have expressed concern about what the Obama administration has in mind for "a new model of major-power relations," a phrase Chinese President Xi Jinping used to characterize the bilateral relationship. Obama must articulate in Japan that the U.S. anchors its Asia policy in regional alliances and the U.S.-Japan alliance is among such critical anchors.

At the same time, however, Obama also has to encourage Tokyo to stabilize its relationship with Beijing. He needs to make it clear -- in private, as nobody, including Japanese people, wants to see the U.S. president publically lecturing their leader -- that, while Washington appreciates Japan's grievances over Chinese behavior, it should refrain from demonizing China. In private, he also has to communicate that Japan should refrain from the behaviors that give China excuse to blame Japan for Beijing's own aggressive rhetoric and behavior. Prime Minister Shinzo Abe has consistently said that the window of dialogue is always open for China. Obama should encourage Abe to continue to pursue policy that reflects this statement, thereby putting the onus on China to take the next step.

Overall, the most important message that Obama has to deliver in Japan is that, while differences exist in approaches to specific policy issues, the United States and Japan share an interest in welcoming and encouraging constructive behavior from China that respects established international rules and norms, and that they stand united against any behavior to destabilize the status quo by force.

Ely Ratner 

Obama will visit four countries on China's periphery this week, three of which (Japan, South Korea, and the Philippines) are treaty allies and one (Malaysia) that is an emerging security partner. Look for Obama to emphasize, including in Tokyo, that the United States seeks positive and stable relations with Beijing and encourages countries throughout the region to do the same.

Further messages in Japan will echo three principal themes of the trip: that the U.S. rebalance to Asia is real, that the policy is multifaceted (i.e., not primarily concerned with security issues), and that U.S. alliances and partnerships provide important platforms for regional and global cooperation.

On security issues in particular, I'll be looking carefully to see how Obama addresses three specific issues. First, will Obama say explicitly that Article V of the U.S.-Japan defense treaty covers the Senkaku Islands? High-level U.S. officials have repeated this talking point in recent years, but it will have special meaning coming directly from the president.

Second, will Obama single out China for engaging in uniquely provocative and destabilizing actions? Many observers thought National Security Advisor Susan Rice's remarks at Georgetown University in November, especially during the brief question-and-answer period at the end, missed the mark by appearing to draw equivalence between the actions of Japan and China.

And third, will Obama voice strong support for Japanese constitutional reinterpretation of collective self-defense? My hope, and expectation, is that the answers to all three questions will an unambiguous yes.

But the most powerful message Obama will send to Beijing during his time in Tokyo won't have anything to do with China at all. Instead, it will be about the role of Japan as a responsible, generous, and positive contributor to regional and international issues. Obama will highlight U.S.-Japan cooperation in Southeast Asia; U.S.-Japan trilateral cooperation with India, Australia, and South Korea; and the two countries' collaboration on global issues, including climate, Syria, Ukraine, Iran, and Afghanistan.

Quite distinct from the territorial row in the East China Sea, it is the many values and interests that the United States and Japan share in Asia and the world that will draw distinctions with China.

Dan Blumenthal

Obama is headed to a nervous Tokyo that needs clear signs of U.S. endurance and credibility. He should abandon the term "pivot," which is causing more angst and confusion than reassurance and clarity.

The pivot now appears ill-conceived for three reasons. The first is a mistake of strategic conception. Yes, Asia is of emerging consequence in world affairs. All post-Cold War presidents have recognized this. And China has had the potential to pose the greatest challenge to the United States since it became the prime actor in world affairs. Without a doubt, Asia needs more U.S. attention and resources. But the United States is a global superpower with vital interests in several interlinked regions. There can be no Asia policy without a global strategy. For example, Japan gets most of its energy from the Middle East, where Washington has played a stabilizing role. And what about India? How will Delhi play the role Washington imagines for it in Asia if the United States mishandles Afghanistan? Furthermore, all Asian powers watch Washington's handling of the other revisionist states -- Russia and Iran -- for clues about its fortitude in Asia. U.S. grand strategy must account for these facts.

The second mistake is one of implementation. It is not possible for Washington to play a consequential role in Asia while drastically cutting its defense budget and demonstrating an uneven commitment to the Trans-Pacific Partnership (TPP). A U.S. military second to none is the sine qua non of stability in Asia. The TPP is the gold standard of multilateral trade agreements, integrating Washington more deeply into Asia. But many countries have spent political capital on the TPP and worry that Washington is not doing the same. Tokyo needs to see Obama build support for the pact in the United States.

Finally, no one believes that the pivot is not about China. Why keep up the charade? It has gained the U.S. nothing in Beijing, where Chinese policymakers view it with hostility. The U.S. China strategy should be what it has been for two decades, built upon the dual pillars of engaging China while balancing its power.

Instead of reaching for a new strategic masterstroke, the president should settle for something more mundane: building on the Asia work of his predecessors. If a slogan is needed, how about an old one: "Speak softly and carry a big stick"?

Shogo Suzuki 

First and foremost, Obama needs to reassure the Japanese about the United States' commitment to the U.S.-Japan security alliance, and more specifically its commitment to protecting the Senkakus alongside the Japanese, should the Chinese side attempt to seize the islands. There have been reports that the U.S. response to Ukraine has caused disquiet in Tokyo about Washington's ability to stand up to powerful states. I do not believe that Japan can be equated with Ukraine -- the latter is not a key ally and a linchpin in U.S. strategy in Europe, like Japan is in Asia -- and neither do the Japanese think that Obama's stance toward Kiev is comparable to his Japan policy. Nevertheless, the fact that such reports got out probably means that the Japanese are sending a signal: They want a much firmer stance toward China from the United States.

My (admittedly unrealistic) wish list would also include that the Obama administration abandon the United States' official stance of not taking sides toward the territoriality of the Senkakus. It is the United States that handed over the islands to the Japanese in 1972, so in a way it de facto recognized the islands as belonging to Japan. Washington has thus played a key role in this dispute, and claiming that it takes no sides while simultaneously stating that the islands fall under the remit of the U.S.-Japan security alliance is deeply unhelpful. It could embolden (and perhaps already has) the Chinese to adopt aggressive tactics toward the Japanese in this dispute. It also serves to ensure that Japanese anxieties with regard to the United States' commitment to the alliance will continue to fester. If Japanese anxieties are not placated, Japan could seek to enhance its military capabilities further, leading to an arms race in the region.

Alliances are built on the delicate balancing between the dynamics of abandonment (i.e., fear that my ally would not support me in a time of need) and entrapment (fear that my ally would drag me into an unnecessary war), and they need constant maintenance. Obama is understandably in a difficult position, as he has to navigate between these two factors. It is perfectly understandable that he does not want to see the United States pulled into a military standoff with China because of Japan's disputes with the Chinese. Yet, at some point, he must make his stance clearer. Does the United States want to reach some sort of entente with China, even if that means sacrificing Japan and its interests? Or would Obama like to maintain U.S. military supremacy in the region, with the help of its regional allies, including Japan? If Obama does not wish to see China, an authoritarian, one-party state, becoming the regional hegemon in the Asia-Pacific, then he should know which policy he has to choose. 

Edward Luttwak

Once Obama has finished reminding  Abe that the U.S. commitment to defend all the territories administered by Japan is unlimited and unconditional, he can next assure Abe that China's post-2008 excursion into noisy navalism and would-be expansionism must end in a debacle -- the alternative would be too catastrophic even for a reckless leadership. But in the meantime, China's words and deeds are generating a real threat that in turn propels a process of coalescence from India to Japan, in which Japan must shoulder an unequal burden by paying for strategic roads in India, submarines in Vietnam, and the building of real military forces for the Philippines, whose ports Japanese warships should start visiting on a regular basis. After reminding Abe that China is 70 percent good, 30 percent bad, as well as a great market for all --both Toyota and Nissan are working hard to recover their market share, which declined after the 2010 tensions between China and Japan -- Obama can insist on the importance of reinforcing good China by firmly resisting bad China. Finally, Obama should clearly declare that Japan must accept the discipline imposed by its strategic predicament. It cannot afford to lose support for itself and thus for the entire coalition because of the absurdly unhistorical Yasukuni museum (the ashes can stay there) and because of Antarctic whaling. Now that China's conduct has forced Japan to become an independent strategic actor again, it pays full price for whatever is suboptimal in its conduct, and at least those two irritants must be eliminated. Not to do so would mean that Japan does not accept the discipline of strategy and that it is not a serious power.

Wu Jianmin

I expect Obama to say: 

I had a very successful meeting with Xi in Sunnylands, California, in June. The US-China relationship is one of the most important bilateral relationships in the world. I welcome the peaceful rise of China. Xi and myself have agreed to build a new model of big power relationship. This is a historical agreement. We are determined to avoid past confrontation and conflict between rising powers and established powers. This is good news not only for our two countries but also for Asia and rest of the world.

East Asia remains the global growth center. The whole world needs Asia's growth to overcome the consequences of the financial crisis, to stimulate growth and to create jobs. We have to do our best to maintain East Asia as global growth center.

China and Japan are two important countries. I hope they will resolve their territorial disputes through peaceful means. Peace, stability and détente in East Asia are in the best interest of the world's peace and prosperity.

In World War II, Japanese militarists brought untold sorrow and devastation not only to China, Korea and other Asia countries, but also to the United States. We all remember Pearl Harbor. This war left deep wounds. On the Japanese side, one should refrain from doing anything which may reopen these wounds. I strongly recommend you to stop visiting Yasukuni Shrine. Any act of denial and defiance would be highly undesirable.