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.
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.
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.
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.
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.