China: On Top of the WorldPosted: May 3, 2014
“It is not a surprise that China’s economy is big but this is just because its population is big…”
In two essays, the FT’s chief economics commentator and Asia editor examine the significance of China’s imminent emergence as the world’s biggest economy
For FT.com, Martin Wolf and David Pilling write: This week we learned that China is about to overtake the US as the world’s largest economy. Since the latter is believed to have had the world’s largest economy since the early 1870s, this is a noteworthy moment. But it is not as noteworthy as many fear and others hope.
Start with what these calculations, derived from the World Bank’s longstanding international comparisons project, mean. This is an attempt to compare standards of living across countries. In 2011, China’s gross domestic product per head at market exchange rates was just 11 per cent of US levels. But once the low prices of many of China’s relatively non-tradeable goods and services are taken into account, this rose to a fifth of US purchasing power per head.
Nevertheless, China is still a poor country: the purchasing power of its GDP per head was 99th in the world. Since China also invests close to half its output, relative consumption per head was lower still.
China is, however, an enormous country, with a population of 1.34bn in 2011. Compared with this, even the US, with 312m, is almost a minnow. So in spite of being so much poorer, the purchasing power of aggregate Chinese GDP was 87 per cent of US levels in 2011. The purchasing power of China’s GDP has by now surely surpassed US levels.
It is possible to debate whether the newly revised numbers are right. The answer is that they are reasonable. A more important question is what they mean. What they do not mean is that China is already the world’s greatest economic power.
China is a huge trading power. Its exports of goods last year were 14 per cent bigger than those of the US. But its imports of goods were 31 per cent smaller. It is the size of the market a country offers that determines its clout in global bargaining. China is not the world’s largest importer yet. As its economy continues to grow relatively rapidly, it will become the world’s largest soon.
A different dimension of economic power is holdings of foreign exchange reserves. China’s total of $4tn in March is gigantic. But this is at least as much a source of weakness as of strength. Over many years, China has accumulated assets western central banks can create in a heartbeat by pressing a few keys. Yes, China could dump these assets. But it would be the chief loser. In our savings-glut world, the US could readily find other buyers.
US financial markets and financial companies are at the centre of the global financial system. This gives America exceptional influence over the shape of global finance and details of global regulation. The probability is that this will remain true for a long time, partly because the Chinese financial system confronts many challenges in managing its exit from a gigantic credit boom.
Another dimension of global economic influence is technology. An indication that China remains well behind is that economywide average productivity remains a fifth of US levels. Even more important is the absence of world-leading Chinese technology companies, with the principal exception of Huawei. The US, by comparison, hosts a number of world-leading companies.
The technological edge and scale of US spending on defence gives its military global reach and power. That is likely to last for quite some time. The US is also in effect a huge island, with relatively weak and friendly neighbours to its north and south. China, on the other hand, is surrounded by powerful and jealous countries. And the US has long been able to create powerful alliance systems. China has failed to match that.
The US possesses “soft” advantages, too: an influential popular culture; the world’s leading institutions of higher learning; an unmatched scientific base; and a commitment to the ideals of freedom and democracy that remain attractive to much of the world, however far short it has so frequently fallen in practice. To much of the rest of the world China’s political system is far less attractive and its historic culture far more alien than that of the US…(read more)
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