The World Bank ICP report on April 30 found that China will overtake the US as the world largest economy in 2014, based on its Purchasing Power Parity (PPP). The report said that, by this approach, one dollar was equivalent to RMB 3.506. As a result, China’s GDP should be $13.5 trillion in 2011, or 86.9% of US GDP ($15.53 trillion). The report also found that during 2011-2014, Chinese GDP would have grown by 26%, while the US GDP grew by 7.6%. Based on this calculation, China’s GDP will be 0.12% larger than the US’ in 2014, toppling the latter from world No. 1.
He Weiwen
This finding has caused lots of glamour in the world’s media. Some even regarded it as a milestone in world history, as the US will bid farewell to the No. 1 spot it has kept for 142 years since 1872. The official China National Statistics Bureau, and most Chinese experts, however, have shrugged off this finding and insisted that PPP data is only one of the approaches in research, instead of the official statistics.
This author regards the GDP data based on PPP as laboratory data, interesting for further study, but not the official statistics.
Standard Purchasing Power Won’t be Found in Real Life
The PPP approach assumes a basket of products and services, and calculates the cost to buy them in US dollars. Then it applies the same approach to other countries and calculates the cost in each of the countries in their own currencies. Suppose that $100 is needed to buy it in the US, and RMB 350 is needed in China, it reaches parity of one dollar to 3.50 renminbi. Based on this parity, it calculates the Chinese GDP. The report found that the parity between the dollar and the yuan is 1:3.506. Hence, the Chinese GDP in 2011 was already $ 13.5 trillion.
In real life, however, no one can work out the cost of products and services, even in the US. The reason is simple: there is no single, national price for any specific product or service. Take the big Mac for example. The author had a big Mac at a McDonald’s in Leezburg, Virginia, on August 26, 2010 for $ 6.39 (sales tax included), and had the same big Mac at a McDonald’s in Queens, New York City, on October 29 for $8.29 ( sales tax included). What is the US price of a big Mac? None exists. When living in Manhattan 10 years ago, the author often filled up with gas in New Jersey, instead of Manhattan, because it was cheaper. And the gas price changed almost every week. So, what was the US national price for gas in 2011? None exists. Therefore, the purchasing power could only calculate a limited price for specific products at specific markets in specific cities. There is no standard cost of the “basket” at all. It is the same in China. There is no single national price for eggs, rice, apartments, or anything else.
Dollar vs. RMB Parity Questionable
The ICP report conclusion of China’s GDP overtaking the US in 2014 was based on the dollar-yuan parity of 1:3.506, or 1 dollar equals 3.506 Yuan. It is questionable how this parity has been worked out. Let’s make a brief comparison of prices of selected products and services in the US and China. Again, there is no national price, only prices in specific cities at specific times.
Food: Take Boston and Hangzhou in 2011 for example. Rice was RMB 4.33 yuan per 500g in Hangzhou and 0.93 dollar (converted to 500g) in Boston, with the parity of 1 dollar to 4.65 Yuan. Whole fat milk was 11.50 yYan per litre in Hangzhou and 0.60 dollar (converted to the liter) in Boston, showing a parity of 1 :19.20. A Fuji apple was 5.99 per 500g in Hangzhou and 1.1 dollar ( converted to per 500 g) in Boston, with a parity of 1:5.45.
Clothing and footwear: Levi’s casual trousers were sold at 39.9 dollars per pair in Boston and 799 in Hangzhou, with a parity of 1: 20. A Tommy Hilfiger T shirt was sold at 29.99 dollars in Boston and 799 yuan in Chinese major cities, with a parity of 1: 26.6. Nike shoes range between $ 39.99-129.99 in most US east coast outlets stores, and between 300-2000 yuan in Chinese major outlets and stores, with a parity of 1: 7.5-15.4.
Transportation: The Toyota Corolla retail price is normally at around 14,000 dollars in San Francisco, and around 130,000-140,000 yuan in China’s major cities, with a parity of 1: 9.50-10.00. Petrol at gas stations was sold at around 1.05 dollars per liter (converted from the gallon) in New Jersey last mid-December and at around 7.00 yuan in Beijing, with a parity of 1:6.67.
Housing: A 1100 sf apartment in Union City, NJ, 30 minutes by bus to Port Authority, Manhattan was sold at $216,000 in 2009, converting to $ 1368 per construction sm. An apartment of 63 sm between the North 4-5 ring roads, Beijing, an hour by bus to Xidan, was sold at RMB 1.86 million, or RMB 29,520 yuan, leaving a parity of 1:21.58. The stories are true because I know both of the buyers.
Services: The taxi rate in Manhattan is $ 0.20 per 1/9 mile, or $ 1.125 per km, and RMB 2.40 yuan per km in Shanghai, a parity of 1: 2.13. The express passenger train fare of Amtrak, US east coast, is $ 78-112 for equivalent first class between Metropark, NJ to Washington, D.C., 210 miles. The high speed train between Shanghai and Nanjing, 305 km, takes RMB 224 yuan for first class, with a parity of 1: 2.0-2.87. The long haul bus fare from New Brunswick, NJ to Manhattan, 60 miles (96 km) was $ 9.55, or $ 0.10 per km; while that for Zhengzhou to Kaifeng, Henan Province is 18 yuan for 32 km, or RMB 0.56 per km, leaving a parity of 1: 5.6.
The above comparison shows that the dollar/yuan parity in selected services is lower than 3.506, but is considerably higher than 3.506 for products and housing. One can argue that the RMB parity of 3.506 to the dollar is well overvalued.
PPP Cannot Cover All GDP
The basket for the PPP test covers only selected products and services, mostly in consumption. It cannot cover all the consumption of tens of thousands of varieties. More fundamentally, GDP means the total output of a national economy, including investment, construction, government services and external trade. Therefore, the PPP approach only deals with a small part of the economy, not the national economy.
A Static PPP Means a Laboratory Test
The finding of the report that China’s GDP will be 0.12% larger than the US in 2014 was based on the calculation on a static 2011 figure, multiplied by the accumulated real growth from 2011-2014. Hence the self-contradiction: PPP compares the “basket cost” with the prices changing each year and inflation level hovers up and down. The report, however, neglected all the price and inflation factors over the past three years and based the 2014 figure on 2011 price level. It shows that the PPP approach is a laboratory test, which does not represent the real picture.
The current exchange rate approach is still the internationally accepted norm for measuring national GDP. On this basis, China’s GDP could exceed RMB 60 trillion in 2014, or approximately $ 10 trillion, as compared to the expected over $ 17 trillion in the US. China will still remain world No.2 for years.
He Weiwen is co-director, China-US/EU Study Center, China Association of International Trade.
