Recently, the World Bank’s International Comparison Program (ICP) raised its estimation of China’s purchasing power parity (PPP) by 20 percent, leading to naïve media speculations that China will overtake the United State in aggregate GDP to become the world’s largest economy by the end of this year. However, this is an overestimation of China’s economy and an underestimation of China’s price levels. The reality in China is that about a hundred million people are still living under the poverty line. China is typically “a big country in aggregate size but a small country in per capita counting.”
On April 30, the World Bank issued the “Purchasing Power Parities and Real Expenditures of World Economies – Summary of Results and Findings of the 2011 International Comparison Program”. According to the program, the yuan’s purchasing power in 2011 equaled $0.285, or one dollar equaled 3.506 yuan. This is about 20 percent higher than the previous estimations made by the World Bank, IMF and OECD. Calculated on the basis of this estimation, China’s GDP in 2011 would have been $13.5 trillion, or 87 percent that of the U.S. and 14.9 percent of the world’s total. The exchange rate of dollar to yuan was one versus 6.46 that year. Using the current rate method, however, China’s GDP in 2011 was $7.3 trillion, equivalent to 47 percent that of the U.S. and 10.4 percent of the world’s total.
According to previous forecasts made by some international institutions, China’s GDP would not surpass that of the U.S. until 2019 if calculated with the PPP method. If the current rate method is adopted, the surpassing will take place much later. However, some foreign media outlets made simple calculations using the PPP method, on the basis of the newly released data, to conclude that China will overtake the U.S. in 2014 and become the world’s largest economy.
Purchasing power parity functions to estimate the cost of living and is a major method to compare scales of different economies. The International Comparison Program uses PPP as a conversion factor to measure different economies’ GDP’s with the same currency. The PPP method can avoid certain inherent defects of the current rate method, and thus can better measure and compare different countries’ economic scales and structures.
However, PPP also has its limitations. The key factor in the conversion using the PPP method is the price index. In its latest calculation of China’s purchasing power parity, the World Bank seems to have overlooked the fact that the current prices of grains, automobiles, gasoline and cosmetics are high in China. Its International Comparison Program estimated China’s commodity price level at 70 percent of the world’s average and 54 percent of that of the U.S. That is obviously an underestimation, which in turn constitutes an overestimation of the yuan’s purchasing power.
In recent years, grain prices in China’s domestic markets have been ostensibly higher than in the U.S. and other international markets. The price of gasoline is nearly 30 percent higher than in the U.S. In addition, because of the high import tariff, luxury goods such as cosmetics and fashion bags are multifold more expensive than in overseas markets.
The underestimation of China’s price level means an overestimated purchasing power of the yuan, which in turn leads to an inflated estimation of China’s economic scale. Calculated this way, China’s aggregate economy would likely surpass that of the U.S. by the end of this year. Both the Chinese authorities and the Chinese public however, reject this conclusion. Before the report was released, the National Bureau of Statistics had expressed reservations about the ICP’s methodology and refused to accept the study’s conclusion about China’s economy.
After more than 30 years of reform and rapid growth, China has become a true economic powerhouse, second only to the U.S. It has even exceeded the U.S. in terms of electricity generation, gross industrial output value, and trade volume. But the quality of China’s economy is still far inferior to that of the U.S. When it comes to high technologies, the number of indigenous brands, big firms’ core competencies, environmental protection and growth sustainability, China lags far behind the U.S. Furthermore, China’s per capita GDP amounts to less than one seventh of that of the U.S. and 60 percent of the world’s average. Even if calculated with the World Bank’s latest data of PPP, China’s per capita GDP is still scarcely 75 percent of the world’s average, ranking itself around the 100th among all economies.
The phenomenon of being a “big country in aggregate economy but a small country in per capita account” suggests that China is far from being a “strong economic power”. The service industry and residents’ consumption are weak in China, whose per capita GDP and per capita income are typical of a middle-income nation. China will attach greater importance to the quality of economic growth, the eco-environment, and scientific and technological innovation rather than merely focusing on the quantity of growth.
Niu Li is the Director of the Macro-economy Studies Office at the Economic Projections Department of the State Information Center.