An employee works at a textile factory in Shidian county, Yunnan province. (Reuters)
This week we've seen lots of hysterical headlines claiming that China just overtook the U.S. to become the world's largest economy.
The Financial Times has been warning this, and so has the website Business Insider, which now says that China topping the U.S. is “all about to happen,” based on analysis by the International Monetary Fund.
These forecasts have come up intermittently since the financial collapse in 2008. The World Bank sounded the alarms this past spring.
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However, China is not now nor will it become the world’s largest economy in the next decade, despite the hyperventilation.
This short-sighted and incomplete analysis is based on one data point that recasts GDP based on consumer purchasing power, adjusted for local prices and wages. The “cost of living” narrative says that, because China has more consumers than anywhere else, and because the wages of its workers are growing, just those facts alone will push the Middle Kingdom to the number one ranking.
But the analysis overlooks the serious weaknesses in the Middle Kingdom’s economy, based on a number of statistics released by China, the U.S., and the IMF itself, which shows China is still significantly smaller and less wealthy than the U.S. China does not have the soft economic power in the form of influential brands, nor the wealth that the U.S. has.
Even the IMF does not forecast China overtaking the U.S. later this decade. Currently, U.S. GDP is $16.8 trillion, while China’s is about $9.2 trillion, despite the fact China’s population is more than four times bigger at 1.36 billion.
By 2019 (the end-point of IMF projections), the IMF’s forecast for U.S. GDP shows the U.S. economy will be nearly 60% greater than China’s, $23.4 trillion versus an estimate of $14.8 trillion for China.
Unless China completely liberates its state-controlled economy by 2019 to suddenly blow its GDP out by 60% within a short five-year time frame, the IMF says the U.S. will still be bigger.
Yes, China has the raw power of the size of its population, but its median household income is still a fraction of U.S. households, less than $4,000 versus $53,000. Adjusted for currency differences and inflation, the average American still makes more than the average Chinese.
China should be applauded for moving towards a free market. But the People’s Republic of Capitalism has yet to unlock true market reforms based on entrepreneurialism, property rights, a strong currency to draw investment capital, and stock market reforms. Unless China dials back its centralized government forces, the Middle Kingdom’s growth will continue to be hallucinatory—just as are the reports that China will soon dominate the world economies.
For one, China under-reports the pile of debt its companies are saddled with, either because the companies believe they don’t have to because its government guarantees that debt, or Chinese companies shove that debt off their balance sheets, says Michael Pettis, a finance professor at Peking University.
China is so top heavy with government debt that today, that its reported paper pile is two and a half times the size of its economy.
Veteran China analyst Stephen Green at Standard Chartered calculates that China’s aggregate debt, all-in, hit 251% of its GDP as of June. Its debt sits at about $26 trillion -- which is more than the entire commercial banking systems of the U.S. and Japan combined -- estimates show. And that’s only the debt that China reports, the debt we know about.
Credit rating agencies have been sounding the alarms about the under-reporting of state loans given to government-owned companies and regional banks, as well as China’s shadow economy, all of which are often not reflected in official statistics.
Crouching debt, hidden fraud? China’s government-backed debt has Fitch banking analyst Charlene Chu warning: “There’s no way that we are not going to have massive problems in China.”
And do more consumers really mean more economic power? A country’s wealth is not solely based on consumer spending during a calendar year.
Cheaper currency to buy cheaper goods or services doesn’t equate to wealth—nor does arming consumers with more paper in their wallets. Especially when a country is devaluing its currency, which is like changing the number of ounces in a pound, as one analyst recently noted.
China pegs its currency to the U.S. dollar, the two move in tandem with each other, either up or down, so the U.S. can be criticized, too, for slamming the greenback with bad monetary and fiscal policies. “Money measures wealth, but does not create it,” as one analyst said.
When it comes to economic might, a nation’s assets matter greatly. National wealth provides a far more accurate view of economic heft than GDP or PPP. Credit Suisse says U.S. wealth is $72 trillion, versus Chinese wealth at about $22 trillion. Is China really more powerful given that $50 trillion gap?
But the idea that China’s consumers can power its economy to beat out the U.S. is dubious. For one, China has a lower cost of living and has cheaper goods and services versus the U.S.
Economists do try to adjust for that by using gross domestic product (GDP) adjusted by purchasing power parity (PPP) to argue China will be bigger than the U.S. next decade. This measure recognizes that earning $50,000 a year in the U.S. is very different from earning $50,000 a year in Shanghai, because the cost of living is different in each place.
However, purchasing power parity is only about purchasing power, that’s it, not the strength of an economy. Plus, the measure ignores the vast differences in purchasing power that exist even within a country’s borders (think New York City and Jonesboro, Arkansas).
“It does not make any sense to compare one country's PPP-adjusted GDP to another and say its economy is larger. Not for any country at any time,” Derek Scissors at the American Enterprise Institute says. Especially when high joblessness is still a problem. China’s real jobless rate is likely double the official headline, at around 9.4%, and rural unemployment topped 20%, Wall Street analysis shows.
Meanwhile, a huge one-quarter of China’s land is desert, and China is in dire need of water resources, with half the water supply of America’s. On top of all this, pollution is a growing problem in China, which is sickening its population, diverting even more of its resources.
And China has still yet to achieve the one thing developed economies do to become economic powerhouses: Soft power from its own home-grown companies. China does not really invent things. Its business model is largely built on copying, on production rather than invention. Which is why Chinese cyberhacking of U.S. companies is on the rise.
The U.S. has that wealth in the form of soft economic power, its brands. To name some: Apple, Google, Microsoft, Facebook, Verizon, Netflix, AT&T, Coca-Cola, General Electric, Intel, JPMorgan Chase, Goldman Sachs, McDonald’s, Yum Brands, Twitter, Tesla, Instagram, General Mills.
China’s most recognizable names are Alibaba, Lenovo, and Huawei. Yes, the Chinese love iPhones, Xboxes, GE dishwashers, Coke, and Big Macs. But they were not invented there.
Even its China’s companies are secretly controlled by the government. AEI’s Scissors reports that Lenovo is controlled by Legend which, until 2009, was majority-held by the Chinese Academy of Sciences. So “until 2009, Lenovo could be deemed a state-owned enterprise,” says Scissors.
China Oceanwide then bought a large stake in Legend, Scissors adds. “Oceanwide is ostensibly private but won the ‘Outstanding Builder of Socialism with Chinese Characteristics’ award from the party’s United Front Work Department,” an honor rarely given to completely private companies in the U.S. The Chinese Academy of Sciences still is an important investor in Legend.
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