Misunderstanding US-China economic comparisons


Two weeks ago, the World Bank published new estimates putting China slightly ahead of the US in 2017 gross domestic product (GDP) adjusted for purchasing power parity (PPP). This is badly misleading. China may become a true peer of the US in economic size, which would be an important development. But it’s not yet equal to the US, and is headed for a growth wall.

The argument for China as number one seems simple: The economies were about the same size in 2017, China has grown faster since, and will grow faster indefinitely. The first problem is the World Bank uses China’s own reports of conventional GDP.

China’s statistical authority makes clear its subservience to the Communist Party. There are indictments of the purported size of China’s GDP generally and growth since 2017 in particular. It’s impossible to be confident about GDP itself, while even state media admit other important economic data are suppressed.

From China to GDP. It doesn’t directly measure size but rather annual activity. An economy’s true size obviously does not revert to zero when the calendar turns over. Yet national GDP is tiny on January 2. A true size indicator accumulates across years.

National wealth does this. It isn’t easy to measure, either, especially with regard to China. The Federal Reserve puts US net wealth near $105 trillion at the end of 2019 — almost five times conventional GDP. Net worth of households was $118 trillion. Credit Suisse’s equivalent for US household worth was $106 trillion in mid-2019. Its China estimate was $64 trillion.

Credit Suisse repeatedly revises Chinese wealth higher. Partial state ownership of many assets leaves them hard to value. Further, much of China’s economic activity ultimately doesn’t create wealth. The country has seen sustained excess supply from aluminum to property to shipping. More output adds to GDP but, since it is not actually needed, doesn’t add to prosperity or national wealth.

Chinese GDP is not ideal, applying PPP makes it worse. The motive in adjusting for purchasing power is sensible — prices for similar items vary across countries. In practice, though, prices vary more within these countries than across. PPP creates a China price, from Shanghai to Lhasa, Tibet. The American price melds everything ranging from New York to Newport, OR.

There are more specific problems, such as PPP seeming to fail for the US and Mexico even after a decade of NAFTA. Along with the intra-economy divergence in prices, this makes it hard to believe that PPP holds between the US and China (as the World Bank assumes).

PPP intuitively makes most sense applied to consumer goods and, more rigorously, it requires that open markets force prices for similar products to converge. Yet the World Bank goes beyond consumption to also adjust investment and the public sector, and does so even when countries explicitly keep markets closed. For example, China’s capital market.

Applying PPP globally and to the whole of GDP is an empty exercise. China’s advocates might admit to the measurement and other severe problems, yet argue it will just take longer to pass the US. While both countries face challenges, China is very likely growing faster now and, they say, will continue to indefinitely. If not number one in 2017, China will be in 2027 or certainly 2037.

Also wrong. This is not a defense of American policy or a claim that American economic leadership will continue in the long term. But no global economic leader at all is far more likely than China as future leader.

At the end of 2019, China faced a larger debt problem than the US, though this may have changed since. Beijing suppresses competition to ensure state control of major sectors, narrowing the scope for innovation. It faces a far larger — to the point of being unprecedented — aging challenge. China’s growth is slowing to a stop, and then won’t resume for at least a generation.

China may or may not catch the US in conventional GDP before complete stagnation sets in. It doesn’t have the time to gain any substantial advantage. Credit Suisse not only puts the mid-2019 American wealth lead at $42 trillion but $12 trillion larger than at the end of 2011.That’s not definitive, but it’s much more important than a fundamentally flawed PPP comparison.

Be the first to comment

Leave a Reply