A lot of hot air

PUBLISHED : Monday, 23 May, 2011, 12:00am
UPDATED : Monday, 23 May, 2011, 12:00am


Forecasters are clamouring to predict when China will surpass the US to become the world's largest economy, the rush increasingly resembling an Olympic 100-metre dash, with the big Wall Street houses as the front runners. These forecasts are based on a comparison of the economic size of China and the US, using market exchange rates to convert the value of nationally produced goods and services into a common currency, the US dollar. So every time the renminbi exchange rate goes up a notch, the end of the 'Age of America' is said to be an inch closer.

The International Monetary Fund, which sets its own rules wherever it goes, decided to change the forecasting rule. In a table posted quietly on its website last month, it forecast that China's gross domestic product based on purchasing power parity (PPP) estimations would surpass that of the United States by 2016. After the posting was quickly seized on by the media, the IMF hastily issued a statement saying: 'Comparing the US and Chinese economies using purchase power parity is not the most appropriate measure ... because PPP price levels are influenced by non-traded services, which are more relevant domestically than globally.'

All this reminds me of a joke in Moscow which says there are two political camps right now vying for the presidential post in Russia, the Vladimir Putin camp and the Dmitry Medvedev camp, and Medvedev hasn't yet decided which camp he will join.

Gauging economic size based on PPP is not really an IMF invention. Actually, a report issued earlier this year by the Peterson Institute for International Economics already put China's GDP of US$14.8 trillion ahead of the US. The Peterson Institute, led by Fred Bergsten, is the think tank that made its name last year by providing much of the congressional ammunition for the accusations against China that the renminbi was undervalued.

The year 2016 is becoming a key year in the eyes of top policymakers in Beijing, as it's believed that the economy will undergo seismic changes then. Aside from the IMF prophecy about the beginning of the 'Age of China', a recent speech by a top National Development and Reform Commission official talked about the 'Lewis turning point' occurring by 2016. This turning point, named after economist Arthur Lewis, signals the exhaustion of rural farm labour as an economy industrialises, which of course explains much of the productivity gains in China over the past 20 years. China will no longer be a low-cost country, and will have to compete globally based on innovation drives. At the same time, China's market economy status was expected to be resolved by 2016, he said.

Its currency, too, will probably be globally convertible by then.

These are all positive things that one would expect of the world's largest or would-be largest economy. But translating these economic achievements into geopolitical ambitions, as some Western analysts have done, seems to be too far a stretch. For example, The Wall Street Journal's MarketWatch commentator, Brett Arends, suggested that the rise of China would have much bigger implications for America's defence and international affairs.

Victor Cha, a senior adviser on Asian affairs at Washington's Centre for Strategic and International Studies, said: 'The [Southeast Asia and East Asia] region is overwhelmingly looking to the US ... as a counterweight to China ... they see the rise of an economic power that is not benevolent, that can be predatory. They don't see it as a benign hegemony.'

Moreover, size at the aggregate level doesn't say much about a country's economic competitiveness and its overall national power. It was actually not that long ago when China held the world's top GDP spot: the Qing empire's estimated US$241 billion put it at the top in 1912, immediately before its downfall, a time when Western powers carved out parts of China one after another.

By 1937, when Japan invaded China on a massive scale, China's GDP was still at least twice the size of Japan's. Back then, I guess no one was talking about China's hegemony, benign or not.

On a per capita basis, China's GDP is even more pathetic, not even one-tenth that of the US. At a nominal level, the World Bank, the IMF and the CIA put the mainland at number 98, 94 and 99 respectively, among all the nations in the world. Based on PPP calculation, the three organisations put China at number 85, 94 and 100 respectively - not much better, either.

So the brawl between the nominal camp and the PPP camp over China's GDP calculation is a moot point. China will surpass the US to be the world's largest economy at some point but, even then, there is unlikely to be much change in the world's economic order. The renminbi will definitely play a more prominent role, but, just as the euro is not dethroning the US dollar as the global currency, even when backed by the European Union's larger combined GDP size, so the renminbi is not going to replace the dollar, either.

In a recent commentary in The Wall Street Journal, state councillor Dai Bingguo said: 'China has never thought of vying for [a] leading position in the world.'

I don't think that is purposeful game play under some kind of disguise. At roughly number 100 in the world economically, China is far from even qualified to contemplate a leadership role, to be honest.

John Gong is associate professor at the Beijing-based University of International Business and Economics. johngong@gmail.com