Chinese economy smaller than previously thought

[Alex Moon]

40 Percent Smaller

The most important story to come out of Washington recently had nothing to do with the endless presidential campaign. And although the media largely ignored it, the story changes the world.

The story's unlikely source was the staid World Bank, which published updated statistics on the economic output of 146 countries. China's economy, said the bank, is smaller than it thought.

About 40% smaller.

China, it turns out, isn't a $10-trillion economy on the brink of catching up with the United States. It is a $6-trillion economy, less than half our size. For the foreseeable future, China will have far less money to spend on its military and will face much deeper social and economic problems at home than experts previously believed.

What happened to $4 trillion in Chinese gross domestic product?

Statistics. When economists calculate a country's gross domestic product, they add up the prices of the goods and services its economy produces and get a total -- in dollars for the United States, euros for such countries as Germany and France and yuan for China. To compare countries' GDP, they typically convert each country's product into dollars.

The simplest way to do this is to use exchange rates. In 2006, the World Bank calculated that China produced 21 trillion yuan worth of goods and services. Using the market exchange rate of 7.8 yuan to the dollar, the bank pegged China's GDP at $2.7 trillion.

That number is too low. For one thing, like many countries, China artificially manipulates the value of its currency. For another, many goods in less developed economies such as China and Mexico are much cheaper than they are in countries such as the United States.

To take these factors into account, economists compare prices from one economy to another and compute an adjusted GDP figure based on "purchasing-power parity." The idea is that a country's GDP adjusted for purchasing-power parity provides a more realistic measure of relative economic strength and of living standards than the unadjusted GDP numbers.

Unfortunately, comparing hundreds and even thousands of prices in almost 150 economies all over the world is a difficult thing to do. Concerned that its purchasing-power-parity numbers were out of whack, the World Bank went back to the drawing board and, with help from such countries as India and China, reviewed the data behind its GDP adjustments.

It learned that there is less difference between China's domestic prices and those in such countries as the United States than previously thought. So the new purchasing-power-parity adjustment is smaller than the old one -- and $4 trillion in Chinese GDP melts into air.

The political consequences will be felt far and wide. To begin with, the U.S. will remain the world's largest economy well into the future. Given that fact, fears that China will challenge the U.S. for global political leadership seem overblown. Under the old figures, China was predicted to pass the United States as the world's largest economy in 2012. That isn't going to happen.

Also, the difference in U.S. and Chinese living standards is much larger than previously thought. Average income per Chinese is less than one-tenth the U.S. level. With its people this poor, China will have a hard time raising enough revenue for the vast military buildup needed to challenge the United States.

The balance of power in Asia looks more secure. Japan's economy was not affected by the World Bank revisions. China's economy has shrunk by 40% compared with Japan too. And although India's economy was downgraded by 40%, the United States, Japan and India will be more than capable of balancing China's military power in Asia for a very long time to come.

But don't pop the champagne corks. It is bad news that billions of people are significantly poorer than we thought. China and India are not the only countries whose GDP has been revised downward. The World Bank figures show sub-Saharan Africa's economy to be 25% smaller. One consequence is that the ambitious campaign to reduce world poverty by 2015 through the United Nations Millennium Development Goals will surely fail. We have underestimated the size of the world's poverty problem, and we have overestimated our progress in attacking it. This is not good.

There is more bad news. U.S. businesses and entrepreneurs hoping to crack the Chinese and Indian markets must come to terms with a middle class that is significantly smaller than thought. Investors in overseas stocks should take note. Companies with growth plans tied to the Indian and Chinese markets could face disappointing results, and the high prices of many emerging-market stocks depend on buzz and psychology. Investor sentiment on China and India may now be significantly more vulnerable to future bad news.

China's political stability may be more fragile than thought. The country faces huge domestic challenges -- an aging population lacking any form of social security, wholesale problems in the financial system that dwarf those revealed in the U.S. sub-prime loan mess and the breakdown of its health system. These problems are as big as ever, but China has fewer resources to meet them than we thought.

And there is the environment. With poor air quality, acute water shortages, massive pollution in major watersheds and many other environmental problems, China needs to make enormous investments in the environment to avoid major disasters. Globally, it will be much harder to get China -- and India -- to make any sacrifices to address problems such as global warming.

For Americans, the new numbers from the World Bank bring good news and bad. On the plus side, U.S. leadership in the global system seems more secure and more likely to endure through the next generation. On the other hand, the world we are called on to lead is poorer and more troubled than we anticipated.

Maybe the old Chinese curse says it best: We seem to be headed for interesting times.

Walter Russell Mead, a senior fellow at the Council on Foreign Relations, is the author of "God and Gold: Britain, America and the Making of the Modern World."

[Shroom Man 777]

Good. Fuck China. Living in a Chinese family in the Philippines, which has a big and affluent Chinese community, is annoying sometimes. Ooh, you must go to a Chinese school to learn to speak Chinese because in the future, English is dead and everyone is gonna speak China. Fuck that and fuck China.

[Hawkwings]

It's always the nationalistic people *not* living in China that have those ideas. In China, they're pretty realistic about their future role. Sure it's important, but they're not gonna swallow up the US anytime soon.

Of course, you get those types anywhere, but I've mostly noticed it here in the US.

[His Divine Shadow]

Besides, it doesn't matter how many people in china speaks chinese, what matters is how many non-chinese in the world do. English is I believe far easier to learn than Chinese too for your average joe, and given its current head start I do believe it's going to win out, maybe followed by Spanish.

[Tanasinn]

Good. Fuck China. Living in a Chinese family in the Philippines, which has a big and affluent Chinese community, is annoying sometimes. Ooh, you must go to a Chinese school to learn to speak Chinese because in the future, English is dead and everyone is gonna speak China. Fuck that and fuck China.

To address the story, though...it's a nice thing to know. The less ammo the China-wankers have to annoy rational people with, the better.

[Erik von Nein]

Wow. That's kind of a big "oopsie" now, isn't it? Hopefully some of the leaders in China realized this and made some plans for the income the government won't be getting. Then they'll be less ... ah, who'm I kidding? They're all short-sighted wankers, except for the odd environmental official who realizes how fucked their country's going to be because of their policies.

[AniThyng]

Good. Fuck China. Living in a Chinese family in the Philippines, which has a big and affluent Chinese community, is annoying sometimes. Ooh, you must go to a Chinese school to learn to speak Chinese because in the future, English is dead and everyone is gonna speak China. Fuck that and fuck China.

No you learn to speak chinese because being able to speak both english and chinese is better then being able to speak only one or the other

[Ritterin Sophia]

Sure it's important, but they're not gonna swallow up the US anytime soon.

Try not at any time in the foreseeable future. They're either going to have to start to become more pliable to western demands, wage an expansionist war for resources, or starve to death. It will happen long before China comes close to reaching superpower status.

[mr friendly guy]

I am interested to see where these old statistics come from that says China will have a GDP the size of the US in 2012. Since every other article I read says it will be around 2050, and there seems no indication the PRC government themselves believe in the former figure.

In other words, this revision won't seem to do much except for right wing hawks who have a hard on about China being next great threat.

[Admiral Valdemar]

China is already facing issues of trust over their industry (ask Mattel and the corpse of the former food and drug minister), food shortages and they're about out of diesel. If their economy is going to grow at the phenomenal 11% they've had this year, then they're going to need every last resource on the market to sate the appetite.

I think the US, Japan and EU may have something to say about that.

[HemlockGrey]

China is doomed. On top of all their other problems, they're going to be first against the wall when the oil crunch hits. The only way they're keeping a lid on the thousands of "civil disturbances" in the countryside is with the promise of economic prosperity in the future. That's obviously not going to happen. My prediction is chaos and mass violence in China within the next 30 years.

[montypython]

China is doomed. On top of all their other problems, they're going to be first against the wall when the oil crunch hits. The only way they're keeping a lid on the thousands of "civil disturbances" in the countryside is with the promise of economic prosperity in the future. That's obviously not going to happen. My prediction is chaos and mass violence in China within the next 30 years.

China will survive and prevail over whatever crap may come in the next 30 years, Chinese haven't survived this long by being stupid or complacent.

[Nieztchean Uber-Amoeba]

China will survive and prevail over whatever crap may come in the next 30 years, Chinese haven't survived this long by being stupid or complacent.

One can go quite far by being stupid and complacent- besides, stupidity and complacence have nothing to do with cataclysmic environmental damage and resource shortfall.

[Stark]

And saying 'China' has survived 'this long' when there is little continuity as a nation is misleading. Sure, there have been ethnic Chinese in much of the area of modern China for thousands of years. Modern China, however, doesn't date back that far, before that it was dismembered and raped by Europeans, before that it was for long periods unstable, fractured, ridden with chaos and all kinds of badness. History shows China has *repeatedly* crashed and burned, just because we still call it 'China' doesn't make that go away. It no more has magical stablity than any other nation.

[montypython]

And saying 'China' has survived 'this long' when there is little continuity as a nation is misleading. Sure, there have been ethnic Chinese in much of the area of modern China for thousands of years. Modern China, however, doesn't date back that far, before that it was dismembered and raped by Europeans, before that it was for long periods unstable, fractured, ridden with chaos and all kinds of badness. History shows China has *repeatedly* crashed and burned, just because we still call it 'China' doesn't make that go away. It no more has magical stablity than any other nation.

And each time China has fallen it has come back up again and again, people too often forget out of convenience. As long as the community itself endures, China will still be here long after states such as the US have bitten the dust. That is one bet I can definitely collect on.

[VT-16]

Surviving is easy as long as you don't need to think about modern industry and transportation.

[Stark]

And each time China has fallen it has come back up again and again, people too often forget out of convenience. As long as the community itself endures, China will still be here long after states such as the US have bitten the dust. That is one bet I can definitely collect on.

You're nuts, and your definition of a 'nation' 'rising again' is extremely loose and politically naive.

[Chris OFarrell]

I'm not utterly sure about this to be honest.

A friend of my Fathers, a rather senior guy working for Australia's reserve bank who does a lot of international writing and research once told me that there in fact are two sets of 'books' in China.

The REAL books are added up VERY carefully from the lowest level to the highest level, with redundant, independent methods to check the numbers at each level and make sure no-one is trying to lie their head off.

They then gather all this data in Beijing and get a real, realistic picture of what is going on.

They then make up another set of books which may or may not have the slightest thing to do with the REAL books, which then get published internationally, which drives much of the worlds financial speculators nuts as from the outside, you can only get a very 'raw' and generalized picture of whats going on.

So frankly I find it hard to belive that China has lost 40% of its economy somewhere. I think the most likely case is either:

A. The books they presented to the world were overstating the economy and now they've got what they want from that, so they are going back to a more realistic figure for whatever reason.

B. The books they presented to the world were for once not very far off the mark, but now they want to publicly understate their economy, probably to justify tighter controls over their market, slowing down some economic reforms and opening some trade barriers e.t.c.

[Medic]

And each time China has fallen it has come back up again and again, people too often forget out of convenience. As long as the community itself endures, China will still be here long after states such as the US have bitten the dust. That is one bet I can definitely collect on.

You're nuts, and your definition of a 'nation' 'rising again' is extremely loose and politically naive.

And probably measured in centuries, not mere decades.

I also have to wonder why you take some sort of pride in your comments montypython? Of course a "community" will endure even if the PRC fucks itself and it's environment into a corner and gets overthrown. But it's always the people that pay for that in blood. This should be admired?

The United States as a political entity may or may not come to an end in the near future but barring some sort of holocaust, simple collapse of society or a gradual decline like we see in Russia now logically extended a few more decades (I believe they've been experiencing population loss since the fall of the Soviet Union, Stas could elaborate further and exhaustively), another political entity / entities will take it's place in central North America, straddling the Pacific and Atlantic. That may even be a good thing but I should take no undue pride in it if the end result was misery on a grand scale as seems likely in China's case.

[CmdrWilkens]

And each time China has fallen it has come back up again and again, people too often forget out of convenience. As long as the community itself endures, China will still be here long after states such as the US have bitten the dust. That is one bet I can definitely collect on.

See here is the funny thing that you refer to China in the sense of an ethnic community then compare it agianst the US as a political system. That's litterally apples to oranges as open as it comes.

Seriously, there have been people leiving and speaking germanic tounges north of the Rhine for millenia but nobody is going to come out and say that the current German government suddenly means the Hessians have endured and come back.

[AniThyng]

The Chinese government may fall. Chinese civilization and cultural legacy will adapt and change to the situation, but it has and likely will endure

Even (not all, obviously) overseas chinese for whose mother tongue is english and append a western name to thier chinese surname still have a certain pride and identity that ties them back to chinese culture after all.

Despite what I said earlier though, I will admit a certain dark sense of amusement if China does fall spectacularly and I don't have to grin embaressingly whenever I have to admit that I can't speak mandarin and have only the barest colloquial grasp of cantonese.

[Darth Wong]

To be honest, I think it's rather academic to discuss who will suffer worse when the oil crunch hits. We'll all be fucked, and when it happens, I suspect we will be only barely aware of how it is affecting other countries.

Despite widespread industrialization in China, there are vast regions of the country which are still living a pre-industrial lifestyle. For them, the economic boom has passed them by, but then again, the crash may just pass them by as well. Meanwhile, the societies we're living in are so dependent upon cheap automotive transport from top to bottom that the entire way in which we live may be transformed when the oil crunch hits, and not for the better.

[ray245]

Although it is funny that it takes the american such a long time to accept china isn't a threat to their power for a while..

Didn't china leaders REPEATLY stated that china cannot hope to match the US?

Regarding the issue of learning chinese...it's still as useful as learning japanese. Since most people only learn japanese for the sole reason of watching anime...mostly.

But then again...china is ALSO pushing for its citizens to learn english as well.


By the way, when the oil crunch hits...which country will be able to remain mostly intact?

[Illuminatus Primus]

I'm not utterly sure about this to be honest.

A friend of my Fathers, a rather senior guy working for Australia's reserve bank who does a lot of international writing and research once told me that there in fact are two sets of 'books' in China.

The REAL books are added up VERY carefully from the lowest level to the highest level, with redundant, independent methods to check the numbers at each level and make sure no-one is trying to lie their head off.

They then gather all this data in Beijing and get a real, realistic picture of what is going on.

They then make up another set of books which may or may not have the slightest thing to do with the REAL books, which then get published internationally, which drives much of the worlds financial speculators nuts as from the outside, you can only get a very 'raw' and generalized picture of whats going on.

So frankly I find it hard to belive that China has lost 40% of its economy somewhere. I think the most likely case is either:

A. The books they presented to the world were overstating the economy and now they've got what they want from that, so they are going back to a more realistic figure for whatever reason.

B. The books they presented to the world were for once not very far off the mark, but now they want to publicly understate their economy, probably to justify tighter controls over their market, slowing down some economic reforms and opening some trade barriers e.t.c.

With all due respect, I don't think you know what you're talking about. Even your hearsay anecdote doesn't imply that a high-case estimate of China's GDP is more accurate. For all you know it could've been that things were according to the "loose books" before and just now its gotten corrected. It doesn't usually happen that people's homework mistakes compound and become further removed from reality over time; typically it comes and bites them on the ass as time goes on.

[Illuminatus Primus]

To be honest, I think it's rather academic to discuss who will suffer worse when the oil crunch hits. We'll all be fucked, and when it happens, I suspect we will be only barely aware of how it is affecting other countries.

Despite widespread industrialization in China, there are vast regions of the country which are still living a pre-industrial lifestyle. For them, the economic boom has passed them by, but then again, the crash may just pass them by as well. Meanwhile, the societies we're living in are so dependent upon cheap automotive transport from top to bottom that the entire way in which we live may be transformed when the oil crunch hits, and not for the better.

Some countries are demonstrably going to be better off than others in the short-term. Russia, France, etc.