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China is a major power in the world. That’s undebatable. But a report from the World Bank suggests the country’s economic size may be bigger than previously thought， maybe even to the point of soon surpassing the United States. The latter has been the world’s largest economy since 1872， when it overtook the United Kingdom， and has held the crown for more than 140 years.
A World Bank report says that based on 2011 prices， the purchasing power of China’s currency， the yuan， was much stronger than what was reflected by exchange rates. By that measure， China’s economy was 87 percent the size of the United States in 2011.
Soon after the data were released on April 29， Western media anxiously started the process of calculation and speculation. With the International Monetary Fund （IMF） having expected that China’s economy would grow 24 percent between 2011 and 2014 while the United States is projected to expand only 7.6 percent， China is likely to overtake the United States this year， according to reports from mainstream Western media outlets.
That’s far sooner than previous forecast： the OECD estimated China would become the world’s largest economy as early as 2016 and the Chinese Academy of Social Sciences pegged 2020 as the year that would happen.
In sharp contrast to the excitement displayed by Western media， Chinese media remained calm and stoical. Their attitude was that the time for celebration had not yet come， as they reflected on the flaws in the methodology of the newly released data. Traditional wisdom dictates that the sheer size of an economy is not the only important measure of how well a nation is doing economically or how powerful it is. In terms of standard of living for the average Chinese， the country has a long way to go.
A questionable methodology
When comparing different countries’ GDP， economists usually use exchange rate as a converter. By this measure， China’s $8.2 trillion GDP in 2012 was only 51 percent of the size of America’s $16.2 trillion GDP. It will be a long time before China takes away America’s economic crown.
However， as has been pointed out by some economists， exchange rate-based comparison between different economies can be misleading， because exchange rates fluctuate constantly and dollar-based GDP data don’t necessarily represent a country’s true economic size.
The International Comparison Program （ICP） held by the World Bank produces internationally comparable GDP based on purchasing power parities （PPPs）. To calculate the PPPs， the ICP holds surveys every six years to collect price and expenditure data for the whole range of final goods and services that comprise GDP including consumer goods and services， government services and capital goods. PPP figures by the World Bank are the most authoritative estimates of what money can buy in different countries and are used by most public and private sector organizations， such as the IMF. PPP adjusts the numbers to reflect what people in a given economy can actually afford.
PPPs are both currency converters and spatial price deflators. They are used by the ICP to make the GDPs of different countries comparable. Initially， GDPs are not comparable because they are expressed in national currencies and valued at national price levels. But， after PPPs are applied， the GDPs are converted to a common currency and are revalued at a uniform price level. As a result， differences between the GDPs reflect only differences in the volumes of final goods and services purchased， according to the World Bank.
After extensive research on the prices of goods and services， the ICP concluded that money goes further in poorer countries than it previously thought， prompting it to increase the relative size of emerging market economies.
The World Bank 2005 ICP report found that China’s economy was only 43 percent as large as that of the United States， while the new analysis stated that China’s economy had grown to 87 percent the size of its American opposite number by 2011.
The National Bureau of Statistics （NBS） of China rejected this conclusion and expressed reservations about some aspects of the methodology employed in the 2011 ICP round. NBS does not recognize these results as official statistics， read the report.
Experts from home and abroad have claimed that the methodology behind PPPbased GDP has its own limitations. China can’t buy advanced foreign missiles， ships， iPhones and cars using the yuan， no matter how strong its purchasing power is. In order to buy foreign products and services， China has to pay for them after converting the currency according to latest exchange rate. That’s why exchange rate-based GDP is extremely important when comparing different countries’ economic power.
Ye Tan， a renowned financial commentator in China， said the PPP-based GDP results are absurd.
“PPP only represents statistical estimates， which are affected by sampling errors， measuring errors and classification errors. Because it’s extremely complicated to gather data and calculate PPP， its margin of error can hardly be calculated，” she said. “A numbers game can hardly change the fact that Chinese economy is still quite underdeveloped.” The report points out that the margin of error in PPP is larger in housing prices and medical service prices than in food prices. The margin is larger for countries that are not on the same continent—such as China and United States—than countries in the same region such as China and India.
Besides， the World Bank said PPP-based GDP can’t be used to reflect a change of conditions during a period of time. Therefore， using the 2011 PPP-based GDP data to infer the 2014 China-U.S. GDP comparison results is unreasonable and illogical， according to China’s official Xinhua News Agency.
Bigger doesn’t mean richer
Since the financial crisis in 2008， China’s economic growth has accounted for one fourth of the global total. Considering its sheer size， its contribution may continue to rise in spite of an apparent slowdown in growth rate.
However， Chinese people’s living standards still lag far behind many developing countries， never mind developed countries. There is a sharp gap between the rich and the poor. And China’s social welfare system， encompassing areas such as medical care， pension and unemployment allowance， is far worse than that of the United States.
Even when using PPP as an indicator for per-capita income， China is ranked 99. Advancing upward of this low rank will take the country a long time.
According to the World Bank standard， China still has over 200 million of its population living under the poverty line， the total of the population in France， Germany and the United Kingdom. In order to offer its over 1.3-billion population a better life， China still has a long way to go， according to Xinhua.
The United States， on the other hand， has accumulated many advantages in industrial structure， technological innovation， creativity and global talents. Even if China’s GDP catches up with the United States， it doesn’t mean Chinese people are richer than their U.S. counterparts. By 2020， China’s per-capita income will reach $10，000 while the number in the United States will reach$40，000.
China is now faced with the growing pains of economic rebalancing and addressing the middle income trap. It needs to improve its economic structure while at the same time maintaining relatively fast development. It faces challenges including environmental issues， mounting local government debt and hefty shadow banking assets.
Even if China’s GDP surpasses the United States， the country still has to optimize its economic structure， strengthen technological innovation， digest excess capacity and climb up the value chain. None of those tasks would be made easier by having the economic crown in hand， said the Xinhua News Agency.
Besides， the calculation of the GDP didn’t factor in the cost of restoring the polluted environment， Ye said.
A report from China’s Ministry of Environmental Protection said the cost of ecological environment deterioration amounted to 1.27 trillion yuan （$203.3 billion）， accounting for 3.9 percent of the GDP in 2008. The amount of money spent on improving the environment stood at 504.31 billion yuan （$80.74 billion）， accounting for 1.54 percent of the GDP that year.
“The days when Chinese people can be toyed with using GDP figures are gone. After climbing above the poverty line， what they need are balanced long-term development， a better environment and more dignity，” said Ye.
A World Bank report says that based on 2011 prices， the purchasing power of China’s currency， the yuan， was much stronger than what was reflected by exchange rates. By that measure， China’s economy was 87 percent the size of the United States in 2011.
Soon after the data were released on April 29， Western media anxiously started the process of calculation and speculation. With the International Monetary Fund （IMF） having expected that China’s economy would grow 24 percent between 2011 and 2014 while the United States is projected to expand only 7.6 percent， China is likely to overtake the United States this year， according to reports from mainstream Western media outlets.
That’s far sooner than previous forecast： the OECD estimated China would become the world’s largest economy as early as 2016 and the Chinese Academy of Social Sciences pegged 2020 as the year that would happen.
In sharp contrast to the excitement displayed by Western media， Chinese media remained calm and stoical. Their attitude was that the time for celebration had not yet come， as they reflected on the flaws in the methodology of the newly released data. Traditional wisdom dictates that the sheer size of an economy is not the only important measure of how well a nation is doing economically or how powerful it is. In terms of standard of living for the average Chinese， the country has a long way to go.
A questionable methodology
When comparing different countries’ GDP， economists usually use exchange rate as a converter. By this measure， China’s $8.2 trillion GDP in 2012 was only 51 percent of the size of America’s $16.2 trillion GDP. It will be a long time before China takes away America’s economic crown.
However， as has been pointed out by some economists， exchange rate-based comparison between different economies can be misleading， because exchange rates fluctuate constantly and dollar-based GDP data don’t necessarily represent a country’s true economic size.
The International Comparison Program （ICP） held by the World Bank produces internationally comparable GDP based on purchasing power parities （PPPs）. To calculate the PPPs， the ICP holds surveys every six years to collect price and expenditure data for the whole range of final goods and services that comprise GDP including consumer goods and services， government services and capital goods. PPP figures by the World Bank are the most authoritative estimates of what money can buy in different countries and are used by most public and private sector organizations， such as the IMF. PPP adjusts the numbers to reflect what people in a given economy can actually afford.
PPPs are both currency converters and spatial price deflators. They are used by the ICP to make the GDPs of different countries comparable. Initially， GDPs are not comparable because they are expressed in national currencies and valued at national price levels. But， after PPPs are applied， the GDPs are converted to a common currency and are revalued at a uniform price level. As a result， differences between the GDPs reflect only differences in the volumes of final goods and services purchased， according to the World Bank.
After extensive research on the prices of goods and services， the ICP concluded that money goes further in poorer countries than it previously thought， prompting it to increase the relative size of emerging market economies.
The World Bank 2005 ICP report found that China’s economy was only 43 percent as large as that of the United States， while the new analysis stated that China’s economy had grown to 87 percent the size of its American opposite number by 2011.
The National Bureau of Statistics （NBS） of China rejected this conclusion and expressed reservations about some aspects of the methodology employed in the 2011 ICP round. NBS does not recognize these results as official statistics， read the report.
Experts from home and abroad have claimed that the methodology behind PPPbased GDP has its own limitations. China can’t buy advanced foreign missiles， ships， iPhones and cars using the yuan， no matter how strong its purchasing power is. In order to buy foreign products and services， China has to pay for them after converting the currency according to latest exchange rate. That’s why exchange rate-based GDP is extremely important when comparing different countries’ economic power.
Ye Tan， a renowned financial commentator in China， said the PPP-based GDP results are absurd.
“PPP only represents statistical estimates， which are affected by sampling errors， measuring errors and classification errors. Because it’s extremely complicated to gather data and calculate PPP， its margin of error can hardly be calculated，” she said. “A numbers game can hardly change the fact that Chinese economy is still quite underdeveloped.” The report points out that the margin of error in PPP is larger in housing prices and medical service prices than in food prices. The margin is larger for countries that are not on the same continent—such as China and United States—than countries in the same region such as China and India.
Besides， the World Bank said PPP-based GDP can’t be used to reflect a change of conditions during a period of time. Therefore， using the 2011 PPP-based GDP data to infer the 2014 China-U.S. GDP comparison results is unreasonable and illogical， according to China’s official Xinhua News Agency.
Bigger doesn’t mean richer
Since the financial crisis in 2008， China’s economic growth has accounted for one fourth of the global total. Considering its sheer size， its contribution may continue to rise in spite of an apparent slowdown in growth rate.
However， Chinese people’s living standards still lag far behind many developing countries， never mind developed countries. There is a sharp gap between the rich and the poor. And China’s social welfare system， encompassing areas such as medical care， pension and unemployment allowance， is far worse than that of the United States.
Even when using PPP as an indicator for per-capita income， China is ranked 99. Advancing upward of this low rank will take the country a long time.
According to the World Bank standard， China still has over 200 million of its population living under the poverty line， the total of the population in France， Germany and the United Kingdom. In order to offer its over 1.3-billion population a better life， China still has a long way to go， according to Xinhua.
The United States， on the other hand， has accumulated many advantages in industrial structure， technological innovation， creativity and global talents. Even if China’s GDP catches up with the United States， it doesn’t mean Chinese people are richer than their U.S. counterparts. By 2020， China’s per-capita income will reach $10，000 while the number in the United States will reach$40，000.
China is now faced with the growing pains of economic rebalancing and addressing the middle income trap. It needs to improve its economic structure while at the same time maintaining relatively fast development. It faces challenges including environmental issues， mounting local government debt and hefty shadow banking assets.
Even if China’s GDP surpasses the United States， the country still has to optimize its economic structure， strengthen technological innovation， digest excess capacity and climb up the value chain. None of those tasks would be made easier by having the economic crown in hand， said the Xinhua News Agency.
Besides， the calculation of the GDP didn’t factor in the cost of restoring the polluted environment， Ye said.
A report from China’s Ministry of Environmental Protection said the cost of ecological environment deterioration amounted to 1.27 trillion yuan （$203.3 billion）， accounting for 3.9 percent of the GDP in 2008. The amount of money spent on improving the environment stood at 504.31 billion yuan （$80.74 billion）， accounting for 1.54 percent of the GDP that year.
“The days when Chinese people can be toyed with using GDP figures are gone. After climbing above the poverty line， what they need are balanced long-term development， a better environment and more dignity，” said Ye.