Wednesday, April 19, 2006

China is Bigger Than You Think

Mark Weisbrot writes
Most Americans, including policy-makers, do not realize that China already has the second-largest economy in the world. At current growth rates, it will pass the United States in less than a decade. …

The main reason why this historic change has not been foreseen is that China's GDP is usually reported on an exchange-rate basis. In other words, the value of China's annual output of goods and services is converted to dollars on the basis of the exchange rate between the dollar and the Chinese currency (renminbi) – currently about 8 renminbi per dollar.

So China is reported as having the sixth largest economy in the world, and one that will not catch up to the U.S. until 2041. But for most comparisons, this is the wrong measure. Anyone who has been to China and the U.S. will testify that 8 renminbi (the value of a dollar in Chinese currency) will buy more of most things in China than a dollar will buy in the United States. Because of these price differences, economists use what is called Purchasing Power Parity (PPP) GDP to make these kinds of international comparisons. This measure tries to adjust for the price differences between countries.

By this measure, according to IMF data, China's economy is more than eight trillion, or about two-thirds the size of the U.S. economy. This is vastly different from the $2 trillion, or 15 percent of U.S. GDP that is often reported. The PPP measure of GDP is what matters for such things as military power, too – it costs much less in China than in the U.S. to build a plane or put a soldier in the army. …

China has agreed – in joining the World Trade Organization – to a radical opening of its telecommunications, financial services, and insurance industries. These multi-billion dollar opportunities could go to Europe and other competitors who – again unlike in the Cold War era – would be loathe to cooperate against China if it meant abandoning the world's fastest growing market for their exports. It is also probably noticed in some policy-making circles that China today could trigger a sharp spike in U.S. long-term interest rates, simply by dumping a fraction of its huge accumulation of U.S. Treasury bonds. This would drive up mortgage rates and burst the housing bubble here, very likely triggering a recession.

So the current tensions with China over trade or foreign policy issues are likely to be papered over, at least for the present. From a U.S. business point of view, especially, China is just too big for U.S.-China relations to fail.