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Aruba, May 2, 2014 - Let’s assume, for the sake of argument, that China’s economy is on the verge of surpassing the U.S. economy in size. (By one measure, anyway—purchasing power parity as calculated by the World Bank’s International Comparison Program.) What does it mean?
Start with what it doesn’t mean. It doesn’t mean China is rich. All that gross domestic product has to be spread around more than a billion people. On a per-capita basis, the highest-income country in the world in 2011 was the oil-soaked and lightly populated Gulf monarchy of Qatar, at $146,000 per person. The U.S., as this chart shows, was No. 12, at just under $50,000.
China? China was No. 101, at a little less than $10,000 per capita. It’s not labeled on the chart, but if it were, it would appear between Serbia and Dominica.
It also doesn’t mean that China has the same international heft as the U.S. does. Remember, these figures are calculated according to purchasing power parity, which compares buying power. China looks good by that measure because it has a lower cost of living. A hundred dollars buys more food, haircuts, etc., inside China than it does inside the U.S. But if China wants to buy critical materials from abroad—say, sophisticated electronics or aircraft—what matters is the regular old exchange rate. And by that measure, China’s economy is considerably smaller. It was 47 percent as big as the U.S. economy in 2011 going by the exchange rate vs. 87 percent as big using purchasing power parity.
China itself isn’t embracing the World Bank’s report. The National Bureau of Statistics “expressed reservations” about the study’s methodology and “did not agree to publish the headline results for China,” the report said.
On the other hand, China is even more powerful in another way than these numbers suggest. China runs big trade surpluses that have given it $3.7 trillion worth of foreign-exchange reserves as of last year, most of which are held in dollar investments. The U.S., on the other hand, runs perpetual trade deficits. Sure, the U.S. can make big purchases abroad. But every time it does, it gets deeper in debt to the rest of the world.