This is a tough question to answer. But I can provide an answer of a mechanical sort. Consider how big the Chinese economy is, compared against the US, the Euro area and Japan.
Figure 1: Nominal GDP in millions of current International (PPP adjusted) dollars. Shaded area for 2009-11 indicate forecasts. Source: IMF, World Economic Outlook database, April 2009 version.
China looms large in Figure 1, rivaling the size of the Euro area. But I’ve plotted output in PPP terms. When considering the impact on economic activity and purchasing power (as opposed to well-being and real units consumed), current dollar valuations are more appropriate. Nominal GDP measured in these units are plotted in Figure 2.
Figure 2: Nominal GDP in millions of current US dollars. Shaded area for 2009-11 indicate forecasts. Source: IMF, World Economic Outlook database, April 2009 version.
Why is this distinction important? It’s because we tend to focus on China because of its size and dynamism. And while this focus is not misplaced, I do think we tend to forget that when thinking about the engines of world growth, we need to keep in mind that China, while growing faster than G-7 economies, is still only about the same size as Japan.
So, while it’s good news that China seems to be rebounding in terms of growth, due in part to the implementation of a substantial stimulus package, one has to keep in mind how big the Chinese economy is (in USD, 8.8% of world GDP, compared to 12.4% in International dollars).
For the purposes of this discussion, the second chart is the only one that matters.
The PPP GDP is only a measure of relative prosperity/poverty, nothing more. No international trade is conducted in PPP adjustments.
HOWEVER,
As China’s GDP per capita rises, the currency appreciates, and nominal GDP will converge up to PPP GDP. This would mean :
1) The price of all commodities rise, especially those priced in dollars (like oil).
2) The Chinese stock market rises a lot, for US investors.
3) US trade deficit with China shrinks.
4) All OECD countries see inflation, as the cost of Chinese exports rises.
This will be the cause of the next recession (2017 or so).
As China’s GDP per capita rises, the currency appreciates, and nominal GDP will converge up to PPP GDP. This would mean :
This would be true if China was a ‘normal’ country like … Japan. But … China growth is an artifact of Chinese government policy. It boils down to China printing money – leveraged on foreign currency reserves – and calling that growth. The government grows … but wages, for instance, will never rise up to a PPP- GDP.
China is in a pickle, they have to print (more) in order to stave off deflation. The Chinese citizens stash it away … they will do this until they don’t any more. Once that happens it will be hyperinflation.
In China, the reserves are the wealth, the rest is an appendage, to be used or abused to any end. I suspect the fiat yuan is practically worthless. If the Chinese thought otherwise, they would trade it.
Given the choice the Chinese will defend their reserves. As in the Weimar Republic, the Goldmark holders got rich, the Papiermark holders were destroyed.
The entire world is looking for the ‘fool in the market’. China is it, no wonder their officials are making so many whacky remarks.
Or maybe it all works out in the end as North Americans save like mad and consume less. Gary Shilling Podcast.
Manufacturing should be returned to EU, US as a result of increasing costs in China as it gets wealthier. So next crisis will be in China when its domestic consumption boom ends.
It’s clear that PPP does not continue to rise for all countries indefinitely. Is it a certainty that China’s PPP will continue to skyrocket as it has in this decade? What would be required for PPP GDP to level off or even dip back toward a rising nominal GDP? It seems difficult to believe that even with China’s “meteoric rise” economically it will continue to add nearly 1 trillion in PPP GDP annually.
what really strikes me in graph 2 is that it is clearly dominated by currency movements: the eurozone appears to massively expand in 2006-08, then just as missively shrink in 2009, when as you know we are talking moovements of 2-3 % per year.
It seems to me that some graph in real terms with fixed exchange rates might be a better indication. Furthermore, as you well know, it is really the trade and capital flow linkages and size that matter most.
bear in mind that most of china’s growth lately has been due to malinvestments in non-productive assets. saddling the economy and the taxpayer with so much deadweight will be taking toll in the years to come when bank loans turn sour and government debt requires ever higher taxes to be serviced.
what a better time for western banks to sell their shares in chinese banks than now, when the gov’t is forcing everyone to lend!?!?
Thanks Menzie.
Regardless of which measure you use the fact that China, as it moves away from a command economy, is increasing its rate of growth relative to those economies that are moving toward command economies.
Just an eyeball analysis, if growth rates continue in terms of PPP China will pass the US in about 5 years! That is a huge event. It should be obvious that the US is making the wrong economic decisions.
If you want a very interesting chart graph China GDP v US GDP in gold, the best proxy for inflation/deflation.
To give you a flavor.
2000
China 2.32 billion
US 35.17 billion
2008
China 1.74 billion
US 13.36 billion
The fall in US GDP in terms of gold is absolutely devastating while China is actually relatively stable.
The town fathers where I live decided about 75 years ago to line the suburban streets with the attractive swamp maple variety. The leaves turn a striking red in the fall.
Over the decades these trees grew larger and larger until they provided the desired shaded, tree-lined, look that is always seen in movies about the perfect towns and families in America.
Unfortunately, they didn’t realize that this variety is susceptible to a type of fungus which eats out the centers of the trees, eventually making them almost hollow. Since the nutrients move through the new growth under the bark the trees continue to look healthy.
Eventually a storm comes along and they just topple over. Once this was realized the town started to test the remaining trees and removed those at risk. They have now been forced to replant using other varieties and staying away from the mono-culture look of the past.
I offer this little parable as a warning about the US economy. For decades we have watched the economy “grow”, but have not looked at the core. Instead of building infrastructure, schools, hospitals and fostering innovation and scientific advancement, we have been engaged in expanding consumerism and militarism.
Now we see the basis of the economy falling over as one backbone industry after another fails. First it was steel, then it was light manufacturing, then electronics, then chemicals and pharmaceuticals and now automobiles and trucks. It seems that aviation will be next.
The growth rate in the US (and Europe to a slightly lesser extent) has been an illusion. The growth in China has not. Regardless of how it is being financed, the new power plants, high rise buildings, roads, dams and factories are real.
China and India now turn out more scientists and engineers than the US. Many get degrees of lesser quality than in the US, but this is changing rapidly as well.
What will be left so that the US can remain competitive?
DickF says: “It should be obvious that the US is making the wrong economic decisions”.
Ok DickF. I agree that the U.S. is making the wrong economy decisions. Which country is making the right decisions? I say Germany because they built up this impressive exporting economy on the back of strong Asian demand for machine tools.
The absolutely worst response to our present difficulties is to follow DickF in his view that government intervention is the problem.
I don’t think market prices are all that matters. China is the biggest importer of many of the key raw materials produced in the world. It is the reason why their price has recovered so fast this year post-collapse. It has far more impact on these prices than say – Japan – which it will overtake in dollar terms around…now.
As James Hamilton has explained 10 of the last 11 recessions have been preceded by a raw materials hike. As China recovers it sucks up the world’s steel, iron ore, copper and cement and so lifts the emerging markets of Africa, Asia, the middle East and Russia. All until the end of 2008 the key new markets for US exports, amongst others.
That’s without mentioning the effect of Chinese treasury purchases on US interest rates, also a key pre-condition for the housing price bubble and subsequent crash.
So how much effect does China have on the world economy? Plenty more than the market price.
Really DickF? Why is that obvious?
China has around 4 times the population of the US. It’s not clear to me at all why their crossing an arbitrary threshold of wealth per capita of around 1/4 of ours is indicative that they know better than we do how to run an economy.
Good point, and yes, the second chart is the relevant one.
Don’t you just hate it when somebody PPPs in the GDP figures? There’s so many things wrong with PPP, I don’t know where to start. It’s not even a good gauge of living standards.
Michael E. Sullivan,
I did not say that the Chinese would know bettter than we do how to run an economy. I think that both China and the US will fail at trying to run an economy. As Hayek says no one has enough knowledge to do that. China is growing stronger economically because they are moving away from running the economy.
As you say because of their size even small movements toward a free economy have made them an economic power to deal with. Even if they do not have as free an economy as the US when their size passes us the nations of the world will have to take notice.
DickF,
If the US has shrunk in terms of gold units, then so have Japan and the EU.
So that metric has little meaning.
Furthermore, 80% of US economic activity is generated from within the US. No other large economy is so self-reliant (despite everything we read about imported oil, imported Chinese goods, China buying US treasuries, etc.)
As a quasi-foreigner, let me tell all of you something :
Americans are the only people in the world who love to OVERRATE everything foreign, and UNDERRATE their own system, culture, and economy. Whether the economic influence of China, the cultural depth of India, the industrial potential of Japan, the quality of life in Scandinavia, the military strength of Saddam’s Iraq, or the importance of Putin’s Russia, America loves to overrate everything foreign.
Virtually every other country in the world does the opposite : Overrate themselves and put down others. That is considered ‘normal’.
Thus, when a foreigner hears an American say that America will be surpassed by China, or that America is in permanent decline, they are amazed to see that ‘even Americans think that, so it must be true’.
Think about it.
Don’t you just hate it when somebody PPPs in the GDP figures? There’s so many things wrong with PPP, I don’t know where to start. It’s not even a good gauge of living standards.
Yes Tom. I too an frustrated at the surprisingly large number of people who just cannot grasp the difference between PPP and nominal-conversion.
I am dreading the nauseating day in the near future when the brain-dead MSM trumpets for days how China’s economy is now ‘bigger than the US’, or *shudder* how China is now the world’s ‘richest economy’ because it’s PPP GDP is more than the US (nevermind that the nominal per-capita would still be a tenth of the US).
China and India now turn out more scientists and engineers than the US. Many get degrees of lesser quality than in the US, but this is changing rapidly as well.
Oh give it up. This argument jumped the shark in 2004.
Europe + Japan have turned out more engineers than the US for decades. America did not become impoverished over this time.
In India, 40% of the people still do not have electricity.
In China, there are 60 million more young men than young women, and air pollution far worse than the worst day in the worst city in America. Yeah, that is a great place to live.
It is amazing that you get duped into paranoia so easily.
Just an eyeball analysis, if growth rates continue in terms of PPP China will pass the US in about 5 years! That is a huge event. It should be obvious that the US is making the wrong economic decisions.
This is probably one of the silliest sentences I have ever read here. It is ignorant on so many levels, that it taints this entire blog.
It is NOT a huge event. It is a NON-EVENT.
When enough countries joined the EU by around 2007, the EU’s economy became bigger than the US, not just in PPP terms, but even nominal terms. Gasp! Shock! How did we ever survive?!?!?! /sarc
I think your bottom line is worthwhile Menzie. You forgot to mention, however, that the official GDP estimates are likely cooked.
To davef: Having lived in China before, I can assure you that PPP means little in this case. Even for measuring well-being and absolute consumption, it falls short for China. To obtain a sense of the country, you have to look at a distributional map of per capita PPP; this is also inadequate, though, as consumption in China means something far different than consumption in the US.
if growth rates continue in terms of PPP China will pass the US in about 5 years! That is a huge event.
Let’s not forget that China is a poor country and will remain poor for a significant time to come.
It’s GDP per capita at PPP is between $5,000 and $6,000, only about one-eighth of the US’s $47,000. It’s such a big economy only because it aggregates so many people.
People who think of China “overtaking” the US in GDP in the nearish future should consider the interesting arithmetic fact that it may do so while falling further behind the US in GDP-per-capita absolute dollar terms.
E.g., If from the above numbers US GDP grows at only a 2% rate China’s GDP must grow at 15.7% rate or the gap between it and the US will widen in absolute dollar terms, because China’s growth is from such a lower base.
And while China’s average growth rate in recent years of 9% or whatever is very impressive — we should wish all poor countries to grow so — it’s also true that growth from a low base is a lot easier than growth from a high base, and China’s economy is going to face major structural challenges in the decades to come before it joins the ranks of the first-tier GDP-per-capita economies.
Personally, if I were to place a bet, I’d wager that the second half of the 21st Century will belong to India, not China.
They output 4th or 5th most R+D. This will be 1st in a generation. So important soon.
Probably you meant “economic growth” or consumption. They abandoned environmental accounting when they realized it cut their GDP figures in half, ignoring that topsoil and freshwater are the bottom rungs of economic ladder; more valuable than plastic catfood and lead toys.
The problem with this entire topic is it compares apples to oranges. We are a unique country in this world.How do you compare the wealth of china to the us when our countrys are so differant. If you look at bugdets then china is richer than we are ( trillion dollar surplus vs 10 trillion debt ) but for living standards we have no equal. chinas gdp includes most of their idustry because their government ownes it. ours is made up of privatly owned industry ( until recently ).comparing the to seems to imply our government ownes us as is the case in most countrys.we are supposed to be a nation with a government that serves the people. we seem to be moving towards a nation that serves the government. this seems to coincide with higher inflation and los of standard of living ( we still have it better than elswhere ).i beleive america did better when we put ourselves first, then worried about others.i beleive chinas success comes from them putting china first.china will not dictate our future,we will,moving to socialism isnt going to helpwe are not going to find answers comparing apples to oranges either
China’s importance is at the first derivative–the rate of growth. If you go back and check commodities one-by-one, what you’ll find is that China represents typically 50% of global growth directly, and an additional 20-50% of growth indirectly (ie, the growth in consumption comes from China’s suppliers like ME, Brazil, etc.) This makes China, except during a recession, the price setter.
It also implies that the US is thus a price taker, and therefore is tranforming into a ‘small’ open economy from being a ‘big’ one.
“If you go back and check commodities one-by-one, what you’ll find is that China represents typically 50% of global growth directly, and an additional 20-50% of growth indirectly (ie, the growth in consumption comes from China’s suppliers like ME, Brazil, etc.) This makes China, except during a recession, the price setter.”
But how much of China’s growth is derived from demand eleewhere? Suppose, for example, that much of China’s growth represented production displaced from developed countries.
Great charts but very surprising. In chart 2 China goes from 2000 in 2004 to 6000 in 2011, a tripling in 7 years. This implies 17% nominal growth in dollars per year. Plausible? 9% real, 3% inflation and 5% currency appreciation?
Thanks for the very insightful blog.
“Just an eyeball analysis, if growth rates continue in terms of PPP China will pass the US in about 5 years! That is a huge event.”
No, it’s not. It will be made so in the media, but it’s not a “huge event.” It’s PPP GDP.
“It should be obvious that the US is making the wrong economic decisions.”
China’s PPP GDP surprassing the U.S. would happen regardless of what decisions the U.S. has made this year or in any other year recently.
“Even if they do not have as free an economy as the US when their size passes us the nations of the world will have to take notice.”
That will not happen when their PPP GDP exceeds that of America. Are you sure you understand what PPP GDP is?
Why would China continue to support a strong dollar once our consumption drops off dramatically and once their domestic consumption grows? We are still living in a subsidize economy based on unstable and unsustainable foreign capital flows. Reality will hit us squarely between the eyes when the dollar falls, commodity costs soar, import costs soar, discretionary incomes falls and our most valuable assets are sold off to repay our outstanding debts. We just might become a nation of serfs, working for our BRIC landlords.
For all its recent great success growing from a low base, China may have problems in the pipeline.
China’s growth has been tremendous. They have effectively utilized their rich resource “manpower”. You name it any field.They are there. “Omnipresent”. An excellent example for hard work and resource management. Keep it up.
One thing that I find interesting is the background of the leadership. For example, most US Leaders are Lawyers by trade, including Obama and Hillary, while most Chinese leaders are Engineers by trade.
Maybe I’m biased, being an Engineer myself, but I find Engineers easier to work with and focused on setting up an effective system where results can be measured objectively. Usually an Engineer wants to fully understand a problem and the pros/cons before making a decision. While they sometimes are interpersonally difficult to work with, usually they are results oriented. However when I’ve dealt with lawyers, I get the gut feeling that they are more like a “sales Guy”, selling me on something – by any means (fear, Greed, etc..), but that their real motive is filling their own pocket, not helping me.
I’m not saying that China is set up perfectly, just that if I were to have a complicated problem that requires a solid strategy and results, that I’d rather work with an Engineer on it than a lawyer. With all other things equal (except in interpretations of the law), if an Engineers suggests to zig and a lawyer suggests to zag – I’ll usually zig.
Just food for thought, from an American Ex-Pat living in China.
17th Politburo chiefs:
Xi Jinping – Chemical Engineer*
Wen Jiabao – Geological Engineering
Hu Jintao – Hydraulic Engineering
Wu Bangguo – Electrical Engineer
Yu Zhengsheng – Electrical & Aeronautics Engineer
Bo Xilai – Social Science
Jia Qinglin – Electrical Engineer
Zhang Gaoli – Economist
Wang Yang – Political Administration
Yang Jiechi – History
Li Keqiang – Economist*
Li Yuanchao – Mathematician
Li Changchun – Electrical Engineer
* Tipped to replace Hu and Wen in 2 years
I’m with GK, on the “americans consistantly under-estimate themselves and over-estimate others”. I think to a great extent it is a typical charecteristic of an society built on individualistic tendencies. Having travelled the world, and lived many places, I am still stunned by American protestations of economic frailty. Sometimes it’s just obnoxiuos, like hanging out with a model who keeps complaining she’s getting fat.
The world has never looked better for America. Surely a good portion of the growth in European GDP over the last fourty years has come from the economic ascendence of the U.S. & Japan, not despite this. All that growth in the BRICS and others, will bring extrodinary economic bennefits to the U.S., maker, of Aircraft, Pharmaceuticals, Blockbuster Entertainment, and the Google’s of the world. I was in rural Uganda last month, and the growth and dynamism was palpable, in ways that never existed before. And much of it is driven by the adoption of Western approaches to doing things. That’s the story world wide. It’s the quality of your GDP, not the quantity.
It’s the people damit, that makes the U.S. system succesfull, their more diverse, and they migrate more, co-exist more, and dream more, than any others i’ve met elsewhere. The open society, Open systems and Open political culture, is an unbeatable DNA for a world order, and it is the U.S. world order that is spreading, even if in fits and starts. What the u.s. will lode is it’s politcal power, and some of it’s excess pride, which is the real heart of the bleeting. But that is fine, the best thing that will happen to America, is transition to Normal country
I am as disgusted at the politcal class in the U.S. as much as anyone, but it is a real reflection of the countries political landscape. The chinese politburo comprised of engineers, is the modern day equivalent of the landed gentry, founding fathers, a group who can deliberate and steer without disturbance from the peasantry. But, will not prevail in the long run. China is yet to have it’s political super nova, but it is comming.
Looking around a U.S. campus, the talent of the world congregates there and as important as engineers can be, I want sytems that produce Google and Facebook founders, not flatter screen TV’s.
I found to be very helpful the information disclosured by Econbrowser
Thanks
Lozardo
“The world has never looked better for America. Surely a good portion of the growth in European GDP over the last fourty years has come from the economic ascendence of the U.S. & Japan, not despite this. All that growth in the BRICS and others, will bring extrodinary economic bennefits to the U.S., maker, of Aircraft, Pharmaceuticals, Blockbuster Entertainment, and the Google’s of the world. I was in rural Uganda last month, and the growth and dynamism was palpable, in ways that never existed before. And much of it is driven by the adoption of Western approaches to doing things. That’s the story world wide. It’s the quality of your GDP, not the quantity”
just an except from ur egocentric self righteous rant, had me puking, Americans underating themselves? They even tried to overate themselves by propping themselves to first place on the Olympics medal standings based on their own calculation system. yeah underate indeed, the trend of underating their economy mind you, only applies to a handful of intellect that actually understood the economic situation, like peter schiff for example among a few of them, Americans have the tendency to boast and overated themselves over anyone else, and statements like this make it even more spectacular lol, you are actually boasting about you tendency to underate yourselves, how retarded is that? Hey real world anyone? My guess is that you guys saying this are still taking candies from your sugar daddies.