The rise of China as a global powerhouse continues at a pace few people could have predicted a decade or two ago. Now the guessing has begun about when the country will become the world’s largest economy.
“PPP exchange rates provide a more representative way to compare the relative size of economies than volatile market exchange rates, as price levels, especially for non-tradable goods and services, are normally higher in high-income economies”
LUCIO VINHAS DE SOUZA
Moody’s Investors Service
Depending on how one crunches the numbers, that could be as soon as the end of this year, according to a new World Bank study that has set the financial world abuzz in recent weeks.
Already ratings agencies such as Moody’s Investors Services are citing the study, known as the International Comparison Program (ICP), to underline the progress the Chinese economy is making.
A summary of the study, officially known as ICP 2011 for the year it began, was released on April 30 and the full report is due to be published in July. It predicts that China will have the world’s largest economy in terms of purchasing power parity (PPP) five years earlier than previous estimates.
“Based on purchasing power parity, the new estimates suggest that China’s GDP will reach $17.9 trillion by the end of 2014, compared to $17.5 trillion for the US,” said Lúcio Vinhas de Souza, a Moody’s managing director and sovereign chief economist.
Other estimates, such as those by the International Monetary Fund, have been calculated using current price levels and exchange rates. They put US GDP at $17.5 trillion and China’s at $10 trillion for 2014.
“While it had been expected that China’s GDP would surpass US GDP in the medium term, new estimates — compiled by the World Bank’s ICP — indicate that China’s emergence as the world’s biggest economy will take place by the end of this year, five years sooner than most economists had previously expected,” Moody’s said.
“PPP exchange rates,” argues Mr Vinhas de Souza, “provide a more representative way to compare the relative size of economies than volatile market exchange rates, as price levels, especially for non-tradable goods and services, are normally higher in high-income economies.”
Using the PPP methodology, China now accounts for the largest share of the world’s investment expenditure at 27%, compared with 13% for the United States.
China’s rise over the past decade has indeed been dramatic. Based on conventional measurements, China overtook the United Kingdom in 2006 to become the world’s fourth largest economy. In 2009 it moved past Germany and in 2010 it edged out Japan for second place.
However, the official response from the Beijing government to the ICP-led cheerleading has been decidedly unenthusiastic.
The ICP report even acknowledges that China’s National Bureau of Statistics had expressed reservations about the methodology and did not “endorse the results as official statistics”.
The message was reinforced in a commentary in Global Times, an international publication affiliated with the official People’s Daily.
“China being the No. 1 economic power is like a double-edged sword, which on the one hand will enhance the nation’s confidence but on the other hand pose great challenges to the improvement of people’s wellbeing,” Global Times commentators wrote.
“Whether the crowning will produce more positive results instead of social problems will be a huge test for the Chinese society.”
Other commentators say Beijing’s modesty is not hard to understand. If China declares itself the world’s biggest economy, they say, the government will face pressure from the population to improve healthcare, pensions, housing and other services.
The ICP study also offers a new way of looking at other significant economies. For example, it notes that the seven middle income economies of the G20 — China, India, Russia, Brazil, Indonesia, Saudi Arabia and Turkey — accounted for 31.6% of global GDP, an increase from 22.6% in 2005. The share for the remaining high-income economies fell from 56.3% to 44.9%.
“The ascending rankings of these emerging economies highlight their rising economic importance,” said Mr Vinhas de Souza.
The ICP summary showed that in 2011 the global economy produced goods and services worth more than $90 trillion and that almost half of this came from low- and middle-income countries.
Using PPP has shown that the developing economies have made greater strides in economic growth than earlier believed. With the tepid growth in many high-income economies, the increasing importance of the emerging economies in the global economy is on the trend to continue.
The ICP survey of 199 economies in all showed that a six of the world’s 12 largest economies were in the middle-income category (based on the World Bank definition). When combined, the 12 largest economies account for two-thirds of the global economy and 59% of the world population.
Based on PPP, global gross domestic product amounted to $90,647 billion, compared with $70,294 billion measured by exchange rates. Middle-income economies’ share of global GDP is 48% when using PPP and 32% when using prevailing exchange rates.
The research found that six of the largest middle-income economies – China, India, Russia, Brazil, Indonesia and Mexico – accounted for 32.3% of world GDP, versus 32.9% for the six largest high-income economies – the United States, Japan, Germany, France, the United Kingdom and Italy.
Asia and the Pacific, including China and India, accounts for 30% of world GDP, Eurostat-OECD 54%, Latin America 5.5% (excluding Mexico, which participates in the OECD, and Argentina, which did not participate in ICP 2011), Africa and Western Asia about 4.5% each.
China and India make up two-thirds of the Asia-Pacific economy, excluding Japan and South Korea, which are part of the OECD comparison.
ICP said that the five economies with the highest GDP per capita were Qatar, Macau, China, Luxembourg, Kuwait and Brunei. The first two exceed $100,000 per capita, while 11 economies have more than $50,000 per capita, though they collectively account for less than 0.6% of the world’s population. The United States has the 12th highest GDP per capita.
A general measure of material well-being of each economy’s population is measured better by actual individual consumption per capita – a measure of all expenditures in the economy that directly benefit individuals – rather than by GDP per capita.
By this measure, the five economies with highest actual individual consumption per capita (in order) are Bermuda, the United States, the Cayman Islands, Hong Kong, China and Luxembourg. The world average actual individual consumption per capita is $8,647.
In terms of investment at 27%, China now has the largest share of the world’s expenditure for investment (gross fixed capital formation), followed by the United States at 13%, India (7%), Japan (4%) and Indonesia (3%).