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Page added on December 16, 2014
Is China’s economy really the largest in the world?
For the first time in more than 140 years, the US has lost the title of the world’s largest economy – it has been stolen by China, according to the IMF. But how reliable are the statistics underpinning this claim? The BBC’s economics editor, Robert Peston, explains lower down why China matters to all of us.
The Chinese economy is now worth $17.6tn, slightly higher than the $17.4tn the International Monetary Fund (IMF) estimates for the US.
So for the first time since 1872, when it overtook the UK, the US has been knocked off the top spot.
The IMF calculated these figures by using purchasing power parity (PPP) which enables you to compare how much you can buy for your money in different countries. As money goes further in China than in the US, the figure for China is adjusted upwards.
Without the PPP adjustment, the IMF estimates that China’s economy is worth far less – $10.3tn.
But how much faith can be placed in the accuracy of GDP figures supplied by China when even the current premier, Li Keqiang has doubted their validity in the past?
A declassified US diplomatic cable revealed that in 2007, Li, who was then secretary general of Liaoning Province, had told the US ambassador that Chinese GDP statistics were “man-made” and “for reference only”.
But with a population of 1.36 billion people, China really should be the world’s largest economy, argues Matthew Crabbe, author of Myth-Busting China’s Numbers. He’s spent more than 20 years looking at the country’s figures and the facts behind them.
His reaction to China’s new title: “So what?”
More or Less: Behind the stats
Listen to More or Less on BBC Radio 4 and the World Service, or download the free podcast
He points out that if you look at per capita spending power – the value of all goods and services produced within a nation in a given year divided by the average population for the same year – then, even adjusted for PPP, China ($11,868) is still lagging a long way behind not only the United States ($53,001) but also the likes of Turkmenistan ($12,863) and Suriname ($16,080).
So how easy is it to accurately measure the size of the Chinese economy or even just parts of it?
Not very, says Crabbe. “One of the key things that has to be understood is that distortions that happen at the village and provincial levels become amplified as they go out the statistical gathering chain.
“Year on year the GDP figures for each province grew faster than the national total, which logically and mathematically could not be.”
He attributes part of this discrepancy to corruption but also says that inaccuracies became exacerbated by the sheer size of the country and the rate at which it was growing.
Inaccurate GDP figures can have serious consequences for companies that base investment decisions on them. Crabbe has a cautionary tale.
In 2005 the Chinese government readjusted its GDP figures and the statistics on which they were based, including retail sales. The consensus in the retail community at the time was that nobody really understood the true size of the retail market in China.
“I went through each of the sectors to see what the real size of each of those would be, how fast they were growing and therefore what the real size of the retail market was.
“My conclusion was that the real retail market at that time was half the value of the official government figure,” he says.
Crabbe discovered there were problems with definitions of what retail goods actually were. The government figures included wholesale sales of consumer goods, some government procurement, and some business to business sales – so not everything that had been included was strictly retail.
It’s difficult to gauge whether the accuracy of definitions and the data have really improved in recent years. But the IMF forecasts growth of 7.4% in China for 2014 and 7.1% in 2015, compared to US growth of 2.2% this year and 3.1% next year.
This means that the Chinese are unlikely to relinquish their number one status soon. In fact the IMF predicts that by the end of this decade the Chinese economy will be worth $26.98tn – 20% bigger than the US at $22.3tn.
But while the US held the top spot for 142 years, China may not be able to match that record – long term financial forecasts from the IMF and others indicate that by 2100 India could overtake them both.
Why China matters Robert Peston, BBC Economics Editor
The most important number in the world, for the past 30 years and next five years, is China’s growth rate. For 30 years its economy grew at a mind-boggling rate – roughly 10% a year but that stopped when the global economy hit problems in 2008 and it fell very sharply.
Then the Chinese government did something remarkable and persuaded its banks to lend as if there was no tomorrow. They lent for investment and investment went up from an already extremely high 40% or so of GDP, to about 50% and the growth rate picked up again. There’s been nothing like it in the history of capitalism. It’s astonishing.
The Chinese have worked out that this new way of growing through debt funded investment rather than exports can’t go on forever and is actually potentially quite dangerous. So they are trying to reconstruct the economy but it’s not going desperately well and growth is now around 7%.
I’m not sure whether we can trust these numbers to be honest though. I think most of us would say that if we’re slightly uneasy about most government statistics, then we’re profoundly uneasy about China’s statistics. We do know that China is slowing down and there is a big debate about how fast that should be happening.
But the big story that has influenced all our lives in the last 30 years has been the economic revolution in China. For years it improved our living standards by making the things we buy cheaper and cheaper. It gulled central banks everywhere into thinking they had inflation under control so they kept interest rates way too low for too long.
China generated these enormous surpluses, which it then lent to the US to finance its colossal deficit. China was the big economic force in the world – and it still is – but it’s moving in the opposite direction and the speed at which it slows down and the way that it slows down influences all our lives.
We should be under no illusion that the really big thing in the world, which will have an impact on our living standards is what happens in China. Nothing else really matters in comparison.
20 Comments on "Is China’s economy really the largest in the world?"
Makati1 on Tue, 16th Dec 2014 6:28 am
Maybe the fact that the Chinese are not buying anymore US debt is a good sign of the future? They have been investing it in multi-billion dollar resources and infrastructure in other countries, and gold by the hundred tons. You know, that 6,000 year old “bubble” that has been considered as a valuable and reliable storehouse of wealth since, well, Noah’s time.
Dredd on Tue, 16th Dec 2014 7:01 am
“I’m not sure whether we can trust these numbers to be honest though.” – BBC
Then don;t write about it.
The competent U.S. journalists who walk that beat have been confident about their coverage.
The big, big surprise and the main story is how fast it happened … as much as 25 years before expected (Economic War Of The Pacific – 4).
Davy on Tue, 16th Dec 2014 7:29 am
Mak, part of the reason China is not buying more US debt is China growth is declining. The real numbers on China GDP growth is almost certainly 1/2 of the official numbers. If you include all the malinvestments, corruption, and market manipulation I imagine China in recession. If you include the fact that China is one huge brownfield site with a population far in excess of carrying capacity then you see China is in the worst possible position of any major power. All regions are going to nose dive but China and Asia will go into the abyss.
Rodster on Tue, 16th Dec 2014 9:25 am
Who the hell knows at this time who has the largest economy in the world? Everybody fudges their numbers including China…gasp !
I read an economic report from someone in the area that puts China’s realistic growth at around 2% the last several years and not the mind blowing 7-9% we have been led to believe.
penury on Tue, 16th Dec 2014 12:30 pm
Would you believe it? China STOLE the U. S. rightful title of “Largest Economy” and they did it with suspect .gov numbers. Isn’t it horrible that the “honest” U.S .gov numbers were not taken into consideration. Maybe our .gov can lie about the economy like these thieving Chinese. Would that be better?
Davy on Tue, 16th Dec 2014 1:06 pm
Pen, in any case, in the new paradigm we are entering bigger is not better. Traditional BAU Good is bad in the new paradigm.
Northwest Resident on Tue, 16th Dec 2014 1:31 pm
Is debt-fueled growth really growth? I don’t know the answer to that question. But in China, as in the USA, from my perspective ALL growth these last few years has been nothing but debt-fueled growth. In other words, without massive debt being issues to finance economic activity, there wouldn’t have been any growth at all. Maybe that has always been true in this debt-based capitalistic system we have all become accustomed to. The big difference, though, is that at one point in time the debt issues was expected to be paid back and there was always another debt-fueled boom on the horizon to pay off old debt with the proceeds from economic activity and gluttonous consumption financed by the new debt. Today, and going forward, I believe we can expect that virtually ZERO PERCENT of the existing trillion$ in debt will be paid off, in fact, it is more likely to evaporate into thin air leaving both sides of the ledge zeroed out. And moving forward, don’t look for another economic boom to generate the proceeds required to pay off current/old debt — because there isn’t going to be another economic boom, almost guaranteed (imo).
Apneaman on Tue, 16th Dec 2014 2:08 pm
Why not measure wealth by waist and ass size per capita?
Davy on Tue, 16th Dec 2014 2:33 pm
Won’t work AP because once hunger sets in everyone will have a bonie ass. Hunger is the true wealth equalizer.
Makati1 on Tue, 16th Dec 2014 6:24 pm
Davy, China is buying oil and resources, not American debt, because it has realized that USTs are losing bets fast becoming trash. The rest of the world is following.
They are holding in excess of $2T in those Charmin papers and are getting rid of them as fast as they can without crashing the system. Even with $50B deals, it take time to burn thru $2T. They can buy a big chunk of the world with $4T in reserves plus the interest they get from those holdings.
Davy on Tue, 16th Dec 2014 6:34 pm
Makkie, when the hell are you going to answer the 25 Trillion China question? After you do get back to me and we can discuss your propaganda vomit.
GregT on Tue, 16th Dec 2014 7:26 pm
The Chinese are buying everything that they can get their hands on here in Western Canada. Resources, real-estate, and businesses. Even tourism is now being targeted. It is estimated that over half of all downtown condos in Vancouver are now owned by Asians and are sitting empty. A large percentage are sold sight unseen, and are being payed for with cold hard cash. I have heard that Vancouver has the largest number of Mercedes automobiles per capita of any city in the world. The vast majority being driven by nouveau Chinese multi-millionaires. Their 20 year old kids drive Porches, Lamborghinis, and Ferraris, and get them confiscated by the police for street racing.
Makati1 on Tue, 16th Dec 2014 10:17 pm
Davy, right after you answer the $100+ Trillion US question. The Us is in hock for more than that amount and that does NOT include State or local government debt.
Makati1 on Tue, 16th Dec 2014 10:19 pm
GregT, wait until those condos are worth zero. Big cities are the last place to invest today. But then, many here don’t see that situation. Obviously too many Chinese are drinking American cool aid.
antaris on Tue, 16th Dec 2014 10:45 pm
When the shit hits the fan in China, all those millionaires who bought their way into Canada will run for the condos they own in Hongcouver.
MKohnen on Tue, 16th Dec 2014 11:48 pm
They don’t only own condos in Vancouver. They are now major stake holders in the tar-sands … oops, oil-sands. We have gotten to the point where there are a hell of a lot of Canadians, in Canada, working for the Chinese.
GregT on Wed, 17th Dec 2014 4:56 am
“GregT, wait until those condos are worth zero. Big cities are the last place to invest today.”
Completely agree Makati. All of this offshore money has blown a real-estate bubble of epic proportions. It is also creating a false economy. Sooner or later this bubble isn’t going to burst, it is going to explode. I can only hope that my exit strategy won’t be too late.
Davy on Wed, 17th Dec 2014 5:34 am
Mak, the feds balance sheet is dwarf by China’s credit creation estimated to be 25 Trillion from the central and provincial governments. IMA in debt that is bad debt for all the mal investment, industry overcapacity, infrastructure never to be utilized efficiently, and ecological destruction never witnessed by humans.
The Fed as the Dr. of the world’s reserve currency is in another category and that number is 4.5 Trillion. A truly bad number considering the privilege of having a reserve currency. You then can throw in the Fed Gov debt of 18 Trillion. Much of this debt is held by Americans and much by countries like China who artificially depress their currency so they can unfairly gut the US economy through jobs migration.
Much of the Fed debt is US gov debt so anyone with dollars has a US gov debt liability. The rest of the 100 Trillion Mak is notional. Much of that is unfunded liabilities of which your small SS check you survive on is part. This is ill-gotten gains from a claim on the future that folks like you unfairly claim to. Mak, do you realize you are sucking blood out of the children of America for ill-gotten gains. My SS I do not believe I will ever see a penny so it is written off in my mind. This claim is bogus because the physical wealth to support that was never there.
China and the other great powers are in the same boat with unfunded liabilities maybe not as great but very large. Europe is a prime example of excessive unfunded liabilities. The real question comes down to carrying capacity wealth and Asia is bankrupt and will explode into famine and social chaos when The Asian Mega population centers depopulate into the brownfield countryside of the what smallish amount of food producing countryside Asia has. Mak, my biggest question to you is how is Asia going to grow food on old toy factory sites?
MKohnen on Thu, 18th Dec 2014 3:19 am
Davy,
This thread is probably already dead, but in terms of the $25 Trillion Chinese “debt bomb”, I would refer you to an article by Forbes (not that I believe everything they have to say):
http://www.forbes.com/sites/jackperkowski/2014/01/21/chinas-debt-how-serious-is-it/
It’s interesting. I’m sure China’s economy is going to have to go through some tumult because of debt, but I doubt it will wreck their economy any more than the US’ debt is wrecking theirs. After all, debt is just part of the Monopoly game the capitalist system plays. As long as everyone wants to keep playing, debt is rather meaningless. Unfortunately for the players, though, tangible resources are the bug in the wood-works. As those become harder to get, the game will fall apart. But I don’t think it will fall apart until then.
Davy on Thu, 18th Dec 2014 6:32 am
MK, the debt bomb is going to erase the digital wealth of the HNW individuals. That is where the real bomb is going to hit. All those fake notional digital 1 & 0’s that do not reflect reality nor anything physical. The US has a concentration of these individuals so it will have the biggest hit in that regards.
Yet, on carrying capacity the US is much better shape than Asia. Asia is a mega population region with mega urban areas surrounded by a brownfield countryside of degraded farmland and water resources. This condition is from the final blowout of unrestricted development and industrialization. I used to think US suburbia was the biggest mal investment in the history of man but Asia topped that especially China.
China went from one of the better positions for an end to BAU with a sustainable and resilient rural countryside to a vast urbanized country surrounded by destroyed countryside. I remember when I was young Chinese cities where bikes were the norm. This amazed me and admired it. Today China is one big traffic jam in air one cannot breathe without masks. Yes, China had a population too large but if the condition of rural resilience and sustainability would have remained they would have been able to adjust. China has historically always adjusted with population die offs but a remaining core structure.
Today china is toast. They have destroyed their food producing areas and degrade most of their water. Tell me how they are going to raise food on an old toy factory site? How is that going to end well?