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UPDATED: May 14, 2014 NO. 20 MAY 15, 2014
Playing Catch-Up
Will China overtake the United States in 2014?
By Zhou Xiaoyan

The World Bank 2005 ICP report found that China's economy was only 43 percent as large as that of the United States, while the new analysis stated that China's economy had grown to 87 percent the size of its American opposite number by 2011.

The National Bureau of Statistics (NBS) of China rejected this conclusion and expressed reservations about some aspects of the methodology employed in the 2011 ICP round. NBS does not recognize these results as official statistics, read the report.

Experts from home and abroad have claimed that the methodology behind PPP-based GDP has its own limitations. China can't buy advanced foreign missiles, ships, iPhones and cars using the yuan, no matter how strong its purchasing power is. In order to buy foreign products and services, China has to pay for them after converting the currency according to latest exchange rate. That's why exchange rate-based GDP is extremely important when comparing different countries' economic power.

Ye Tan, a renowned financial commentator in China, said the PPP-based GDP results are absurd.

"PPP only represents statistical estimates, which are affected by sampling errors, measuring errors and classification errors. Because it's extremely complicated to gather data and calculate PPP, its margin of error can hardly be calculated," she said. "A numbers game can hardly change the fact that Chinese economy is still quite underdeveloped."

The report points out that the margin of error in PPP is larger in housing prices and medical service prices than in food prices. The margin is larger for countries that are not on the same continent—such as China and United States—than countries in the same region such as China and India.

Besides, the World Bank said PPP-based GDP can't be used to reflect a change of conditions during a period of time. Therefore, using the 2011 PPP-based GDP data to infer the 2014 China-U.S. GDP comparison results is unreasonable and illogical, according to China's official Xinhua News Agency.

Bigger doesn't mean richer

Since the financial crisis in 2008, China's economic growth has accounted for one fourth of the global total. Considering its sheer size, its contribution may continue to rise in spite of an apparent slowdown in growth rate.

However, Chinese people's living standards still lag far behind many developing countries, never mind developed countries. There is a sharp gap between the rich and the poor. And China's social welfare system, encompassing areas such as medical care, pension and unemployment allowance, is far worse than that of the United States.

Even when using PPP as an indicator for per-capita income, China is ranked 99. Advancing upward of this low rank will take the country a long time.

According to the World Bank standard, China still has over 200 million of its population living under the poverty line, the total of the population in France, Germany and the United Kingdom. In order to offer its over 1.3-billion population a better life, China still has a long way to go, according to Xinhua.

The United States, on the other hand, has accumulated many advantages in industrial structure, technological innovation, creativity and global talents. Even if China's GDP catches up with the United States, it doesn't mean Chinese people are richer than their U.S. counterparts. By 2020, China's per-capita income will reach $10,000 while the number in the United States will reach $40,000.

China is now faced with the growing pains of economic rebalancing and addressing the middle income trap. It needs to improve its economic structure while at the same time maintaining relatively fast development. It faces challenges including environmental issues, mounting local government debt and hefty shadow banking assets.

Even if China's GDP surpasses the United States, the country still has to optimize its economic structure, strengthen technological innovation, digest excess capacity and climb up the value chain. None of those tasks would be made easier by having the economic crown in hand, said the Xinhua News Agency.

Besides, the calculation of the GDP didn't factor in the cost of restoring the polluted environment, Ye said.

A report from China's Ministry of Environmental Protection said the cost of ecological environment deterioration amounted to 1.27 trillion yuan ($203.3 billion), accounting for 3.9 percent of the GDP in 2008. The amount of money spent on improving the environment stood at 504.31 billion yuan ($80.74 billion), accounting for 1.54 percent of the GDP that year.

"The days when Chinese people can be toyed with using GDP figures are gone. After climbing above the poverty line, what they need are balanced long-term development, a better environment and more dignity," said Ye.

Email us at: zhouxiaoyan@bjreview.com

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