What is the real size of China’s economy? – Asia Times

In May, the World Bank completed one of its periodic International Comparison Program (ICP) assessments – the price survey that “officially” determines GDP purchasing power parity.

Like the college rankings, the league table of the world’s largest economies shifted just enough for the obsessive to notice, while there were no real surprises. Harvard will be Harvard, and whether Princeton ranks above or below Yale this year is largely irrelevant.

For obsessives, China’s lead over the US widened by 5.6%, India caught up with China, Japan maintained its ranking by sliding down one spot, Russia moved ahead of Germany, France ahead of the UK, Indonesia fell two places and Brazil climbed a place. The top 10 stayed in the top 10.

While Russia fans may be beating their chests about a 13% PPP rise and Brits may be worried about dropping out of the top 10, all told, the latest ICP didn’t provide any outstanding revelations. Nor should there be.

Periodic price surveys are necessary to calibrate and maintain the accuracy of PPP adjustments. However, if they result in significant shifts, either too much time has passed between surveys or the methodologies have broken down.

ICP is a massive undertaking. According to The Economist, World Bank researchers visited 16,000 stores in China alone to collect price data. The latest ICP assessment collected data in 2021, four years after the 2017 survey. And the bottom line is that China’s GDP was understated by $1.4 trillion, pushing China’s PPP GDP in 2022 from 119% of the US to 125%.

According to the Economist, China’s National Bureau of Statistics (NBS) was unimpressed, downplaying the results saying, “We need to interpret the results carefully and correctly understand the global economic landscape and the status of each economy in it.” while stressing that China remained an “emerging economy”. If the NBS didn’t like such a modest upward adjustment to China’s PPP GDP, it will surely hate the rest of this article.

China’s PPP GDP is only 25% larger than that of the US? Come on people… who are we kidding? Last year, China produced twice as much electricity as the US, produced 12.6 times as much steel and 22 times as much cement. China’s shipyards accounted for over 50% of world production, while American production was negligible. In 2023, China produced 30.2 million vehicles, almost three times the 10.6 million produced in the US.

On the demand side, 26 million vehicles were sold in China last year, 68% more than the 15.5 million sold in the US. Chinese consumers bought 434 million smartphones, three times the 144 million sold in the US. As a country, China consumes twice as much meat and eight times as much seafood as the US. Chinese shoppers spent twice as much on luxury goods as American shoppers.

In 2023, Chinese travelers took 620 million flights, 25% less than the 819 million flights taken by Americans, but Chinese travelers also took 3 billion trips on high-speed rail (and 685 million on traditional rail), significantly more than 28 million Amtrak. thrips

With the exception of luxury goods, all of the above are volume or unit measurements and must be adjusted for quality/features to be comparable to apples. It would be very presumptuous of us to discount the 16,000 shop visits conducted by the World Bank and blame them for severely undercutting China’s PPP GDP.

But that’s exactly what we’re going to do. It is prima facie ridiculous that China’s production and consumption, at multiples of US levels, can realistically be discounted for lower quality/features to come to only 125% of US PPP PPP.

It’s not that we think the World Bank has done a bad job. It is that we believe that China’s NBS, contrary to popular opinion, has been reducing GDP for decades and the World Bank should work within the bounds of the NBS’s reported data. This was politically important decades ago for WTO concessions, and it is politically important today to maintain emerging economy status as China makes a play for leadership of the Global South.

We believe that China’s GDP and PPP GDP have been depressed by an incomplete transition from the Material Product System (MPS) of national accounts, which excludes services by design. The World Bank is likely to dutifully do its sums with China’s consumption of goods at multiples of the US, but measuring consumption of services as a fraction of the US.

The United Nations System of National Accounts (UNSNA) provides voluntary guidance and specifically states that nations should base their national accounts on local conditions. What this means in the West is to adopt all the UNSNA “innovations” introduced over the years.

Items such as imputed rent, legal fees and Research and Development are now all included in GDP. The UK was wild with both illegal drugs and prostitution as now part of its GDP because… hey, why not? The 2008 UNSNA guidelines explicitly recommend that illegal market activity should be included in GDP.

China’s NBS stayed on the ground at a conceptual level. Rightly or wrongly, the Leninist MPS considers services the necessary costs of material production and not the creation of real value. In China’s first attempt to convert MPS to SNA in 1985, it arrived at a ridiculously low 13% of the MPS number and called it China’s service GDP.

Over the years, the World Bank has twisted the NBS’s arm for modest growth in China’s services GDP – with limited success.

The affordability crisis in Western economies, particularly the US, is largely driven by inflation of essential services – rent, health care, education and childcare – not manufactured goods. While these costs have also increased in China, they have increased less and are still largely left out of GDP.

Also not captured by the ICP survey conducted in 2021 are the price and service wars that have erupted across industries and products – a bane for businesses but a boon for consumers.

This is most evident in China’s car market with OEMs either cutting prices to the bone (Hyundai Sonatas down to $17,000 from $42,000) or offering the latest technology for peanuts (a BYD Q plug-in hybrid electric car with 2000 kilometer range for $14,000). . The price of solar panels fell 50% in 2023 and continues to decline in 2024. CATL has announced plans to halve lithium-ion battery prices by the end of 2024.

The restaurants offer white-glove perks like hot towels, lotion by the sink, and nicely remodeled decor. Hairdressers hand out bottled water and fruit platters. Technology companies have reduced the prices of the large language model (LLM) to essentially free. The quality of service in China, impossible to measure, is now above the West and perhaps even Japan.

Accession to UNSNA has caused a split in the understanding of GDP. As essential services become an increasingly large part of Western economies, their growth does not seem to result in significant improvements in living standards.

Are US health care and universities twice as good as they were in 2000? If American families have not greatly improved their health care, education, housing, and child care over the past two decades, then inflation has been systematically underreported and GDP growth may actually have been less than 1% in year (instead of 2%). which is equal to stagnation considering 0.8% per year population growth. This may go a long way in explaining the popular anger and meltdown in American politics.

China’s material-focused GDP may be a better measure of the economy as it relates to living standards, especially since the UNSNA has lost its mind by officially recommending that drugs, prostitution, illegal gambling and theft be included in GDP .

Western defense analysts are on to something when they come up with wildly inflated estimates of China’s defense spending. But it’s not China’s defense spending that’s low—it’s Western defense spending, especially by the Pentagon, that needs to be reassessed.

Some $1 trillion a year the US spends on defense (including intelligence and Department of Energy programs) has caused the US Navy to shrink while China’s $236 billion budget has built the world’s largest navy by number of ships.

Similarly, analysts who complain that China accounts for 30% of world manufacturing output but only 13% of household consumption are way off the mark. China accounts for 20-40% of global demand for almost every consumer product, but most of the services it consumes are left out of national accounts.

So how much is it? How big is China’s economy really? About six months ago, this writer estimated that China’s GDP needed to rise by 25-40% to be on the basis of UNSNA.

But after buying cars, buying a domestic brand carbon fiber road bike with all the bells and whistles for $2,600 (equivalent to a $15,000 ride), paying $7.65 for Bluetooth headphones (much better than the $250 PowerBeats Pro they replaced), renting cars for $20 a day, staying in boutique hotels for $30 a night, buying an incredibly sturdy heavy umbrella for $2.20 (and lost it immediately) and undergoing an unfortunate series of medical procedures (major and minor) for less than the immigrant discount health insurance and receiving white-glove customer service for smaller purchases, price mind map and the value of Han Feizi has collapsed.

No, ICP didn’t do a bad job. They were hampered by the initial conditions imposed on China’s NBS. And the data released in 2024 was taken in 2021 – ancient history in China. The recent ICP adjustment of several percentage points to China’s PPP relative to the US caused concern from the NBS.

But the reality is that an exact fix would be a multiple or two.