I had seen a few headlines on how China’s total economy had been overvalued to the tune of four trillion dollars (about the size of Japan’s economy), but I had never bothered to read anything on it. I wrongly assumed this was just another meaningless recalibration. But today, the Yuan Also Rises blog, in a post by Eveline Chao (who does double duty as Associate Editor of China International Business Magazine), entitled, China’s economy shrinks by USD 4 trillion overnight I was convinced otherwise.
Ms. Chao gives meaning to the numbers:
My friend Yam Ki just alerted me to this article in the New York Times. Basically, the World Bank’s measure of the purchasing power parity rate in China was based on numbers from the 1980s. This year those numbers got updated and, hey, it turns out that the Chinese economy is worth something more like USD 6 trillion, not USD 10 trillion. That means, among other things, that those oft-cited figures about the impressive number of people lifted out of poverty in China are way off: “Suddenly the number of Chinese who live below the World Bank’s poverty line of a dollar a day jumped from about 100 million to 300 million, roughly the size of the United States population.”
The post cites to a New York Times article, entitled, China Shrinks, which explains this seismic shift in greater detail:
This is not a mere technicality. Suddenly the number of Chinese who live below the World Bank’s poverty line of a dollar a day jumped from about 100 million to 300 million, roughly the size of the United States population. And if you thought China’s energy consumption was dismally inefficient, consider that it still uses the same amount of energy to produce 40 percent less stuff. The reassessment does not just involve China. India is also likely to be downsized. And, by the way, global growth has very likely been slower than we thought.
I don’t think China’s leaders have said anything about the recalibration. But they should be pretty pleased. China has been known to enjoy throwing its weight around, but being big also exacts a cost. If a country is that wealthy, others can demand that it start pulling its weight and play more by the international rules. If China is less wealthy, and less a rival, maybe some members of the United States Congress will not press it so hard to revalue its exchange rate. Using the earlier estimate, China’s economy was due to surpass the $13 trillion American economy in about five years. At $6 trillion, it may look somewhat less scary.
Economists out there, is all of this simply due to a failure to account for China’s price inflation? What other implications might this shift have?