Economically, is China no. 1 or no. 2?

Is China the leading nation with its newly acquired economic might, or is the USA still the economic leader? The economic forces that we will briefly analyse are the size of the economy, the level of international trading, foreign investments, and the financing provided to other countries.

Over the last 30 years, the economic growth of China has been phenomenal. The most talked about measurement to assess the economic might of a nation is the GDP (i.e. creation of economic wealth). The challenge in comparing countries is that the value of the GDP needs to be converted from the currency of the country into a common currency, generally the US dollar. Often the number that is used is the GDP at CER (Current Exchange Rate, also called Nominal), compared to the GDP at PPP (Purchasing Power Parity).

GDP at CER is the GDP in local currency converted into US currency using the currency exchange rate at the time the two countries are compared. The challenge for this method is that the currency exchange rate is at times established artificially and is often subject to rapid fluctuation due to external factors.

For 2016, China’s GDP was 74.4 trillion RMB. For 2016, the value of the Chinese currency was on average 6.6 RMB to the US$, while in early March 2017 it was 7.0 RMB to the US$. Let us convert the Chinese GDP from RMB into US$, for these two values.

  Value in trillion
  In RMB In US$
 

Rate of

Rate of

 

6.6

7.0

Chinese GDP

74.4

11.1

10.6

Comparison of China’s GDP at two different exchange rates.

We note that the value of the Chinese GDP has shrunk by US$0.5 trillion (11.1 – 10.6), while in fact, the actual GDP value has remained the same.

The comparison of the GDP at PPP uses the actual wealth generated in goods and services, and the resulting power of consumption that is compared between two nations. It is for that purpose that for an end result that better reflects the reality, the GDP at PPP is used. In the CIA Factbook, one of the most comprehensive accessible database that covers all countries, comments on the GDP for China read: “Note: because China’s exchange rate is determined by fiat rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate substantially understates the actual level of China.”

The following table presents the GDP converted in US$ at PPP for the G20 nations.

gdp-at-ppp              GDP of the G20 countries in US$ at PPP. Source: CIA Factbook

We see that the GDP of China at US$21.3 trillion is the largest in the world, even exceeding the combined current economic might of the 28 states in the European Union. It also exceeds the GDP of the USA by almost 15%. In fact, China’s GDP surpassed the US GDP in 2015. No other country approaches the economic might of these two nations.

A country can also impact or influence another country through trade. By using data from the CIA Factbook for exports and imports, we see that China’s Total Trade value marginally exceeds the numbers from the USA. For this analysis, we have added to China a portion of the numbers for Hong Kong.

 

Export value

Import value Total Trade
  US$ trillion US$ trillion

US$ trillion

China (partial HK)

2.2

1.6

3.8

USA

1.5

2.2

3.7

International Trade for China and the USA. Source: CIA Factbook

Another manner in which a country can economically influence another one is through FDI (Foreign Direct Investment). There are two types of FDI: Outward FDI where companies in one country invest in another country, and Inward FDI where a country receives foreign investments. This table illustrates both types of FDI. The Inward FDI value, for China (including HK) in 2014 (232 US$ billion) matched what the USA received (US$231 billion). For 2013, China trailed the USA by 15%. For the Outward FDI, the USA leads over China with China rapidly catching up.

outward-and-inward-fdiOutward and Inward FDI. Source: UNCTAD

Lastly, countries can influence other countries by lending them money. In this case, the USA has historically been the leader. Recently, China pulled off an amazing feat by launching a competitive institution that rivals the US. Since the Bretton Woods Agreement of 1944, the global framework for the world economy was dominated by the leading powers at the end of WWII. With the rapid growth of China, it came knocking at those doors, which remained closed. So China decided to introduce its own international banking organization. In 2014, China launched the Asian Infrastructure Investment Bank (AIIB) with the implicit goal of rivaling the World Bank, which is indirectly controlled by the USA. The USA encouraged western nations not to join the AIIB, but it failed. By the end of 2016, the AIIB already had 57 member nations, with 6 more aiming to join.

So overall, where does China stand? Let us tabulate the above information.

 

China

USA

GDP at PPP

+15%

 Trailing

Trade

Slight lead

 Decreasing

FDI

Catching up

Slight lead

Foreign Lending

Catching up

Solid lead

Comparative information. Sources: Various

There is no obvious economic leader, but what is clear is that over the last decade, China has nearly caught up with the USA in all aspects of what can impact the economic might of a nation. With a population of 1.38 billion compared to 0.32 billion for the USA (4 times smaller), it is a sure bet that in the near future China’s economic might will exceed the power of the USA, and in fact will easily surpass the USA by the middle of the 21st century.

So the answer to our question is: “It can be said that China has the largest economy. But in terms of economic might, the USA remains number 1, but only marginally. Within a decade or so, China will have taken over that position”.

Pierre

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