Sunday, Nov 23, 2014

Just a coronation

China is an economic giant, but a financial midget. Its currency is non-convertible and lacks the coveted status of a global reserve currency. (Source: Reuters) China is an economic giant, but a financial midget. Its currency is non-convertible and lacks the coveted status of a global reserve currency. (Source: Reuters)
Written by Minxin Pei | Posted: June 27, 2014 12:31 am | Updated: June 27, 2014 8:28 am

The day China surpasses the US as the world’s largest economy may be only months away according to the World Bank.

Based on purchasing power parity (PPP), the Chinese economy is expected to be $16.72 trillion by the end of 2014, roughly $100 billion larger than the US economy. Before the recent announcement by the International Comparison Programme of the World Bank, which projected the size of the Chinese economy at the end of this year on the basis of the differential growth rates between China and the US in recent years, the most optimistic estimate suggested that China would seize the number one spot from the US in 2019. (The US has held the top position since 1872.)

The reason it took China five years less to surpass the US was simple: the global financial crisis dramatically slowed down the US economy while the Chinese economy has continued its rapid, albeit decelerating, growth.  Between 2011 and 2014, the US registered a cumulative growth of 7.6 per cent, compared with China’s 24 per cent.

While the projection became headline news in several major Western papers, the reaction in China has been muted. Instead of celebrating the dethroning of America, the Chinese government all but ignored the report. Official news outlets did not carry the story. Global financial markets and the business community barely paid any attention.

It is easy to explain why the report failed to stir much excitement. For Beijing, which actually tried to lobby the World Bank to not include any reference to China’s newfound status, overtaking the US may fulfil a long-sought national goal but may also carry serious downside risks.

As the world’s largest economy, China will likely be called on to contribute more funds for development assistance and shoulder greater international responsibilities. In global climate talks, China may also have a harder time insisting that, as a developing country, it should pay less than wealthy countries. In China, awareness of the country’s top position could bring unwelcome pressure on the government, which spends less than 15 per cent of its budget on social welfare programmes (compared with 37 per cent in the US).

Even for China’s pragmatic ruling elites, it is hard to see any real benefits from the World Bank’s declaration. Using PPP to measure the size of the Chinese economy is just an accounting exercise. The most important economic objective for Chinese leaders is to sustain growth and achieve technological upgrading. They understand only too well that China may be big, but it is also decades behind the US in terms of technological sophistication, innovation, and economic efficiency.

The international business community’s subdued response is also easy to understand. The continued…

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