China's economy may be 40% Smaller than estimated

Nov 16, 2007

China economy may be 40% smaller than estimated

About 300m Chinese living below poverty line, three times larger than current estimates
JUGGERNAUT-IN-WAITING: New analysis shows that China, despite its red-hot industries, may not overtake the US as the world's largest economy until 2030.

WASHINGTON - CHINA'S economy is actually 40 per cent smaller than most recent estimates, a United States economist has said, citing a new way of measuring growth based on purchasing power.

Dr Albert Keidel, a senior associate at the Carnegie Endowment for International Peace and a former US Treasury official and World Bank economist, made the comments in a report published by the US think-tank and in a commentary in the Financial Times.

Dr Keidel said he made the calculations based on a recent, little-noticed report by the Asian Development Bank (ADB) that made its first analysis of China's economy based on so-called purchasing power parity (PPP), which stripped out the impact of exchange rates.

'The results tell us that when the World Bank announces its expected PPP data revisions later this year, China's economy will turn out to be 40 per cent smaller than previously stated,' Dr Keidel wrote.

'This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities, such as growth, public investment, pollution control and poverty reduction.'

The ADB data was the first to be based on purchasing power analysis, according to Dr Keidel.
Based on this new analysis, he said, 'the number of people in China living below the World Bank's dollar-a-day poverty line is 300 million - three times larger than currently estimated'.

China's gross domestic product would have been roughly US$5 trillion (S$7.2 trillion) in 2005, compared to some US$12 trillion for the US on the same basis.

This still means China is moving ahead of Japan as the world's second-largest economy, but it may not overtake the US until around 2030.

'These calculations are not just esoteric academic tweaks,' Dr Keidel wrote.

'Based on the old estimates, the US Government Accountability Office reported this year that China's economy in PPP terms would be larger than the US by as early as 2012. Such reports raise alarms in security circles about China's ability to build a defence establishment to challenge America's,' he said.

The use of PPP began in the 1950s as part of an effort to compare economies without the distortion of exchange rates, which could be influenced by trade or investment flows.

Dr Keidel said the data helped explain why the Chinese authorities were paying little heed to calls by Washington and Europe to boost the yuan.

'Our focus in the US on trade and exchange rates is secondary or tertiary in their view', while 'risks to its impoverished rural hinterland from a sudden large revaluation of its currency loom larger in Beijing's eyes than in Washington's', he added.

In Beijing, the World Bank's lead economist for China, Dr Bert Hofman, said he thought it was too early to use PPP as a basis for revising size estimates of China's economy.

'There is a big international effort going on about international price comparisons to correct differences in price levels across countries in order to give a better comparison across economies,' Dr Hofman said.

But that effort is 'still very much work in progress', he added. 'It's too early to tell what the final implications will be.'

AGENCE FRANCE-PRESSE