Is China a Paper Dragon?

China: It's Not As Big As You Think

By INVESTOR'S BUSINESS DAILY | Posted Tuesday, December 18, 2007 4:20 PM PT

Competition: The common wisdom is that China's large and fast-growing economy could overtake the U.S. as soon as 2012. Not so fast. New data suggest China's not quite as big as economists once thought.

Related Topics: East Asia & Pacific

The World Bank's latest estimates for the global economy contained a stunner of a statistic: China accounts for just under 10% of the world's total output — or about 40% smaller than thought.

At $5.3 trillion based on 2005 data, China's economy is still No. 2. But it has considerably more ground to make up before passing the U.S. in absolute size — if, in fact, it should ever do so. Total world output in 2005 was $55 trillion. The U.S. produced $12.4 trillion of that — with a population only one-fourth the size of China's.

How did these new data come about? The World Bank uses what's called Purchasing Power Parities — PPP for short — to figure how big an economy is. Basically, it surveys a market basket of some 1,000 goods and services, and sees how much of each people in those countries can actually buy in their own currency.

Doing this around the world, the bank discovered that 12 economies make up more than two-thirds of the world's GDP. Seven of those are so-called high-income economies — the U.S., Japan, Germany, the U.K., France, Italy and Spain.

Five are "transitional" economies — Brazil, Russia, India and China (the so-called "BRICs") plus Mexico. Together, they make up about 20% of output.

But the one that sticks out is China. World Bank statisticians got access to real data on China for the first time ever, and came away surprised. "The previous, less reliable, methods led to estimates (of China's GDP) . . . 40% larger than the results of the new, improved methods and benchmark," the World Bank report said.

This should be a lesson for those who take international statistics at face value. Anytime you're off by 40%, it's more than a rounding error. It's a big mistake — largely China's fault, since it wouldn't let anyone accurately measure its economy before.

And this is of more than just statistical interest. It means, for instance, that there are likely more than 300 million Chinese who live below the World Bank's $1-a-day poverty line — not the 100 million previously estimated.

This helps explain why China's communist regime still cracks down hard on any manifestations of dissent — contrary to its PR of China as the land of perpetual economic boom. It knows how bad things really are in the undeveloped hinterlands.

It also calls into question China's financial ability to support a massive military buildup to challenge the U.S. Dollarwise, the country just won't have the money — at least not yet. And besides, it should be spending that money on development — not arms.

This doesn't mean China's economy isn't growing fast. It is. Nor does it mean China isn't a potential U.S. rival, both economically and militarily. Again, it is.

But to us, this smacks a bit of the CIA's faulty analysis of the Soviet threat in the 1950s and '60s. Back then, there were no good real-world data issued by the Soviets. So economics analysts fell back on the tried and true: toting up Soviet output using satellites, secret cameras and other means to count the raw number of trucks and trains leaving factories during a given month, then comparing it with the same month a year earlier. If a factory had 100 train cars leave its doors one year, and the next year it had 110, it was assumed that the plant's output expanded by at least 10%. Not a bad assumption — but a wrong one.

For while the Soviets churned out massive amounts of goods, their quality was suspect. Box cars could be filled with shoddy, virtually unusable goods intended to meet state quotas. But we pretended that output was the same as ours.

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