China set to surpass the US Economically This Year — Wait, not so fast…

US-China-Economy-2011

US and China – 2011. Courtesy: WSJ Click for Larger.

While it’s true that the economy of People’s Republic of China [PRC] is indeed set to surpass that of the United States “soon,” [some estimates even say by the end of the current year] — that’s really not that important.  Here’s why:

The United States has held the top economic spot in the world for well over 120 years.  It turns out, if you count everything but sheer “mass money,” America still is the largest economy — and still will be for quite some time.  Here’s why:

Firstly, the Chinese market and economy is manipulated and controlled directly by the Chinese government.  While a lot of what goes on in China that involves international trade or business goes on in “Special Economic Zones” [which are areas that involve far less government intervention than anywhere else], its relatively safe to say that the Chinese economy, as such, is otherwise centrally planned and managed.  The world knows this, and this is something born in mind in any economist, businessman/businesswoman or otherwise when considering the economic power of the PRC.

Secondly, PPP.  Fareed Zakaria aptly demonstrates that the Purchasing Power Parity of the United States still far exceeds that of the PRC.  Indeed, Fareed’s demonstration of the same loaf of bread in China being bought for $1.66, compared to that of $2.39 on average in the States.  Further, his example of the cost of utilities, on average being a third the cost in the PRC compared to a similarly sized home in the US also further demonstrates the US’ superior PPP standing.

Quite so, when one analyzes the PPP of the US and China, China could combined its PPP with that of JAPAN and still not exceed that of the United States.  Indeed, China’s still not able to bank on its PPP — it has to pay for everything at the prevailing exchange rate — not the rate based on its PPP, unlike the US.  And this is just one singular example.

So… is China really overtaking the US economically?   In the words of Tom Wright at the Wall Street Journal, “Yes and No.”  You decide.

Further Reading:

– Tom Wright.  China’s Economy Surpassing U.S.?  Well, Yes and No – The Wall Street Journal Blog

– Chung-Tong Wu. China’s special economic zones: five years later – Asian Journal of Public Administration

– Fareed Zakaria  Is China really about to overtake the US? – Fareed Zakaria 360 – Global Public Square

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