China the largest economy in the world? ..that’s what the World Bank is saying

The World Bank has just released the findings of its International Comparison Program, derived from analysis of world economic data from 2011.  This is an update of the ICP results from 2005.

The data show that three years ago the US economy was only about 8% larger than China’s.  Given that China is growing by at least 7% per year while the US is barely expanding at all, the implication is that sometime in 2014 China will seize the #1 crown the US has worn since 1872 (according to the Financial Times).  That’s when the US surpassed the UK.

Generally speaking, the report shows the increasing prominence of emerging economies, especially in Asia.  That’s really no surprise, since that continent is home to two giants, China and India (#3 in the world).  In fact, the only news in the ICP report is timing.  Prior to this, and based on the earlier ICP data, most economic observers had expected China to pass the US within a few years.

Two caveats:

–the figures are based on total GDP.  Per capital GDP is still much higher in the US than in China, but the latter has over 4x as many people.

–the numbers are calculated using Purchasing Power Parity (PPP), not conventional GDP measures.

The difference?

Up until about a quarter century ago, economists took local currency GDP figures for each nation and converted them into a common currency, usually the US$, for comparison.   They used market exchange rates to do the conversion.  In the 1980s, however, people began to notice that this method was giving out crazy results.  China, for example, was growing at maybe triple the rate of the US at that time–but conventional GDP showed it shrinking relative to the US.

That’s how economists realized that measuring GDP through the ability to purchase internationally traded goods (which is, after all, what the exchange rate shows) wasn’t good enough.  So PPP, which measures the cost of purely domestic goods and services–like haircuts or movie tickets–as well, was born (you can find more detail in this post).

Significance?

It’s probably more social and political than directly relevant to the stock market.  On the other hand, it reinforces the fact that the health (or not) of the Chinese economy is of crucial importance to the rest of the world.  As investors, China is too big, and too fast-growing, not to try to have some exposure to.  The clear way to do so, in my mind, is through Hong Kong, which is the destination of choice for legitimate Chinese firms seeking a listing that will attract non-mainland investors.  My impression is that not many US investors have been willing so far to put in the time and effort needed to learn about it.

 

Tomorrow Keeping Score returns, after a month’s hiatus.

 

 

 

One response

  1. Pingback: Chinese economic growth « PRACTICAL STOCK INVESTING

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