Guest Post: China’s Economy: #1 or #126?

Tyler Durden's picture

Submitted by Kurt Brouwer of Fundmastery

China’s economy: #1 or #126?

There have been plenty of reports that China’s economy is overtaking
the U.S. economy and that it may soon outstrip the U.S..  As an example,
in a recent piece, my colleague Brett Arends, reported
on a study by the International Monetary Fund on the size of China’s
economy.  The IMF study suggested that by one economic measure China’s
economy would look almost as big as the U.S. economy in a few years.  Of
course, that set off my innate skepticism so I did a little digging.  
In this post, my goal is to cover two questions:

  • How big is China’s economy compared to ours?
  • And, is it really going to surpass our economy in size any time soon

To get started, check out the opening from the Marketwatch report:

The International Monetary Fund has just dropped a bombshell, and nobody noticed.

For the first time, the international organization has set a date for
the moment when the “Age of America” will end and the U.S. economy will
be overtaken by that of China.

And it’s a lot closer than you may think.

According to the latest IMF official forecasts, China’s economy will
surpass that of America in real terms in 2016 — just five years from

Yikes.  Sounds pretty scary doesn’t it? Some folks might find a
report like this disconcerting because they want the U.S. to be the #1
economic power.  I don’t really care one way or the other about our
economy being #1 or #2 in the world.  Size has both advantages and

But, if that concerns you, don’t worry. Despite the gloomy reports, the U.S. is likely to  remain the world’s largest national
economic power for many years to come.  And, if we would stop wearing
wearing cement shoes while running against competitors in lightweight
Nikes, it wouldn’t even be close, but that’s a story for a different

A trillion here; a trillion there

To do my own research, I went to one of my favorite sources, the CIA
World Factbook.  I’ve used it many times before and I have more
confidence in the FActbook’s data than most sources.  According to the
Factbook, in terms of comparing Gross Domestic Product (GDP) straight
up, we’re #2 at $14.62 trillion and China is a distant #3 at $5.75
trillion.  Japan is close to China at $5.39 trillion. We would be #1,
but when the European Union is viewed as a single entity, it is at
$15.95 trillion. Viewing the European Union as a single, unified entity
is a bit of a stretch, but let’s not quibble.

We’re #2 and China is a distant #3

So, if we are north of $14 trillion and China is a bit over $5
trillion, how the heck can the IMF legitimately claim that China is
catching up and may even be on its way to #1 in a few years?  Well,
without massaging the numbers a lot, they cannot.

A straight up comparison shows China is far behind us.  However, the
IMF report used an alternative way to measure economic output called
purchasing power parity (PPP).

Purchasing power parity: what the heck is that?

Purchasing power parity (PPP) attempts to compare economies that have
very different price levels for basic goods and services. The most
famous example of using PPP is the Big Mac Index which is described by the Economist this way:

…[the Big Mac Index] is based on one of the oldest
concepts in international economics, purchasing power parity (PPP), the
notion that a dollar, say, should buy the same amount in all
countries. In the long run, argue ppp fans, currencies should move
towards the exchange rate, which equalises the prices of an identical
basket of goods and services in each country. In this case, the basket
is a McDonalds’ Big Mac, which is produced in more than 100
countries. The Big Mac PPP is the exchange rate that would leave
hamburgers costing the same in the United States as elsewhere…

This chart from the CIA World Factbook shows the world’s economic
powerhouses in terms of GDP, as adjusted for purchasing power parity. 
According to this, the EU is #1, the U.S. is a close #2 and China is
still #3.  This data is from 2010.

Source: CIA World Factbook

PPP tries to look at economic output across countries by leveling
the playing field. In China personal incomes are lower, but the cost
of rent or food is also lower, so by using PPP, you can perform a useful
comparison of economic output between the two countries.  Another
aspect of PPP is that it helps compare economies adjusting for currency
disparities.  Even the CIA World Factbook suggests that currency
differences need to be accounted for to compare our two economies.  I

In GDP per person, China ranks…

A further way to look at economic output is to divide GDP by the
number of people in a country.  This is GDP per capita.  It takes the
same data used in the chart above, which is GDP adjusted for purchasing
power parity, but divides that number by population. So, for China we
have to divide by more than 1.3 billion people.  For the U.S., we have
to divide by a bit over 300 million.

Here are the top 10 countries for GDP per person:

Source: CIA World Factbook

As you can see, the top 10 countries for GDP per capita are very
small nations that are either oil producers or financial centers.  The
only large country is the U.S., with a GDP per person of $47,400.  What
about China?  Well, it’s nowhere to be seen on this top 10 list.  Would
you like to guess at where China stacks up by this comparison, I gave
you a hint in the title of this post.

China is #126 is in GDP per capita:

For GDP per capita, China ranks between two economic powerhouses —
Turkmenistan and Albania.  And, remember, for this ranking, we are using
the PPP adjusted GDP so this is favorable to China compared to the
U.S.  In other words, China has a big economy overall, but it has a very
low ranking when you adjust for population:

Source: CIA World Factbook

Does this mean China’s economy is bad?  No, of course not.   China
has come a long way since its leaders adopted limited free market
reforms back in the late 1970s.  Nonetheless, it is also clear that much
of China’s large economic impact in the world is a function of the size
of its population.

China is not #1 on any economic ranking

Even with a generous methodology such as PPP, the highest China gets
is #3.  And, adjusted for economic output per person, it is #126 and
that’s not exactly something you crow about.  At a per capita GDP of
$7,400 China is a long, long way from the $47,400 we have in the U.S. 
In fact, I’ll make a prediction. China will not come close to our per
capita GDP.  Not next year or even 10 years from now.

In terms of overall economic output, China would have to grow at a
very high rate for many years to catch up to the EU or to the U.S.  I
hope it does keep growing because that is good.  And, China has vastly
improved its economy over the past few decades, particularly in terms of
export industries.  I’m not trying to knock those accomplishments at
all.  However, the idea that it is an economic power comparable to the
U.S. is clearly not accurate.

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disabledvet's picture

my favorite book from the 90's:  "Less Than Zero."  I don't know what that means but "i feel a Big Buddha comin'."

LFMayor's picture

is it based off the film of the same name?  You know, the one where Robert Downey Jr. was method acting?

flavian's picture

Half of the US so-called GDP is made up by "services" and especially financial services. Now, on the production side, half of that is military stuff.

Now wonder that China produces more real stuff than US and most of the products you buy from the supermarket is made in China.



covert's picture

for china to become #1, it first become even more Libertian than all other countries. not likely to happen.


tmosley's picture

Uh-huh.  And what happens when the Yuan appreciates 50%?  100%?  200%?


Harlequin001's picture

they print more of it and the exchange rate stays the same...

Nobody special's picture

The author is an idiot.  Not only does the Yuan have the means to appreciate, it has the headroom.  The total economy in China would be larger than the US if each person had only 20% of the buying power a US citizen has.  As China grows, it could overtake the US by a factor of five.  Now I don't believe that the world's resources can sustain that, but I do believe we will get closer to a per capita GDP balance than we are today.  Little growth is actually required for the US position to be challenged by China.


When Britain was losing power to the US, what do you think British newspapers were printing?  Here's a hint... they weren't promoting their demise.  They only acknowledged it LONG AFTER it happened.  And so shall it be in the US.


Ray1968's picture

European Union is not a country... its a continent. 

If you get to lump all of Europe together then we should include Canada's GDP with ours.

tmosley's picture

But then we'd have to take Mexico's too.

And they have a monetary, and something resembling a political union--we do not.

falak pema's picture

a continent that doesn't know if its lost or found...Should consult the lost & found in one year to know whats what!

trav7777's picture

it's one currency zone, however

faustian bargain's picture

Just think, if the NWO folks get their way, that list will only have one member on it.

Mallenet's picture

Actually - NO! There are 27 EU member states, 15 States use the Euro (which I suspect you are refering to), the rest use their own currencies.  Of course, there is also the one huge anomally - Montenegro (650,000 people), which is not in the EU but uses the Euro as its currency.

I do wish people would learn how to read before they learn how to write!

kaiten's picture

European Union is not a continent, actually. It´s a political union of 27 european countries, while Europe, the continent, has 50 countries. There are (still) more than 20 european countries outside of the EU.


European Union:

TK7936's picture

The EU is a united economy and not a continent. The Continent is called Europe and the EU does not cover all continental countries. Just for some facts here...

Mallenet's picture

Is it really bliss?  Ignorance, I mean?!

TheGreatPonzi's picture

I don't understand the point of this article. I think everybody on Zerohedge already knows the GDP and GDP per capita figures of China. 

This "my dick is bigger than yours" contest is becoming quite annoying.

By the way, the IMF is probably right, if you take into account the fact that the US are dead since the 1960s, and have simply postponed their ruin via fractional banking pyramids and accounting frauds. 

Harlequin001's picture

Very true, if we simply inflate prices by 5% by printing more money has our economy 'grown'?

schizo321437's picture

Britain probably did similar maths when the US overtook it.


Keep resting on your laurels.

falak pema's picture

britain will be the new continent of virtual money ...when the City is declared Atlantis...before it sinks...

TheGreatPonzi's picture

The author of the article claims he doesn't care if the US are number 1 or not, but he clearly does, as he uses "we" to describe the US economy. 

By the way, it shouldn't be a surprise that a country with a 200-years history of free market is - for now - the leader in GDP per capita, compared with a country which just got out of communism 20 years ago. What matters is not the nominal figures, but the pace of organic growth. 

kito's picture

 their "per capital gdp" is irrelevant when discussing their massive economy. they have 1.3 BILLION people!! thats four times the size of our population. and they are in the process of urbanizing 250 million people who live in the sticks. they will be well beyond us soon enough.

trav7777's picture

isn't enough oil supply for them to do that

faustian bargain's picture

well, not us and them at the same time, anyway.

hedgeless_horseman's picture

Urbanization is probably better than suburbanization, which is what we are stuck with in the USA, as we all slide down the backside of the oil production curve.

tmosley's picture

Not enough oil, but plenty of energy--especially when you don't give a damn about the environmental effects.

css1971's picture

Well that all depends whether they have it, or if you have it. No?

critical_mass_soon's picture

Well you paint a pretty picture for the western nations, but you forget the chinese are very selfless people they operate like the borg, like a collective,i've seen it with my own eyes, a whole family parents, uncles aunts nephews nieces (people who have money) all pay for the next child to go to university. they know together they can acheive alot. and so the whole argument for per capita gets blown straight out of the water. only selfish americans and brits think about how much wealth they can amass regardless of how his own brother is getting by.

Its harsh but its reality.

Harlequin001's picture

It's to do with credit and your history of being developed from a debt based English system. Take away the credit and that's what you have, a system where money is hard to come by, and so families are forced to operate as a unit.

Without credit, could your children afford to move out and buy a house in their early twenties?

faustian bargain's picture

He does know where Nikes are manufactured, does he not?

falak pema's picture

Well maybe the chinese will develop the energy worm like they did the silk worm five thousand years ago. A worm to out worm all fossil fuels and out ant all chinese ants relegated to leisurely life riding energy worms to opium dens for a daily massage parlor of people's hopium. 

Creed's picture

Tariffs are coming, US domestic manufacturing rebound draweth nigh.


Book it. 


Thanks for the info TD & Kurt.

LawsofPhysics's picture

So is the next world war.  Could you be a little more specific regarding the timeline?


Also let me know just exactly who we are selling all of our products too?

tmosley's picture

You're going to need a lot of scissors to cut through the red tape we have accumulated over the last 40 years.

Tariffs aren't going to do anything to get rid of those.  

falak pema's picture

that's what the boss of WTO says : Doha round dead! All jump from the global stop the iceberg of protectionism!

TriggerFinger's picture

makes me want to go out and get a Happy Meal

Leraconteur's picture



PPP actually UNDER estimates the real Chinese economy. You may as well double or triple the figures you see in raw, nominal GDP for China as they do everything on such razor-thin, cut-throat margins, and do it for far cheaper. Chinese per capita PPP is currrently about $7,400 but if you look out the window of ANY Tier 3 or up city in China what you see is a country with a $15,000 PPP per cap GDP.


Comparing China to Mexico, China is obviously more well off when one looks out the window walking around the nation, yet Mexico's PPP is twice that of China's.

LawsofPhysics's picture

I was waiting for someone to point that out.  More proof the good old U.S. is quickly becoming a third world country.

topcallingtroll's picture

Still it is a small minority that live in those cities.

Arent there 600 million peasants still squatting over holes in the ground to take a dump?

RichardENixon's picture

They actually have a holes to squat over? Such opulence.

thefedisscam's picture

That makes 700 Million + live in urban areas, MORE THAN TWICE As MUCH as the U.S. TOTAL population!!

Leraconteur's picture

I live in rural China.

They squat over a trench toilet in a public facility that has an auto timer with a motion sensor that flushes the trench every so often. Then they grab their mobile phone, hop on to their bicycle, e-bike, car or in the rare instance pull their cart of recycled cardboard, and then go on about their business.

They live in houses or apartments or a large compound with many rooms arrayed around a central courtyard. Usually small villages or towns or near (1 to 5 km) to Tier 4 cities of 40,000 or fewer inhabitants.

They save about 40% of their income so that slackers in California can have 151 weeks of funemployment, sitting at home all day surfing the net, playing X-box, and ordering pizza.

Like most of the planet, what you 'know' about China is wrong and outdated. To be fair, things change here on a yearly basis so it is a challenge to keep up.

topcallingtroll's picture

Yeah south americans look rich in comparison and dont have to eat bugs and rats, but china did send them the poison toothpaste that killed about a hundred. Maybe they were jealous of south americas lavish lifestyle, getting to eat decent meat for example.

Do we so quickly forget who we are dealing with? Plastic rice, anyone? Poison toys? Poison milk?

Urban Redneck's picture

The final sentence sinks the entire article-

"However, the idea that it is an economic power comparable to the U.S. is clearly not accurate"

Per capita statistics have nothing to with economic power, unless the author is suggesting Qatar, Lichtenstein, Luxembourg, Bermuda, et al. are comparable economic powers to the US. 

Incidentally, in terms of functioning industries that produce the GDP to be divided per capita- the US is rapidly turning financial center centric, just like Lichtenstein, Luxembourg, and Bermuda but with the same impoverished masses found in China.