Tuesday, January 08, 2008

China Overtakes US in Manufacturing?

Longtime Taiwan supporter John Tacik writes on China's superpower economy -- and also shows what can be done with purchasing power parity and similar attempts to gauge the productivity and wealth of whole economies:

China's new status is not surprising. China has been the world's leading producer of steel, copper, aluminum, cement, and coal for several years. As a consumer, China surpassed Japan as the globe's second largest importer of petroleum in 2005. In 2006, China surpassed Japan as the world's No. 2 auto market, with total sales of 7.2 million vehicles and production of 7.3 million. In 2007, China also became the world's top producer of merchant ships.[2] In short, one needs no number-juggling from the World Bank to know that China is an economic superpower.

But the revised World Bank numbers have the effect of minimizing the impact of China's impressive growth. Most commentators claimed the new World Bank numbers showed China "shrinking."[3] In fact, the Bank merely lowered the factor for China's purchasing power parity (PPP), a multiplier used by economists to make realistic comparisons of global economies.

In 2006, America's manufacturing sector produced about $2.7 trillion in goods. China's manufacturing sector produced about 8.74 trillion yuan in goods, or about $1.124 trillion at the prevailing exchange rate of 7.77 yuan to the U.S. dollar. But the real value of China's output is more than twice the exchange-rate value, according to price studies done by the World Bank for the year 2005.

In an exhaustive study published on December 17, 2007, the World Bank's international Comparison Program (ICP)[4] determined that, in China, one only needs about 3.4 yuan to buy what would be a dollar's worth of goods on the U.S. market -- far less than half of the official exchange rate. So, the World Bank lowered China's PPP -- last set in the 1980s -- from about 3.94 times the nominal exchange rate to about 2.38 times the nominal exchange rate.

Not surprisingly, The Economist magazine arrived at a similar figure for PPP simply by checking the prices of "Big Macs" at McDonald's restaurants around the world (The Economist sharpened the figure to 3.42 in its February 1, 2007 issue).[5] Sure enough, a Big Mac that cost $3.22 in Richmond, Virginia, sold for 11.00 yuan (or about $1.41) in Guangzhou.

The World Bank study simply confirmed that this pricing deflator is valid across the entire Chinese economy. Applying the PPP factor of 2.38, China's $1.124 trillion worth of manufacturing output would be worth $2.717 trillion on the U.S. market --slightly higher than America's $2.7 trillion in manufacturing output.

Where does the 800 pound gorilla sit? Depends on what price deflator you use...

UPDATE: For a counterpoint, NPR has a good series of articles on the Yellow River, in peril due to development...


MJ Klein said...

$3.22 for a Big Mac? that's insane! yeah, i'm missing the US alright.

Mingers said...

I don't get why the Yellow River articles are a counterpoint.

I also don't get why there's a choice between the two deflators. The first is an old outdated deflator calibrated in the 1980s. The new deflator is a recalculation based on prices in China today. There's no question on which deflator one should be using.

And using the new deflator, China's economy is much, much smaller than everyone thought it was. It will overtake the US as the world's largest economy; it's just going to take quite a bit longer (and the question that is China going to get old before it gets rich is also a very important question yet to be answered).

Thomas said...

I was thinking about the old-rich thing too in relation to the economy. China's economy is roaring ahead now, but I am wondering to what extent a MAJOR correction is not in store in two decades where, quite suddenly, China finds out its economic muscle has suddenly atrophied with age.

Basically, I think that China kind of suffers from its own version of the "resource curse". In China's case, its resource is its population.

China will begin (and has been beginning for a while) to move up the value scale and produce some quality goods. However, the enormous population will present a dilemma in the short and medium term. How do you move up to high-tech production (which requires a smaller number of highly skilled workers) without unemploying a vast section of the workforce? There surely can't be that many service-sector jobs available. Some big companies will be able to quietly make the necessary changes, but can the others?

Now fast-forward 20 years when people start to retire. Since most of them will necessarily have to have been involved in quantity-focused or menial work, then the Chinese economy will have to suddenly make a major shift to a quality and efficiency focus. Not changing will be impossible. But how will the economy do a turn on a dime from quantity-based to quality-based production? And how will this happen while so many old people must be supported by so many young ones with few resources to do so?