(Letter) How fast China can catch up the US in GDP? It may be faster than you think.
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If we assume the relative paces of the underlining economic numbers remain the same, China will catch up the US in 2019. That’s scenario #1. The key underlining economic numbers are: nominal GDP growth and currency exchange rate.
Between 2002 and 2007, the compound annual nominal GDP growth of China was at 19.2% (in yuan term), and the compound annual nominal GDP growth of the US was at 5.79% in dollar term). The difference was much larger than the headline real GDP growth difference. The main reasons are:
#1 China’s GDP deflator is larger and likely overstated compared to the US’. For instance, the 2Q08 China GDP deflator was at implicit 10.6%; and the 2Q08 US GDP deflator was at supposed 1.1%. The difference is breathtakingly extraordinary if you consider CNY was quite a bit stronger than USD between 3Q07 and 2Q08.
#2 China had a one-time 16.8% upward GDP revision in 2005, mostly readjusted for its understated service economy. Was the revision a one-time event, or likely repeated down the road? In 2007, the service economy of China was 39% of the total economy. For instance, Egypt, which has a roughly 30% lower per capita GDP, has its service economy at 54% of the total economy. Is China’s service economy less developed than Egypt’s, or is it simply understated by the Chinese statisticians — that will require further upward revisions down the road? I tend to believe it’s the latter. For anyone who has traveled to Egypt, judged by the available restaurants, shopping malls, and the number of domestic leisure travelers, it’s very hard to fathom China’s service economy isn’t anything but far more developed that Egypt’s.
The other crucial factor is the exchange rate. on 12/31/02, CNY:USD was at 8.2788; and on 12/31/07, CNY:USD was at 7.3031. Very few dispute CNY is undervalued compared to USD, and the Chinese government has been for the large part in recent history, suppressing the advancement of CNY. As to the reasons, the best theory I have heard is that a large part of the Chinese are still farmers. If the value of CNY is to be too high, they can’t compete with the farmers of other countries, hence the Chinese government will have to suppress the value of CNY to appease this bulk of its constituency, at the expense of other Chinese consumers. The fact that CNY rises the fastest during the world food commodity price increase, and a rising CNY didn’t seem to hurt China’s manufacturing exports, adds credence to this theory. If we go by this theory, continuous urbanization and elevated world food price will take that pressure away, and China will eventually let CNY go. That may make some low-end exporters unhappy, but Chinese consumers should benefit.
How fast can CNY rise? You can easily imagine a black swan case that is similar to geological magnetic polar flip, i.e. USD becomes a discredited international currency and CNY is to replace it. But I will take that out of the equation, and compare to a recent milder version of appreciation: Brazil Real between 2003 and 2008. Still being a developing country, Brazil benefited from rising commodity prices and sounder monetary and fiscal policies, has seen its currency compared to USD per Big Mac Index rising from 48% undervalued, to 34% overvalued. The scenario #2, assumed CNY can rise to BRL’s valuation (per Big Mac Index), will put China’s GDP overtaking the US’ in 2013.
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August 5th, 2008 at 9:36 pm
This is a good analysis. I agree that China’s service sector is underestimated and has good potential to grow in the health care sector as well. I don’t think the Yuan will rise very quickly, 5 or 7% a year.
August 5th, 2008 at 9:58 pm
I think by ‘deflator’ you mean ‘inflation’, and it is not even nearly as simple as that.
Egypt’s ‘service economy’ could include anything – for instance, is the Suez canal included as ‘service’? Egypt also attracts much more per capita in the way of tourism than China does.
For China’s GDP to be equal to the US’s and make sense, would mean that China’s population were enjoying a standard of living with a monetary value a quarter of the US’s. This is not going to happen soon, certainly not as soon as 2013, when at least half the population will still be earning a living from the land in the way they have for centuries.
August 5th, 2008 at 10:03 pm
Interesting analysis. thanks for posting.
I am curious about the point 2 regarding the service economy- somehow the comparison between China and Egypt doesn’t ring true. The way I understood your logic is as follows:
1) China’s service sector is more advanced and diverse than Egypt’s service sector.
2) But Egypt’s service sector takes up 54% of Egypt’s GDP, whereas China’s service sector only amounts to 39% of GDP.
Therefore, because China’s service sector is more advanced than Egypt’s service sector, China’s service sector should take up a relatively larger percentage of China’s economic output than Egypt’s service sector takes up of Egypt’s economic output.
Have I missed something?
Also, with regard to the reason that the People’s Bank of China has been keeping the RMB fairly stable, I think it is common knowledge that this has to do with supporting the export-led growth model.
However, recently several exporter friends of mine have told me that the combination of RMB appreciation and a tough labour market have really put their businesses in jeopardy… one friend told me that businesses in Zhejiang were hit particularly hard…
August 5th, 2008 at 10:58 pm
Netizen K, from 7/05 when China practically depegged from USD, to 6/08, CNY had appreciated 6.5% annually. I can see where you get the “5% or 7%” from. 2 rules about trends: #1 the current trend can last much longer than you anticipated — hence PBoC will likely hold a mind-boggling $2 trillion foreign reserve at the end of 2008 and a sickeningly lot more in the future. #2 when a trend ends, the conversion to a new trend can be violent and often overshoot a lot more than you anticipate.
FOARP, it’s “GDP deflator”. About 40% of the Chinese labor force is engaging agriculture now. Roughly 80% of the 18 year olds in Shanghai now will have some sort of college education in their lives. Now, why can’t Shanghai (or Beijing, or Guangzhou) in a future day have a higher living standard than say NYC?
Vadaga, I probably skipped a couple of steps. Egypt is just an example. China’s service economy as a percentage of the GDP, is smaller than India’s and Philippines as well. Typically the higher a country’s per capita GDP, the larger percentage of its service economy is — this makes sense if you think about it. At first we need food, and then stuffs, and finally we want services. China’s statistical collection is still production-centric. Statisticians are good at knowing how many TVs are made, but not how many visits to karaoke parlors.
The cost for PBoC holding down CNY, is the ever increasing and underperforming foreign assets. I am sure the game will continue for a while. But if the last and the largest bag holder of USD stops buying (before puking it out), I don’t know if there will be a floor for the USD value, however low that might be.
As to the exporters — they will have to retool their games, like everybody else. At it stands, Chinese consumers and PBoC are subsidizing them (and Chinese farmers).
August 6th, 2008 at 1:59 am
Very interesting – thanks for posting this. I know this wasn’t part of your main point but I’d like to say that although I don’t find it hard to imagine the $US losing its leading position as the international currency of choice, I do find it pretty hard to see the RMB replacing it when the Euro and Yen are well ahead in that particular queue.
August 6th, 2008 at 2:06 am
One other factor you’re missing is the cost of pollution and emissions on GDP growth, a factor which is already at tremendous levels and growing. I believe one of the main reasons the government’s Green GDP program was scrapped was due to the fact that subtracting the cost of pollution effectively negated *all* growth in industry heavy areas, such as Shanxi, etc. These are many of the same areas that are responsible for China’s record GDP growth. Just something to keep in mind…
August 6th, 2008 at 3:06 am
Thank you for the analysis. Just some quick notes:
1. You can use the GDP measured by PPP to do a further analysis, though PPP still remains controversial…(but what topic of economics doesn’t? 😉
2. A consumer is also a producer in the meantime. It’s a classic way to separate the two but you have to combine them together in the end. If the exporters, who contribute a large proportion of employment, are hurt, their employees will also be hurt, thus the purchasing power of them, thus the consumption sector. Chinese consumers will also bear the loss. There are two possible outcomes of a smaller export sector: A. The Chinese exporters, though only earn a minimal profit in the whole value chain, actually have benefited many people, particularly the migrant workers. If the export is seriously hurt by an appreciation of RMB in response to the irresponsible request, these people might eventually bear the loss and go back to agriculture. B. Currently the exporters concentrate on the east coast geographically, these firms might be forced to “move in”, to the large part of inland China, because they have to find cheaper later to compensate the profit loss from RMB appreciation. This can help narrow the development gap between the east and the west of China.
I can see the both now but not sure which one will overcome the other. Lack of statistics makes it very difficult to reach a fairly sound conclusion. One can get a rough idea from the income growth of the western rural area, but again, it’s very difficult to obtain accurate data, even for the National Bureau of Statistics.
3. The current appreciation of RMB is an illusion. The central bank has changed the target of the RMB exchange rate, once USD, now a “basket” of currencies. Thus you can see the exchange rate against USD is rising, but that against euro or GBP is going down. I read somewhere that the Chinese central bank has done a successful job to keep the exchange rate on the “basket” of currencies steady. Less export to the US can thus be compensated by more export to other countries.
4. I don’t really like the question when China’s GDP would surpass the US GDP. No one can answer this question. Well, one can predict it very accurately—it’s just number games, if he knows the growth rate. If China can maintain the current the growth rate(in real GDP terms), China’s GDP will double every 7 years, thus 14 years later its real GDP will catch up with the US GDP. But how much faith do you have in this assumption? China has a amazing history of 30-year high growth, however it remains a big question whether the high growth to continue in the future. A more important question to me is “What can we do to maintain the current growth rate?”:
August 6th, 2008 at 3:13 am
@Kingsley,
Very good point, RMB will never become the international currency until the exchange rate can be allowed to float freely(not to say it will float when it’s allowed). These are other issues with euro and yen, but I would say they are more competitive.
But I believe the Chinese central bank doesn’t want RMB to be the international currency anyway–even the US FED has never pursued it.
August 6th, 2008 at 3:35 am
@DaMai
That’s an interesting point that you bring up. I first heard it on CNBC. A researcher insisted that the corrected GDP for China is something like 1% factoring in environmental cost. Personally, I never bought that point of view. First, the cost of cleaning up pollution does not imply a lowering of GDP. If it’s done domestically, and there is no reason to assume not, then I don’t see a reason why it shouldn’t increase GDP because you are generating a new service and product sector dedicated to cleaning up pollution.
Also, the purpose of GDP is to measure the growth of a country. If you have a number saying the economy is barely moving when it’s obvious the opposite is true, then I question the usefulness/math behind the theory.
August 6th, 2008 at 3:46 am
JXie,
My only critique is that the assumptions you make in the analysis is based on 6 years of data. But then again, I think it might be too much to ask of a person to perform a detailed and tedious analysis of growth in China for a blog post. 😛
Let’s say I’ll bet dollars to donuts that China will not surpass the U.S. in GDP by 2013.
August 6th, 2008 at 3:49 am
@DaMai,
Actually JXie didn’t “miss” the environment factor, because it’s not supposed to be included in the comparison. The comparison has to be equivalent, GDP with GDP, Green GDP with Green GDP (BTW, I am no fan of this green idea). But you provided a point worth discussion.
1. What’s the environment cost of China’s development?
Must be huge…I am saying that as a Beijiner…It’s a purely subjective judgment because I don’t know how to measure cost of fresh air, blue skies, and clean rivers(and I don’t think anyone is able to measure it) We know it’s very important, but cannot using prices to measure it. It means the way to calculate a “green GDP” is non-existent. The environment cost is hue, is important, but should not be solved within the economy framework.
2. What does the environment issue mean to China’s GDP?
First of all, I have to repeat point 1, it’s definitely not a subtraction to GDP.
The popular idea is that the environment issue indicates China’s GDP growth is not sustainable. This might be true, but the environment issue also can be a potential for future GDP growth. Much of China’s industry is outdated, non-environment-friendly, and inefficient, which means it can be improved, and most importantly, we already now how to improve it. Aside from possible political obstacle (NGO restrictions, corruption…, which I don’t think are important anyway), technology is available, but not really available to China (maybe other developing countries as well). There are three potential problems with this solution: the will to buy, the ability to buy, and the will to sell. It’s just not so clear to me which is/are the real problems.
Anyway, the environment issue is a half glass of water, half full, half empty, depending on your attitude, or maybe pi gu. What the saying is? 屁股决定脑袋.
August 6th, 2008 at 3:52 am
@yo,
英雄所见略同;-)
August 6th, 2008 at 4:00 am
@KL,
“英雄所见略同”
Was that something Anti-Semitic 🙂 我的中文不好
August 6th, 2008 at 4:31 am
@ Yo
My understanding of green GDP only comes from some research we were doing for an energy client a while back. Notice I said that it effectively negated GDP growth in heavy industry *areas*, I’m not implying that it negates GDP growth for the country as a whole.
@ KL
I agree that it’s not something you can necessarily directly subtract, but it is food for thought. The Green GDP process just seemed like an apt example considering that it was a homegrown program designed to display environmental consciousness, a move that is definitely to be applauded, despite the fact that it got put back into the vault when the report showed GDP growth in particular *areas* to be negated. Is it directly applicable? Probably not, again I’m not an expert, or even half an expert in these areas. Is it perhaps indicative of an issue that is extraordinarily important, easy to overlook and hard to quantify? Hmm, I’d say most likely.
August 6th, 2008 at 5:44 am
I believe the economy can continue to grow as it has for a long time. However, there are definitely some things to worry about (and they will be worries whether China surpasses the US or not):
* The real estate market. How can buildings just get more and more expensive when people’s salaries aren’t increasing at the same rate, and still be a profitable business? Also, this is one of the areas where government and businessmen happily make deals with each other, making it a quagmire of corruption.
* Energy use and environment. Well, here there is some hope now that China and Japan is cooperating on energy-saving technologies. In the short run, though, it doesn’t matter much for the growth whether environmental problems are solved or not, which makes short-term prospects scary.
* Integrating rural workers into the city, and giving them higher legal status. Again, there is more hope, but so far reform of the hukou system has been slow (and I believe many people think it has to be slow, even though it is a fact a lot of rural people already are in the cities).
I don’t want to sound too pessimistic. In the long run I think these problems will be solved, but I’m not sure Hu/Wen are creative enough. I’m looking forward to Xi Jinping in that area. 🙂
August 6th, 2008 at 6:54 am
“FOARP, it’s “GDP deflator”.”
Gotcha
“About 40% of the Chinese labor force is engaging agriculture now.”
NBS puts the rural population of China at 56%, down 8% from 2001, and still likely to be above 50% in 2013, according to the US Office of Management and Budget, the 80% of the population of the United States is ‘Urban’ according to their definition of the term.
“Roughly 80% of the 18 year olds in Shanghai now will have some sort of college education in their lives. Now, why can’t Shanghai (or Beijing, or Guangzhou) in a future day have a higher living standard than say NYC?”
There is no reason why the people of Shanghai or any other city may not eventually overtake New York in terms of per capita GDP, but not nearly as soon as 2013, or even 2020. Current per capita GDP for Shanghai is in the range of 8-9,000 USD, even five years of 10% growth will not make that reach the average for Mississippi (the USA’s poorest state), which is only about half that of New York state – and the per capita GDP of New York City is higher still. I do not think that the number of people receiving higher education is actually that good a measure of future standards of living, much depends on the quality of that education and whether it is in an area that offers genuine ‘value added’ in proportion to the loss suffered due to the time and money spent on education.
Finally, I’m definitely one of those people who deprecates using purchasing power parity measures of GDP – it leads to all kinds of miss-calculations. Money is not magically worth more when it is shipped to China, it is merely that people in China are willing to work for much less.
August 6th, 2008 at 7:47 am
i did some analysis a couple years ago. my conclusion is quite the opposite.
http://sun-bin.blogspot.com/2005/12/when-will-chinas-gdp-overtake-us.html
if you are doing inflation on one hand, and nominal exchange rate on the other, you are double counting stuff. and you cannot expect one time adjustment to repeat and repeat. on top of that, as we all know, GDP in china are overstated due to the fact that is has been used as a performance indicator for bureaucrat promotion.
anyway, this is a rather meaningless comparison, IMHO. GDP/cap is more relevant in most cases. what is the point of saying ‘out total GDP’ is the same as yours because we have 4 times more people and we use PPP. to feed fodders for china threat advocates?
August 6th, 2008 at 10:49 am
Good analyze, but can the world supply enough raw material to china for China to catch USA?
August 6th, 2008 at 12:03 pm
@DaMai
Agreed. But I still have to say that environment issues should be solved outside the economy framework, the economic growth is one thing, the pollution is another. They are related, but please, don’t promote economy measurements like Green GDP. Use it as propaganda or anything to promote people’s awareness of the urgent environment issue, but no, don’t say let’s calculate the “Green GDP”;-)
August 6th, 2008 at 12:10 pm
@sun bin,
very good analysis indeed. thanks for the link
August 6th, 2008 at 12:16 pm
@yo,
Hah, I was just bragging that “wise men share the same thought”…narcissism maybe…
What’s anti-semitic? My English is just so-so…
August 6th, 2008 at 2:20 pm
KL,
Oh, sorry, well your english looks good to me 🙂
anti-Semitic means anti Jewish.
August 6th, 2008 at 3:07 pm
@DaMai
Thanks for the clarification. However, to be fair, your comments that pollution should be included in GDP because it’s a factor at “tremendous levels”, and that the size/role of the heavy industry sector in effecting overall GDP implies otherwise.
“I agree that it’s not something you can necessarily directly subtract, but it is food for thought.”
I agree, because if the clean up already happened, it’s already included in GDP(added or subtracted), and if it didn’t happen, the calculations are assuming a value that will need to be factored in/out later down the road. I think we should stay away from green GDP as a measuring stick, but the analysis is good to understand the problem, outside the GDP aspect.
August 6th, 2008 at 3:37 pm
First, don’t get me wrong. I would care less of China’s GDP (or even per capita GDP) overtaking the US’ if I personally cannot take advantage of it. The driving forces behind the 2 scenarios are high nominal GDP growth and a fast appreciating currency. Will they happen in the next decade or so? We don’t know for sure, and if you have your money in it, you certainly should do your own due diligence. Heck I have spent quite some time to research the US’ rising in the early 1900s to 1920s and Japan’s rising in the 1960s to 1980s, just to understand the potentials of investing time/money/energy in China now. If anything personally behind my post, it surely isn’t a sense of misguided patriotism painting an inflated China in the future. I am old enough to live peacefully in my own skin, be it labeled as Chinese, American, Australian, Brazilian or Bahamian. All I want is — allow me to put in crudely — positioning my money, my time and myself to make the most out for myself, and myself only.
A few points:
* PPP in concept is fine. Its biggest drawback is lack of quality data, and it becomes more or less a guessing game. It took the World Bank a few years to revise the Chinese PPP ratio, and even that was only for the urban area. In the meantime, the basket of goods and services one should compare keep changing, so the old PPP ratio is borderline useless.
* JPY appreciated around 100% between 1985 and 1987, and BRL appreciated even more between 2003 and 2007. But neither country ran a trade deficit after the currency appreciation. In Japan’s case, its oversea customers adjusted to the idea that Japanese made products had been once cheap and good, but now were expensive and good. In Brazil’s case, commodities were cheap but now are expensive. Most of us live our lives as if the current trends will never end. Oil and food once were very cheap but now they are expensive. What changed? Could you have seen the changing agents before the rising became apparent?
* If we agree that carbon dioxide isn’t a pollutant and Al Gore is a buffoon, then environmental discussions may be meaningful. It’s all about economic development. When people get richer, they care about the air they breathe and the water they drink. That’s why Guangdong’s air and water are cleaner than Shaanxi’s, and Shanghai’s are cleaner than Chongqing’s.
* FOARP, “percentage of people engaging farming” isn’t the same as “percentage of people live in rural areas”. Actually the difference is huge. By the way, my projection for the latter crossing 50% is 2010 or 2011.
* Sun Bin, there is no double counting. All nominal GDP, no inflation. As to China threat advocates, f*ck’em. Life is too short to mind their opinions. You don’t live a miserable life just so that others may feel less threatened.
August 6th, 2008 at 4:30 pm
Interesting analysis except for one serious omission. GDP figures include one important econometric in China that measures the true China economy, its Gross National Product. The last time I checked the latter was less than half its GDP. The difference is the part of GDP produced by foreign owned production.
The most interesting number there is the share in the hands of Taiwanese capital. IMHO any discussion of China’s GDP shouldn’t lose sight of the difference between its GDP and GNP.
August 6th, 2008 at 4:52 pm
No, Gagnon. You probably read something but was confused… GNP is GDP plus net income flow. China’s foreign asset holding is A LOT bigger than foreigners’ asset holding in China, though the return of the former is likely smaller than the return of the latter for a host of the reasons. China’s GNP is somewhat larger than China’s GDP, but the difference is minuscule in the grand scheme of things.
August 6th, 2008 at 5:07 pm
@Robert Gagnon and JXie
GNP = GDP + (income earned abroad by domestic companies) – (income earned by foreign companies in the country)
Is that right?
In that sense, it is not the asset holdings but the income earned on the assets that count in the GNP, right?
Isn’t the concept of GNP obsolete given that many major companies are multinational?
August 6th, 2008 at 5:15 pm
@Robert,
You have to be careful though. GNP is now becoming less and less used. My understanding of this is because it’s not really relevant to differentiate who owns the company in a country if you want to measure the overall strength of a country’s economy. Companies who do business overseas add to the oversea economies and very little(or nothing) to their local economies back home (e.g. GM moving production to China, thus depriving Americans jobs). As a rule of thumb, GDP is the preferred measure.
August 6th, 2008 at 5:18 pm
@Wuming
“Isn’t the concept of GNP obsolete given that many major companies are multinational?”
That’s my understanding as well.
August 6th, 2008 at 5:19 pm
BTW, Sun Bin, we don’t know if China’s GDP is overstated. There are certainly local officials who overstate the production numbers presumably for career advancement, but there are certainly local officials who understate the numbers to reduce tax. Zhu Rongji was famously known to squeeze out “water” in the local stats, but did NSB play with GDP deflator at the high side too much? You know, GDP deflator numbers don’t have to be always in sync with CPI numbers, but in the long run they should be very close. However, China’s GDP deflator has been larger than CPI in recent years. Once China’s provincial GDP numbers were the butt of the joke since they all were growing faster than the national number. However, lately the talk has been maybe the provinces have been right all along.
On top of it, you likely have a service economy that NSB can’t get their hands around fully yet.
August 6th, 2008 at 5:23 pm
Wuming, I meant the return on asset in percentage term, China’s foreign asset holding likely performs worse than foreigners’ asset holding in China. But in absolute term, China has earned more from its oversea assets than foreigners has earned from their Chinese assets in recent years, i.e. China has a positive net income flow.
August 6th, 2008 at 8:33 pm
To yo,
I think that you might consider a few points raised by John Pomfret in a recent article titled “A long wait at the gate to (economic) greatness” in the LA Times:
“China should have a big economy. But on a per capita basis, the country isn’t a dragon; it’s a medium-size lizard, sitting in 109th place on the International Monetary Fund’s World Economic Outlook Database, squarely between Swaziland and Morocco. China’s economy is large, but its average living standard is low, and it will stay that way for a very long time, even assuming that the economy continues to grow at impressive rates.
The big number wheeled out to prove that China is eating our economic lunch is the U.S. trade deficit with China, which last year hit $256 billion. But again, where’s the missing nuance? Nearly 60 percent of China’s total exports are churned out by companies not owned by Chinese (including plenty of U.S. ones). When it comes to high-tech exports such as computers and electronic goods, 89 percent of China’s exports come from non-Chinese-owned companies. China is part of the global system, but it’s still the low-cost assembly and manufacturing part — and foreign, not Chinese, firms are reaping the lion’s share of the profits. ”
I think that the reality of foreign direct investment in China is so big and so focused on capital intensive production that the difference between GDP and GNP in China is very relevant to arrive a realistic picture of national income. Clever words can’t mask many of the basic factors in China’s economy.
China has achieved much with its economy and will achieve much more but there will be a few, and maybe more than a few, reality bumps on the road upward!
The current sad position of Shanghai stock and real estate market performance certainly points to a current serious bump in the road for many Chinese investors, who probably expected that markets could only go up!
August 7th, 2008 at 12:50 am
GDP is as much politics as anything else, so it will ultimately depend on world politics. If the US sees China’s GDP as a national security issue, China can’t grow because its heavily dependent on external factors such as trade and investment. China’s current GDP is around $3.8 trillion, but currency swings can have a big effect. The EU-12’s GDP is way more than the US now, but in 2002 was smaller than the US. Same goes for Japan, it could have a much larger GDP, but its high savings rate and weak currency keep it smaller than it really is. China has those same factors. If China doesn’t get derailed it has a chance to pass the US soon, but if it does get derailed all bets are off…so yes its way too early to make an educated guess.
August 7th, 2008 at 3:11 am
Nearly 60 percent of China’s total exports are churned out by companies not owned by Chinese (including plenty of U.S. ones).
I have pretty low regard on the accurate reporting & analytical skills of the reporters from WP and NYT, Pomfret included. The accurate statement should be:
“Nearly 60 percent (in 2006 58%) of China’s total exports are churned out by companies not fully owned by Chinese (外商投资企业）.”
Furthermore, you have to consider:
* Historically China had preferential tax treatment to 外商投资企业, which encouraged some Chinese domestic capital to make a round trip and become foreign capital. Some investments from Hong Kong, bulk of the investments from British Virgin Islands, Cayman Islands, and Samoa (all top 10 FDI origins with HK being by far the numero uno) are likely those round-trip FDI investments.
* Let me give you the example of my uncle. He owns a couple of factories making electronic components in Guangdong. A bit less than 10 years ago, he exported roughly half of his products to oversea customers such as LG, Toshiba & Sharp. Now all his oversea customers’ shops have been moved to China, and most in the Pearl Delta Region. He hardly exports anything at all now. You tell me if his lower contribution of China’s merchandise exports, as a source, really has any meaning at all.
August 7th, 2008 at 3:53 am
JXie,
1) why you cannot use nominal and exchange rate together: one example, if you have high inflation, that means the gap in the ‘real value’ of your money is becoming smaller relative to all other goods, including the USD. eg look at brazil and zimbabwe, the nominal exchange rate changes every day when there is high inflation. of course these are extreme examples.
for your objective of ‘arbitrage’ for the metastable exchange rate hike ala Japan in 1980s, i think your analysis works, just be careful to exit at the right time (similar to stock market speculation in the past 2 years, you would make a lot of money if you are not greedy)
2) ‘you don’t give a fxxx to…’. i also have no objection to that. but i suppose you probably heard of theories that there had been some concerted effort to advocate PPP exchange rate (re: CIA website) and the ‘conspiracy’ behind the previous World Bank mistake (allegedly deliberate). regardless of the truth of these theory, it affect china on the trade negiotiation (eg treated as developed country in WTO, etc), and it affects the return of your investment.
August 7th, 2008 at 4:23 am
@Robert,
IMO, what Promfret was trying to get at was that China’s economy is big, it’s GDP growth huge, but the people poor, and he threw out GNP as evidence. If Promfret is concerned about national income levels or the standards of living of Chinese people, he should find other more helpful and specific statistics like salary statistics or consumption statistics instead of using GNP, which is generally not used anymore. Not too useful if you want to make apples to apples comparisons with other countries.
But back to the main issue, I will refer back to my comments on why economist choose to use GDP over GNP to measure the economy.
August 7th, 2008 at 5:35 am
Despite all the flaws of GDP measurement, it’s still the most commonly used indicator of a country’s economy size and development.
August 7th, 2008 at 5:36 am
@yo,
Jewish? Wow, I always thought you are a oversea Chinese…
August 7th, 2008 at 5:38 am
@sun bin,
PPP is undoubtedly controversial, but it’s the first time I hear of “the ‘conspiracy’ behind the previous World Bank mistake (allegedly deliberate)”…any links about that?
August 7th, 2008 at 9:38 am
@KL,
1) well, yes about the PPP flaws. though it is also useful (similar to the big mac index) vs the nominal rate. mainly when ‘nominal’ is quite distorted.
2) back before China joined WTO (and it had taken very long and China missed the opportunity to join as a ‘founding member’), and during the negotiation for China to join WTO, one of the condition raise (reportedly by US) is to insist that China will join as a “developed country”, — implication is the terms are very different such as tariff requirement and opening up of agricultural sector/etc.
one of the reason that China is already a ‘developed’ country is its PPP GDP/cap.
and this number also was used to argue against aids to China, etc.
when zoellick took over world bank, he fixed that bug. then i read some reports links the previous mistake as not an innocent one, i can’t find these commentaries now. but you can try to search with these keywords, focus on the time when zoellick fixed the mistake, and mostly in the chinese media.
but i wouldn’t bother too much about this, as it is just some rather wild ‘conspiracy theory’.
August 7th, 2008 at 11:16 am
Assume that China grows indefinitely at 10% per annum and obviously China will forever rule the earth. That would be a mistake, however, because such a conclusion ignores Azerbaijan. Assuming Azerbaijan continues to grow at 23% indefinitely then the real future becomes clear: a bipolar world with Azerbaijan rivalling China for global dominance and all other nations rendered insignificant.
But which nation will finally prevail? At 23% per annum, it’s inevitable that Azerbaijan will be the hegemon, but if we assume 32% annual growth (and this is amazing!) it happens even faster.
I’m going to learn Azeri so I can assume personal income growth of 25% per year and become the world’s richest person.
August 7th, 2008 at 3:08 pm
@KL,
LOL, it was a joke.
FYI,
I found a person who is half Jewish, half Chinese, these mystical creatures exists!
August 7th, 2008 at 6:27 pm
Sun Bin, your explanation makes sense as to factoring both exchange rate and nominal growth, in theory. Assuming 2 economies at the similar development stage, with the same basket of goods and services, with no trade barriers and deficiency, with statisticians using the same methods, yes, indeed the economy with higher inflation embedded in the nominal GDP growth, will have a weakening currency. Over time those 2 will cancel each other out. However, allow me make a few points,
* If you compare China and the US (or even Brazil and the US), the former runs a fiscal surplus, has a tightening monetary policy, and an appreciating currency, yet the former’s inflation is supposed to be much higher than the latter’s. Sure food and energy consist of a higher percentage in China’s basket, and those 2 are the ones inflating the most worldwide. But honestly in your personal experience, inflation in China is higher than in the US? I’ve paid close attention to my favorite restaurants in China, the US and Brazil and the US’ price increase is by far the highest. Maybe that increase has been largely canceled out by the chemical compound improve in automobile painting in the US — you know, needs a hedonic adjustment since in theory now the cars are better thus cheaper? It’s quite possible all of the statisticians are lying, but at least in my opinion Chinese and Brazilians are keeping it real. For more see http://www.shadowstats.com/
* Like I said, Chinese statisticians likely have been screwing with GDP deflator to make the real GDP growth look smaller, or less menacing, I suppose? On the other hand, GDP deflator of the US in 2Q08 was 1.1%??!! In a perfect world, real GDP growth is a better benchmark. But if in Q208, the US grew 1.9%, there is no way in hell China only grew 10.1%.
* With the same theory, after JPY 100% appreciation between 1985 and 1987, we should’ve seen significantly lower inflation (or even deflation), lower trade surplus (or trade deficit) and slower GDP growth. But none of them happened. Japan’s oversea customers got used to cheap and good Japanese imports becoming expensive; and Japanese consumers develop a taste for more expensive imports.
My whole point of using nominal GDP growth and exchange rate is because these 2 combined are least subject to statisticians pulling an Enron/Freddie/Fannie/Bear Stearns on us.
August 7th, 2008 at 6:35 pm
For the last time folks, China’s GNP is slightly larger than its GDP.
August 7th, 2008 at 8:51 pm
JXie,
Thanks for clearing that up.
August 8th, 2008 at 3:53 am
“Egypt, which has a roughly 30% lower per capita GDP, has its service economy at 54% of the total economy. ”
Or could it be just although Egypit sucks at service sector, but it sucks even more in other sectors like manufactering? I think what you should look at is service economy per capita, in big mac index.
August 8th, 2008 at 6:03 am
@Moneyball – Egypt has a tourism industry much larger in proportion to its population than China’s (according to UNWTO figures, in 2005 China received 20 USD per capita from tourists, compared to 80 USD per capita for Egypt), and much also depends on what is included as ‘service’.
August 10th, 2008 at 2:59 pm
China’s resent development is unparalleled in terms of her ecological footprint and emissions levels, which are adding to an already stressed global eco system.
With blurred vision they are heading for a monumental wake up call, the planet simply can not sustain such an onslaught.
The world will feel the repercussions as china reaps what they sow.
August 10th, 2008 at 4:01 pm
@philip clarkson
World is reaping what the western countries have sown right now. In fact, if only a fraction of the people outside of the West is to reach the current consumption level of the West, the structure of natural source supply will collapse. To solve this problem while not facing massive world wars for resources, the West has to take the lead by drastically reduce its ecological footprint, which in practical terms means lowering the level of consumption and hence the living standard. Are you sure you have thought of the consequences of that?
If you have not, and have nothing else constructive to say, I suggest you craw back to your bed, wake or asleep wouldn’t make much difference to you.
August 19th, 2008 at 11:51 am
<<<<<
I found a person who is half Jewish, half Chinese, these mystical creatures exists!
<<<<<
Just to digress.
Can a person be half Jewish?
Is like saying he is half catholic! or half vegetarian.