China could be world's No. 1 economy this year

China could overtake the United States as the world's No. 1 economy this year, five years ahead of most predictions, according to a World Bank-backed project using a new statistical method.

But economists question the accuracy of the new calculations, while foreign policy observers believe that China's top spot might be more symbolic than real.

Using revised calculations on the real cost of living across countries, the International Comparison Programme (ICP) hosted by the World Bank said that the dragon economy is significantly bigger than previously thought.

Many economists have tipped 2019 to be the year China regains the pole position it had lost to the US in 1891.

If the milestone is reached this year, it would add yet another dimension to China's growing dominance on the global stage, having already upstaged the US as the world's largest trading nation and for having the most billionaires.

Little wonder that The Economist magazine, in crowning China as the likely No. 1 economy this year, proclaimed that "the American Century ends, and the Pacific Century begins".

Such a development will be closely watched, in particular by China's neighbours such as Japan and the Philippines, who need to keep lucrative bilateral trade and investment channels open even as they clash with Beijing over territorial disputes and lean on the US' Asian pivot for support.

The re-ordering of international GDP rankings extends also to India, which was catapulted to No. 3 position, displacing Japan, according to IPC's research.

The changes are a result of IPC updating its 2005 estimates of the relative purchasing power parity (PPP), or the amount of goods and services that money can buy, across 199 countries.

Rather than referencing volatile market exchange rates to convert one country's GDP from, say, US dollars to the Chinese yuan to make comparisons, economists agree that using PPP offers a more accurate picture of the cost of living and hence the size of different economies.

IPC found that China's 2011 PPP rates were actually 20 per cent higher than in the previous 2005 survey. This means that its economy was already 87 per cent that of the US by 2011. The gap is likely to close as China's economy expands by roughly 7.5 per cent this year, while the US grows at around 2.5 per cent.

China's nominal GDP of 56.9 trillion yuan (S$11.42 trillion) last year, however, remains dwarfed by the US' GDP of US$16.8 trillion (S$21.1 trillion).

Still, some analysts say China's new status will only be symbolic. For one thing, there are certain technical issues, including differing quality of products sold in each country, that limit the PPP as an accurate measure of development, economist Li Xiaoqin at PRC Macro Advisors noted.

"GDP per capita is often seen as the proxy for a country's development instead and on that front, China still has a long way to go. It cannot yet be classified as a rich or wealthy country," Dr Li said.

China's influence on the region and beyond is extensive even without its new status, added Mr Chen Long, an economist with consultancy Gavekal Dragonomics.

So what will likely have a bigger impact on China's Asian neighbours will be the way Beijing uses its economic clout abroad, rather than its numerical GDP heft.

"ASEAN countries will not try to draw closer to China just because it is rich, but because of its policies which give them more opportunities to gain from its economic strength," said Fudan University's Professor Shen Dingli.

graceng@sph.com.sg

esthert@sph.com.sg

This article was published on May 1 in The Straits Times.

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