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Friday 18 Aug 2017 | 13:17 | SYDNEY
Friday 18 Aug 2017 | 13:17 | SYDNEY

Measuring China's economic weight

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COMMENTS

16 July 2008 12:04

Malcolm's post on measuring Chinese power noted that it was difficult to get a grip on how powerful China is relative to, say, Japan or the US. The good news is that I think we can actually do a fairly good job when it comes to gauging China’s growing relative economic weight.

An obvious starting point is relative size of GDP. The chart below tracks the evolution since 1980 of Chinese, Japanese and Indian GDP relative to that of the US, where national output has been converted into US dollars. The numbers are taken from the IMF’s World Economic Outlook (WEO) database, and also include the Fund’s medium-term projections.

China’s growing relative economic weight is readily apparent, with the IMF’s projections suggesting China’s economy could overtake Japan’s in absolute size in 2011.

There are, however, big problems with using (market) exchange rates to compare GDP across countries. An alternative approach is to use purchasing power parity (PPP) converters, although these measures also have some drawbacks of their own.

PPP-based estimates of GDP for the same group of countries are presented in the chart below, again using the United States as the benchmark and the IMF’s WEO database as the data source.

 

Once more, China’s rising economic weight is readily apparent. Indeed, on this basis China’s economy was already larger than Japan’s by 2001. As of 2007, the IMF estimates that China’s GDP was more than half as large again as Japan’s, although this still left China at only a little over half the size of the US economy. According to these PPP estimates, last year China accounted for almost 11% of world GDP, compared to more than 6½% for Japan and more than 21% for the US.

If you are sceptical of an estimate of an 11% share of world GDP for China, then it’s fairly straightforward to cross-check for rough consistency against a series of other benchmarks. To take just three examples; according to the BP Statistical Review of World Energy, China accounted for 16% of world primary energy consumption last year; the International Iron and Steel Institute has China’s share of world steel production  in 2007 at more than 36%; and finally, the Food and Agricultural Organization estimates China’s shares of global cereal production and consumption last year were both greater than 18%. None of this suggest the 11% figure is wildly unrealistic.

Of course, there are economic benchmarks that we might consider in addition to total output. GDP is itself the product of population and GDP per head, and there are obvious differences here between China and India (high populations, low GDP per head) and the US and Japan (significantly lower populations, much higher levels of GDP per head). However, while these are extremely important in some respects (a poor developing economy would be expected to have quite different policy priorities than a rich developed one, for example, and per capita measures are important when we are thinking about development and economic welfare), when it comes to measuring overall global economic weight, it is GDP which is likely to be the most relevant.

While GDP is a good measure of economic size, albeit one with some well-known and significant limitations, we might also want to focus on measures of China’s cross-border economic impact. An obvious starting place here is international trade, with the WTO noting that last year China  was the world’s second largest merchandise exporter (accounting for almost 9% of world goods exports) and third largest importer (almost 7% of world goods imports). In terms of trade in commercial services, in 2007 China was the world’s seventh largest exporter (3.9%) and fifth largest importer (4.2%). 

We could conduct similar exercises for financial transactions, with data on China’s share of foreign exchange reserves or FDI flows readily available. Some of these measures would tend to show a less important role for China in international financial transactions: for example, according to the BIS’s latest Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, while the US dollar accounted for 86% of daily foreign exchange market turnover in 2007 and the Japanese Yen 16½%, capital account restrictions and under-developed financial markets meant that the share of the RMB was a mere ½%.*

All up, then, I think we can construct both a fairly accurate picture of China’s relative economic standing in the world economy and track how that changes over time. Which brings me back to Malcolm’s post. Given that we can produce some pretty good indicators of the economic components of national power, how far does this leave us from achieving a broader quantification? I assume that the mapping from economic weight to global power is not a straightforward one, but it would be interesting to hear from some of my security-focused colleagues on this one.

* For those who noticed that these percentages sum to over 100%, this is because since two currencies are involved in each FX transaction, the sum of the percentage shares for individual currencies is 200%, not 100%.

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