Why China is Important
- Economic SizeWe normally measure the size of countries economies by GNP (Gross National Product) which is an approximate measure of how much is produced (or, more precisely, the value added). If trade is roughly in balance it is also a measure of how much is consumed.There are however different ways of comparing the GNP of one country with another (over and above the question of accuracy of economic statistics). If we compare GNP at 2015 average exchange rates the US GNP was $17.9 trillion and China’s $11.4 trillion. But exchange rates fluctuate and may also give a very distorted picture of price levels in the two countries. In general, Chinese goods and services cost less than their American equivalent or, indeed, prices in many developed economies. If this effect is allowed for we can calculate a GNP on a purchasing power parity (PPP) basis. The IMF/World Bank use a measure which gives China a revised GNP of $19.5 trillion, that is significantly larger than the US ($17.9 trillion) and larger even than the combined EU ($19.1 trillion). Thus, there are some measures which show China as the biggest economy in the world and others which leave the US as (for the moment) still the biggest. Both are ‘true’ though they measure different things.Of course, economic size is not the same as living standards. Even on a PPP measure China is still much poorer that the US with per capita income of around $12,000 as against $53,000 in the US.What matters for the future is how fast China grows absolutely and relative to the rest of the world. Chinese growth figures are regarded with suspicion though it is plausible to believe that China was achieving double-digit growth for much of the last two decades. In the last few years, however, growth has slowed sharply to an estimated 6% in 2016. There is much debate as to whether even this rate of growth can be sustained.
- TradeWhen Deng initiated his reforms China’s role in world trade was negligible, after a period in which Maoist economics was based on self-sufficiency. China is now the world’s largest trading nation – of goods – with exports in 2014 of $2.34 trillion as against $1.62 trillion from the USA and $1.50 trillion from Germany. On the import side, the US imports $2.41 trillion, China $1.96 trillion and Germany $1.25 trillion. China has the largest total values: $4.30 trillion versus $4.03 trillion for the USA.
- Savings and Capital FlowsThe corollary of the current account deficit is that China exports capital – savings – to the rest of the world. China has extraordinarily high rates of savings – almost 50% of GNP – without precedent historically for an emerging economy. Most of the savings are invested but there is a large surplus of savings despite attempts to boost consumption. Chinese savings are estimated at $5 trillion annually, up from $1 trillion a decade ago and much higher than the $3 trillion of the USA. There is the prospect of these Chinese savings being increasingly deployed, internationally. The Bank of England has estimated that the Chinese stock of external assets and liabilities could rise from 5% of GDP to 35% in two decades, with the implication that Chinese investors will own a far bigger share of the economy than they do now.
- Military StrengthUntil recently, China was a relatively weak military power compared with the USA (or Russia). It had a large standing army, the PLA, but has been concerned with defence (and internal security) rather than projecting force globally like the US (indeed, the PLA’s numbers are being cut). The overall position is now changing, fast. China has developed bases in contested waters in the South China sea; has established a military base in Djibouti; and has built an aircraft carrier and missiles to ‘kill carriers’. China now spends, on its own estimates, $150 billion a year on defense as against $525 billion by the US but independent overseas analysts like SIPRI believe that the true figure is closer to $230bn. And this is rising in line with the Chinese economy – around 7 to 8% pa.China is not on the same level as the US militarily though in decades to come it could approach parity. Its defense capability is moreover carefully targeted around a strengthening navy and specialist areas like cyber where its capability is formidable.
The Politics of Economics and the Economics of Politicians
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