The recent China International Import Expo (CIIE) in Shanghai attracted little attention in the Western press but it is one more reminder that China is an economic and trading powerhouse that has surpassed the US. That is right, the word is “surpassed.” The CIIE also serves to remind us that China’s economic power now stands on four mighty pillars.
Americans must understand this clearly, for ultimately all power grows out of economic power, including military power. A confrontational approach to China is therefore extremely dangerous in many ways, and it is being urged on us by almost all of the ruling Elite. The consequences of such confrontation are far different from aggression against Venezuela or Bolivia or Syria or Iraq or Afghanistan — or even Russia. Failure to comprehend China’s strength could lead to a mortal disaster for the U.S. — and for China and indeed the world, as Henry Kissinger has recently warned us.
This brief essay is written as one small contribution to forestall such a disaster. It provides a thumbnail sketch, a primer, of China’s economic tetrad, that is four pillars which provide a measure of China’s power and how it interacts with the world based on that power. These four are: 1, The GDP in PPP terms; 2, Exports; 3, Imports; and 4, Internal Retail Market. In each case we shall compare them to the U.S. There have been plenty of forecasts predicting the imminent disintegration of China’s economy over the decades, and none has come to pass. So, let us have done with forecasts and concentrate mainly on what we observe before us. In that spirit this essay is for the most part a review of cold, hard facts as they presently exist. It is written by a non-economist and that is one reason it hews to the world as it is, not as it might or might not be, given a host of assumptions, models and, mostly, wishful thinking. I hope it does not insult your intelligence, dear reader. It is only an introduction that hopefully also serves as a wake-up call to the reality of our world.
- China has the world’s largest GDP in PPP terms and this has been true since November 2014.
Of the four economic pillars we wish to consider, the first and most fundamental is the sheer size of its economy as seen in its Gross Domestic Product (GDP). Here the conventional wisdom views China’s as the number two GDP — but the surprise to most people is that in fact it is number one. China now has the largest GDP in the world in Purchasing Power Parity (PPP) terms, a metric used by the IMF, World Bank and even the CIA for comparing GDPs of different countries. So it is a measure not to be dismissed lightly or dismissed at all. The IMF which provides the most recent data, provided in October 2019, gives the PPP-GDP for China and the US, thus:
China, $27.3 trillion U.S., $21.4 trillion
(The number for China does not include Hong Kong, a Chinese city, with a PPP-GDP of $0.491 trillion or Macau with $0.078 trillion. Those two bring China’s total to $27.9 tn.)
Let’s now consider what the PPP metric is in order to see why it is the most meaningful way to compare national GDPs. Briefly the PPP calculation corrects the nominal GDP, the GDP of any country in dollars. The nominal GDP is calculated simply by using the present currency exchange rate to express a country’s GDP in dollars rather than the native currency, for example the Chinese yuan. The PPP correction of the nominal GDP gives a measure of the actual purchasing ability or purchasing power of the total GDP in a given country. Let’s take a hypothetical example to understand this. Suppose China produced 127 trillion yuan’s worth of goods and services in some year past, hypothetically in 2017. Using an exchange rate of 6.37 yuan per dollar, that amounts to US $11.97 trillion. That is China’s nominal GDP. Let us say that the United States GDP that year was $19.36 trillion. These values $11.97 trillion and $19.46 trillion are designated as the “nominal GDPs” for the two countries, and these “nominal” values are the ones we see for the most part in the monopoly media.
But now let us assume that the only good or service produced in the two countries were a Big Mac. In 2017, let us say, again hypothetically, that a Big Mac costs about $3.17 in China but $5.28 in the U.S. using the standard exchange rate for Chinese yuan to U.S. dollars – values not too wide of the actual ones. Thus, Big Macs are cheaper in China – for all sorts of reasons, including different costs of ingredients, labor, transport, etc. So the “Big Mac PPP” ratio for US/China in this example is 5.28/3.17 or 1.67. Now we can calculate the GDPs in PPP terms by applying that ratio to the Chinese nominal GDP. The new values are $19.36 trillion for the US, unchanged, and $19.93 trillion (that is, $11.97 trillion times 1.67) for China. Now China’s GDP, in PPP terms, is the larger of the two. The real PPP ratio used by IMF, World Bank and CIA World Fact Book does not limit itself to Big Macs of course, but uses a “basket” of goods and services to calculate the PPP ratio. In that basket are rockets as well as hamburgers, the wages of factory workers and tech workers as well as those of McDonalds workers, factory robots, as well as hamburger ovens. The PPP-GDP tells us how much more purchasing power is available than might be recognized based solely on simple exchange rates, i.e., nominal GDPs. (In fact, there is a Big Mac PPP index originally suggested by The Economist some years back as a comic device, but it can give some rough qualitative information since the recipe and ingredients for the Big Mac are precisely the same the world over. Universality is a Big Mac characteristic, the same quality claimed by many religions and for Western values.) The PPP metric is the relevant one for measuring the power of an economy since it tells us what can actually be purchased – currency is meaningless unless and until it actually buys something.
Using the PPP metric, China’s GDP surpassed that of the U.S. in November of 2014 according to the IMF, and today stands at approximately 130% of the U.S. PPP-GDP, according to the IMF’s values for 2019 given above. However, nominal GDP is used by the US and Chinese government routinely in public statements, and there the Chinese GDP is today about 66% of the US GDP. One suspects that this convention satisfies the Chinese government’s desire not to alarm the US, and the US government’s desire to appear as number one in all things. But barring some unforeseen catastrophe, the same story will soon be repeated with the nominal GDP; China will surpass the US in nominal GDP in about 15 years’ time by my rough calculation. But that is a prediction and we wish to avoid them as much as possible. Here we wish to emphasize the PPP-GDP as it already exists. The monopoly Western media also use the nominal GDPs of China and the US for comparison, rarely ever alluding to PPP-GDP. So, it is no surprise that relatively few people are aware of the latter.
Furthermore, even at its present “slowed” pace of about 6%, China’s GDP is growing at a much faster rate than that of the US, which is about 2.0%. There is no sign that China’s GDP will fall back to number two and no prediction from a reliable source that it will do so. It is this enormous and rapidly growing GDP that is the fundamental pillar of China’s economic power.
Finally, even though China has the world’s largest gross PPP-GDP, it remains a developing nation. It is now both rich and poor. With nearly 1.4 billion people, its per capita nominal GDP is about one-quarter that of the U.S. China is rich in terms of collective power but relatively poor in terms of individual income. So, China needs to develop its economy much more if it is to meet its stated goal of bringing most of its people into the middle class by 2049, the centenary of its founding. Nevertheless, national economic power depends on total economic output not per capita output. If 1 billion people each contribute a dime or 100 million each contribute a dollar, the end result is sufficient to buy, for example, a $100 million base for satellite launches. For national power, more often than not, it is the total that counts.
In general, the PPP metric is used only for GDP. All values in the following sections are based simply on the exchange rate with no further corrections.
- China is the world’s number one exporter.
The second pillar underlying China’s economic prowess is its well-known status as the world’s largest exporter. Here the surprise is that China is ahead, but not by so much as we are often told when China is excoriated for “taking advantage” of the US in international trade. According to the UN’s most recent numbers, those for 2018, the export of goods by the U.S. and China are as follows in trillions of US dollars:
Export of goods (2018):
China, $2.5 trillion U.S., $1.7 trillion
(This number for China does not include Hong Kong with an export volume of $0.6 trillion, an addition that brings the total to $3.1 trillion.)
But these numbers, the ones usually given, do not include export of services, which provides a much larger addition to the U.S.’s total exports than to China’s
Export of services (2018)
China, $ 0.23 trillion US, $0.83 trillion
In 2018 the U.S. was far and away the world’s largest exporter of services, whereas China lagged behind the US, UK, Germany and France to be the fifth largest services exporter. And over the period from 2014 to 2018, China’s service exports grew by 6% compared to 11% for the U.S. In the area of service exports China shows definite weakness, perhaps due to its greater language and cultural distance from the West. India for example, though number 6 in service exports, saw them grow by 30% in the 2014-2018 period.
For those curious about which services are exported, some of the major ones coming out of China are found here and out of the U.S. here. Since the US is primarily a service economy, it is not surprising that services should be about one-third of its total exports. And service exports may provide better jobs than manufacture of products for export. For example, one category of service export is education when foreigners come to the US and pay to go to school. Is it better to be producing more professors or more auto workers? Which provides better income and better quality of life? I see China’s relatively poor performance in this area as a definite weakness, partly due to the level of development of its economy and partly due to its lesser soft power and its linguistic and cultural distance from the West.
Total export of goods and services (2018)
China, $2.7 trillion US, $2.5 trillion
Nevertheless, China is number one in exports, and its export growth has proved remarkably resilient. According to the Financial Times of 9/22/2018: “After overtaking Germany as the world’s top exporter of goods in 2009, Chinese exports have grown at an average of 5 per cent a year to $2.26tn in 2017, compared with annual global export growth below 2 per cent. China’s share of manufacturing exports expanded to 18 per cent from 12 per cent during the past decade — adding to gains made after China’s 2001 entry to the WTO which accelerated the decline of manufacturing employment in developed countries.”
In the same very informative piece the FT also notes that, although the world’s attention has been focused on China’s development of high-tech products by companies like Huawei, the rapid increase in China’s exports has been for “medium level technology such as vehicles and their parts, electrical machinery and construction machinery.” Says the FT: “China is the now dominant producer in medium high-tech industries, with its global share nearly tripling in the past decade to 32 per cent, according to the US National Science Board, surpassing the US in the late 2000s and the EU this decade.”
Moreover, 48% of China’s exports go to countries outside the developed countries of the OECD (Organization for Economic Cooperation and Development) according to the FT. This lessens the influence of the U.S. and its European semi-vassal states over China, and it provides links of all sorts between China and the developing world. China appears to be far from relying solely on the U.S. market and other Western markets to consume its products.
China is now showing determination to move further up the value chain to high tech and this was formalized in 2015 with the “Made in China 2025” 10 year plan, inspired by Germany’s Industry 4.0. It is this, not the Belt and Road Initiative, that has official Washington wringing its hands. This program is already well under way as exemplified by Huwei’s 5G technology and growth to number three among sales in smart phones. In this essay, however, we are trying to speak as much as possible about present realities, and China is only at the threshold of high tech production and exports. But let us note the following from the Nikkei Asian Review in a story titled “China memory chip output zooms from zero to 5% of world total: Mass production to start in 2020 as Beijing guns for technological self-sufficiency.” The opening reads:
Taipei — Beijing’s push for technological self-sufficiency is on the verge of a major breakthrough, with the country’s nascent chip industry on track to produce around 5% of the world’s memory chips by the end of 2020 from virtually zero last year, sources familiar with the matter told the Nikkei Asian Review.
The US restrictions on memory chips and other electronic commodities are apparently driving China to become self-sufficient and thereby becoming a competitor with the U.S. and other developed countries on world markets. One can ask if the U.S. is behaving wisely in cutting off China from importing U.S. electronic products. It is hard to see how that helps the U.S. balance of payments much less the future market share of U.S. chip makers and manufacturers of other electronic devices. Are the US concerns over “security” real or merely another form of protectionism?
- China is the number two importer in the world with the second largest retail market and the largest e-retail market — the CIIE in Shanghai.
China’s rapid ascent as importer is not so well-known as its role as exporter. However, in November, 2019, the second annual China International Import Expo (CIIE) in Shanghai brought this to the world’s attention. Business people and government officials from all over the world came to Shanghai to pitch their wares to Chinese importers for the burgeoning internal Chinese market. (Recall the first limb of the Chinese economic triad is the ever-growing Chinese economy with growing wages and salaries which generate a huge demand for products.) Perhaps the most noted dignitary was President Macron of France who was urging French wines and other goods on Chinese importers, wine merchants and restauranteurs. He even seduced Xi Jinping into tasting some Gallic grape which they jointly toasted. Of course Xi gave a speech touting, what else, “opening up,” and reminding the visitors that said opening up included a welcome mat for exporters from around the globe to sell to China.
The import volumes of goods for 2018, the latest year for which values are available, are:
China, $2.1 trillion U.S., $2.6 trillion
Import of services (2018):
China, $0.5 trillion U.S., $0.6 trillion
Total import of goods and services (2018):
China, $2.6 trillion U.S., $3.2 trillion
Further, China’s imports are now approaching its exports of goods and services in value ($2.7 trillion, see above) with imports growing at nearly twice the rate of exports. If this trend continues as seems extremely likely, the Chinese positive trade surplus should diminish, making its exports and imports more balanced and removing some of the fear of its export prowess in the world. More pointedly, China’s growing imports provide the basis for alleviating the trade imbalance that is driving the Trumpian trade war with China. If one looks at what the U.S. exports and what China currently needs, the match is pretty good. China needs agricultural and very high tech products. Cut China off from either and it will find other sources, as it has for agricultural products, or invent and manufacture its own, for example chips for electronic devices. We might ask if that is a wise strategy for the U.S.?
- China’s retail market is roughly equal to that of the U.S. and growing faster.
The growth in imports is one sign of more purchasing power in China. Another is the extraordinary growth in China’s retail market, which is now almost the size of the U.S.’s
Retail sales (2018):
China, $5.2 trillion US, $5.3 trillion
The boom in China’s retail market is made by possible by the growth of its ever expanding middle class. As Monica Peart, senior forecasting director of eMarketer, puts it” “In recent years, consumers in China have experienced rising incomes, catapulting millions into the new middle class. The result has been a marked rise in purchasing power and average spending per person.” China’s e-retail market is even more remarkable, far and away the largest in the world. Again eMarketer: “China’s is by far the largest ecommerce market in the world—more than three times the size of the US ecommerce market. China has a 54.7% share of the world’s ecommerce sales, while the US has just 16.6%.” This is also no surprise because the Chinese have become very tech savvy and closely linked to the internet with the links growing closer as the rollout of 5G, already well underway in China, continues rapidly.
Given the size of the Chinese market and its continued growth, virtually no large corporation wants to be shut out of the Chinese market any more than it wants to be shut out of the U.S. market. Not only corporations but the countries in which they reside must take account of this. This gives China enormous influence, an influence built upon the rising prosperity of its people and no longer on their sacrifice. Moreover, although China has a middle class of about 300 million people, approximately the size of the entire U.S. population, it has 1.4 billion people, and it plans to bring almost all of them into its middle class by 2049, on time for the centenary of the founding of New China.
The immensity of such an economy will make China a power without economic peer on the world stage. And it seems irreversible. barring the prospect of an all-out war in the Pacific. But that is for the future and is beyond the scope of this essay. Predictions are hazardous even in the case of the simplest of systems. China’s present state is quite enough to argue that it should be the object of cooperation not conflict.
China’s triad – the nuclear one.
We would be remiss if after discussion of China’s economic tetrad that we did not also mention China’s nuclear weapons triad. One month before the November CIIE meeting in Shanghai was China’s National Day Parade in Beijing on October 1, celebrating the 70th anniversary of New China’s founding. There on display was China’s nuclear deterrent, the triad — of land-based ICBMs (Intercontinental Ballistic Missiles), SLBMs (Submarine Launched Ballistic Missiles, and Air Launched weapons. The new, advanced ICBMs made their first appearance, providing evidence that China’s nuclear triad is now fully developed. In short China, like Russia and the U.S., can now destroy any country that attempts to make war on it.
But several features of China’s nuclear deterrent deserve notice. As Hong Kong’s South China Morning Post tells us: “The current Chinese nuclear arsenal is estimated to be around 250 warheads in accordance with its ‘minimal deterrence’ strategy, and the country has adopted a “no first use” doctrine towards nuclear missiles…. According to Zhou Chenming, a Beijing-based military commentator, ‘China doesn’t need to keep too many nuclear warheads, and just lets long-range missiles be equipped with the expensive nuclear warheads, because that’s enough for nuclear deterrence.’” Unlike Russia or the U.S., China does not have thousands of nuclear warheads, and unlike the US it has taken “first use” of nuclear weapons “off the table.” China possesses a powerful deterrent but presents no offensive threat.
Conclusion.
What are we to make of this economic and military power of China? In sum, China is a mighty economic power that cannot be destroyed and has no offensive posture toward the U.S. – or any other country. What is the U.S. to do? Is the answer not obvious – in fact inescapable — given the relative power of the two nations? It is time to work out a peaceful arrangement that allows us to live together. The U.S. should do this now while it is possible and before the catastrophe of accidental war, nuclear war, engulfs us all. The clock is ticking.