When leaders of the world’s No. 1 and No. 2 economies get together as they did in Washington this week, people increasingly ask which one is which.
Conservative pundits breathlessly warn that China’s fast-growing economy is on the verge of surpassing the U.S. to become No. 1 in a sure sign of U.S. economic decline. Many U.S. voters think that already has happened, according to public opinion polls, though it is not projected to happen for years to come.
Yet the irony is that Washington’s prescriptions for policy change in Beijing — pressed repeatedly in this week’s summit between the superpowers — would only hasten the day China becomes the new global leader.
If the U.S. gets its top wish and China allows its currency to rise rapidly against the U.S. dollar to reflect its increasing economic strength, China would overtake the U.S. more quickly because the size of its economy would appear much larger in dollar terms.
“Be careful what you wish for,” said Geoff Dyer, Beijing bureau chief of the Financial Times, noting that China may have suppressed the value of its currency by as much as 40 percent to maintain its competitive edge in trade and keep exports to the U.S. cheap in dollar terms.
“Maybe the fact that the currency has been kept so artificially low has obscured just how far China has already come,” he said. “With a much stronger currency, China would loom even larger in the U.S. consciousness. It would reinforce the perception that China is not just a rival for the distant future but is swiftly becoming an economic and military match for the U.S.”
‘A wake-up call’
Beijing has acceded to Washington’s wishes in a small way in the past year and allowed the yuan to rise against the U.S. dollar by 5 percent — a rate of appreciation that Treasury Secretary Timothy F. Geithner applauded, but said needs to accelerate.
Currency disputes aside, conservative commentators such as Americans for Limited Government President Bill Wilson warn that China is on the verge of overtaking the U.S. under a measure that more honestly accounts for the size of both economies.
He points to figures published by the IMF that show China’s economy nearly rivals the size of the U.S. economy when currency distortions are removed and the purchasing power of Chinese citizens is taken into account.
Since lower wages and prices enable the yuan to buy nearly as much goods and services in China as the dollar buys in the U.S., the IMF’s alternative way of estimating the size of China’s economy puts it last year at $10 trillion, not far below the U.S. figure.
By 2016, according to the IMF’s adjusted measure, Chinese output of $19 trillion would surpass U.S. output of $18.8 trillion, and its 18 percent share of the global economy would overtake the U.S. share of 17.8 percent.
Arvind Subramanian, an analyst at the Peterson Institute for International Economics, said Americans should not nurture complacency by focusing on the enormous gap between U.S. and Chinese economic power when viewed through the prism of an overvalued U.S. dollar.
He thinks even the IMF’s adjusted calculations of China’s output, which show it rapidly gaining on the U.S., actually underestimate the power of the Asian giant. Mr. Subramanian calculates that China’s economy surpassed the U.S. economy some time last year.