China Law Blog

Somebody finally figured out, that overhyping the China's achievements (for the purpose of selling "China threat", which nobody is buying anyway) could have negative effects. What are the negative effects? The effect that countries around the world start to emulate China rather than democratize. So it's time to backtrack a little, tone it down a little. :-)

If you believe the US congress, that the RMB is undervalued by 40%, then we are actually just about even.

Here is another explanation.

Message to the Chinese government: if you want to keep your bragging rights (you need this kind of achievement to maintain legitimacy), you'd better revalue the Yuan up by 40%.

Will conveniently ignores that the fact that the meat of the "China threat" comes from ultra-nationalism and rapid militarization.

From east-asia-intel.com quoting a September China Daily article:

"Maj. Gen. Qian Lihua from the Defense Ministry's foreign affairs office made the comments after meetings in Washington between U.S. and Chinese defense officials.
Qian said that the 1999 congressional restrictions of the Foreign Affairs Office of the Ministry of National Defense "have imposed restrictions on the development of the relations between the two armed forces in 12 areas."

"From the legal point of view, they are obstacles to the development of the relations between the two armed forces," he said.

The congressional restrictions were passed after U.S. intelligence revealed that China gain valuable warfighting knowledge from the visits, including learning about the vulnerability of U.S. aircraft carriers. A short time after the incident, Beijing was detected purchasing wake-homing torpedoes for its anti-aircraft carrier attack operation.

Qian also said differences over Taiwan and a lack of "strategic mutual trust" were obstacles to closer ties.

The Pentagon has said in the past that it does not believe the congressional restrictions should be lifted.

Chinese officials asked that the restrictions be lifted during the talks last week, a sign that Beijing wants to gain access to more technology and warfighting information.

The restrictions prevent discussing joint warfighting and nuclear operations, as well as other modern warfare techniques. "

THAT is the China threat and it is not just a threat but a menace.

Will, you realize that exchange rates mean almost nothing in terms of PPP GDP, right?

This is yet another reason why I've always been deeply suspicious of PPP comparisons. The change has been driven by the fact that the World Bank's been using a very outdated basket of goods whose initial prices were in any case slightly sketchily worked out.
The NYT article is making a completely facetious comparison. China's not "producing 40% less stuff". PPP is about relative value, not quantity. The only real valid point to make as a result of the changes is on relative poverty levels and living standards, but even here it needs to be stressed that the government's own figures are still valid, it's only the comparison with other countries' levels (which is in any case filled with complications like different measurement standards) that has altered.
Full details, covering only Asia, at http://www.adb.org/statistics/icp/PPP-preliminary-report.asp

Dan

Yes, PPP assessments are based on often rather heroic assumptions about price levels. The latest data show that the old estimates for price levels in China (India too) were too low.

What does it mean? For anything measured at world prices and market exchange rates, nothing changes. Nearly all those things that people elsewhere fret about to do with the rise of China are unaffected -- China is still about to overtake Germany as the world’s largest exporter, it remains the world’s second largest user of energy, its largest holder of foreign exchange reserves, its largest producer and consumer of steel, etc. Add your own factoids to taste.

But, as the NYT article suggests, China’s reduced standing in PPP terms does help its leaders make the case that the country deserves more leeway on e.g. exchange rate policy because it is still very poor - Chinese per capita GDP, according to the new PPP data, is just 10% of that in the US. However, the data also show something which China’s leaders will be less likely to emphasise: In terms of per capita income, China is the 10th richest country in Asia. But in terms of consumption -- a more accurate measure of individual welfare -- China slips right down the rankings to 15th. Average consumption in China is lower than that in Sri Lanka, the Philippines, Pakistan and India although in per capita PPP GDP, China is richer than any of them. Most striking, Chinese per capita GDP is almost twice that of India, but consumption is barely any higher.

Dan, the Economists explains fairly well the entire issue at
http://www.economist.com/finance/displaystory.cfm?story_id=10209215

"The World Bank's estimate for China is widely used by economists. Yet few realise that it is based on a lot of guesswork, as the bank's previous international price surveys have not included China. Instead, it extrapolated from a study of prices in America and China that dates all the way back to the 1980s. The bank's latest price-comparison study, due to be published in mid-December, does include China for the first time, and preliminary evidence indicates that its GDP has been overstated in the past. In a recent article in the Financial Times, Albert Keidel, an economist at the Carnegie Endowment for International Peace, noted that PPP figures published by the Asian Development Bank (ADB), as part of its input into the World Bank's International Comparison Programme, implied that China's GDP was 40% smaller than the number reported by the World Bank. Interestingly, the new figure is very close to what the Big Mac index has indicated all along.

Mr Keidel's claim is itself based on some guesswork. The ADB report does not actually reveal the yuan's revised PPP rate against the dollar, as it only compares prices with those in Hong Kong, not America. To derive dollar PPPs Mr Keidel has assumed that relative prices in Hong Kong and America have not changed since previous studies. If this holds, then China's implied GDP is indeed 40% smaller than before. The World Bank says that it is still discussing the final numbers. Note, however, that the ADB figures imply that India's GDP is also now 40% smaller, even though India has taken part in previous international pricing surveys (suggesting that Hong Kong's PPP may in fact have changed). It is thus possible that China's GDP may be trimmed by less than 40% when the World Bank publishes its final report."

The IMF has economics statistics from 1980's onward and having looked over some of the IMF figures for developing asia, several countries have rather surprisingly large and rather divergent PPP multipliers. China's PPP multiplier has been slowly but steadily decreasing over last few years from it's historical trend of around 4, so I am not sure if the final PPP revision will end up being 40%, this year it is already down to 3.5. Some countries already have fairly low PPP multipliers to begin with such as Malaysia (2.08), Indonesia (2.56), and Thailand (2.85). While others have fairly large ones such as India (4.34), Vietnam (4.60), and Bangladesh (5.11).

For me, I think I'll stick to simple exchange rate per capita evaluations thank you very much. There is too much uncertainty regarding PPP evaluations and nothing is as solid as greenbacks (well except gold).

Explanation #3:

http://www.reuters.com/article/politicsNews/idUSN1740383420071217

Read the POLITICAL RAMIFICATIONS part.

PPP measurements are completely meaningless in terms of international comparisons of economic power. Their only legitimate use is to better understand local living standards.

Its implications are as follows: "Chinese official statistics are a joke, and anyone who trusts them is an idiot."

China had a similarly outrageous 20 percent upward revaluation about 2 years ago, as I recall.

You know I always think that the size of Chinese economy is underestimated. The reason is that chinese society is cash dominated, most transactions in service industry
are done by cash. A lot of small business owners either totally ignore tax or only pay a fraction of what they should.
Also Chinese central goverment pockets 5.2 trillion RMB revenue this year, a 33.5% increase over last year.