China Is # 2

China is reported to have passed Japan to become the 2nd largest economy in the world last year, and the Japanese have admitted as much.

I am of three minds about this:

1) China will eventually have a larger economy than the U.S., and will be # 1 for a few decades before it is overtaken by India (whose population is already larger than China’s).

2) I wonder how much of Chinese growth is real. Closed bureaucracies have this thing they do called … LYING … and they have a habit of doing it with economic data (e.g., The Soviet Union). If China were systematically lying – liked Bernie Madoff did – I tend to doubt anyone would catch on. Graphs like this one bug me; this is from the CIA’s data (you know … one of those closed bureaucracies that’s good at LYING), and it shows Chinese growth rates consistently rising (not the level of its GDP). This seems implausible:

3) Americans tend to view China as monolithic. It isn’t. There are lots of ethnic divisions, and dissatisfied minorities. But, even if all of them secede peacefully, the rump of Han Chinese China will still be the world’s second largest economy a century from now.

Anyway, The Wall Street Journal  produced this chart on February 14th (you must click through to see it). Note that the vertical axis is precisely the one I told you not to use because it distorts perceptions.

On the other hand, it does use the exchange rate rather than purchasing power parity to compare GDP. But then get this whopper:

By that measure, China passed Japan as No. 2 in 2001, according to International Monetary Fund statistics. Mr. Subramanian calculates that China's GDP as measured by purchasing power has already edged ahead of the U.S.'s, though the IMF doesn't expect that to happen before 2016.

This is wishful thinking, or perhaps the result of wishful drinking. We have pretty solid numbers of the value of Chinese exports to the rest of the world’s paying customers. High GDP estimates for China require that many times that amount of goods be sold internally, to a society that is sorely lacking in visible purchasing power.