President Hu Jintao heads back to China on Friday, his state visit to Washington having underscored his country's status as the United States' top economic rival — or even its superior, by one economist's assessment.
By traditional measures of gross domestic product — the value, in U.S. dollars, of total goods and services produced — the size of the U.S. economy is $14.6 trillion. China's GDP is only $5.7 trillion. But if China's economy is assessed according to its "purchasing power," it may be a different story.
"In a developing country," says Arvind Subramanian of the Peterson Institute for International Economics, "the amount it would cost you to get a haircut or go to a doctor would be much cheaper than what it would be in the United States."
When the size of the Chinese economy is measured by how many haircuts or doctor visits it would buy, the numbers change.
"If you make that purchasing-power correction," Subramanian says, "I find that the Chinese economy is $14.8 trillion, which is larger than the American economy."
Purchasing-power corrections are standard in economics, though Subramanian's assessment differs significantly from calculations made by the International Monetary Fund. Subramanian is in the minority among his economist colleagues in concluding that China has already surpassed the United States in economic terms, by any measure. Many Americans, however, are inclined to believe him. A recent survey by the Pew Research Center showed that a plurality of Americans are convinced that China is already the dominant economic power on the planet, by a margin of 47 to 31 percent.
"We've been brainwashed," says Robert Aliber, professor emeritus of international economics at the University of Chicago. "The general sense that China is an economic powerhouse is far-fetched," he says.
Aliber agrees that, by purchasing-power measurements, the Chinese economy is not as far behind the U.S. economy as the GDP figures suggest. But he points out that much of what China adds to the world economy is cheap labor. And he says China's GDP may actually overstate the value of its housing. On a recent trip to China, Aliber noticed that many urban apartments are unoccupied, so their value is unproven.
"Somebody has to buy these apartments," Aliber argues, "or their prices will decline. China is at the near terminal stage of a massive housing bubble."
If that bubble bursts, China's economic figures won't look so good.
An Ascendant Economy
Another issue in the comparison of the U.S. and Chinese economies is whether they are even comparable.
Stephen Roach, formerly the Hong Kong-based chief economist at the Morgan Stanley investment bank, argues that quantitative measurements of the two economies don't take into account "qualitative" factors that distinguish the Chinese economy. Chinese income per capita, for example, is a small fraction of the U.S. figure. Roach also looks at the "character" of the Chinese economy, "in terms of whether it leads to environmental degradation, pollution [and] widening income inequalities."
On the other hand, this debate over who has the bigger — or better — economy right now misses a larger truth. Roach, now a professor at the Yale School of Management, looks at the broader trend and emphasizes that there is no doubt on one point: China will pass the U.S. economically, sooner or later.
"We can pick apart the numbers and say, 'Well, it's going to happen in 20 years or 10 years.' Or, if we're creative in the way we recast statistics, maybe it happened yesterday. But the Chinese economy will certainly become the largest and most dominant economy in the world."
And that's why Hu got the red carpet treatment this week.