Hyping comparisons with US, ‘China peak’ theory leads to wrong conclusions

Illustration: Liu Xiangya/Global Times

Illustration: Liu Xiangya/Global Times

In 2023, China’s actual GDP growth outpaced that of the US by 2.7 percentage points, while in 2022, it was 1.1 percentage points higher than the US. In 2023, the ratio of nominal GDP between China and the US was 65.4 percent, falling by 4.2 percentage points after a drop of 5.9 percentage points the previous year. With China’s actual GDP growth outpacing that of the US, the gap in economic size between the two countries has narrowed in recent years due to the following reasons:

First, the US has higher levels of inflation, while China has lower levels of inflation. The gap between the nominal GDP growth of the two countries has reversed. During 2017 to 2021, China’s nominal GDP average growth outperformed the US by 4.4 percentage points. However, China’s nominal GDP growth was lower than the US by 4.3 percentage points in 2022 and 1.7 percentage points in 2023.

Second, due to the combined effects of internal and external factors, the Chinese yuan exchange rate has undergone a phased adjustment. Over the past two years, the annual average of the central parity of the yuan exchange rate has decreased by 4.1 percent and 4.6 percent.

The above-mentioned economic phenomenon has sparked discussions on whether China’s economic catch-up has peaked. However, the current situation where China’s potential growth rate leads the US by a considerable margin has not changed, meaning the “China peak” hype may be too hasty and unfounded.

From 2020 to 2023, China’s compound average growth rate was 4.7 percent, which was 30 percent lower than that of 2015 to 2019. From 2020 to 2023, the US’ compound average growth rate was 2 percent, 22 percent lower than that of 2015 to 2019. However, the actual economic growth rate in the US is higher than the potential growth rate, indicating a positive output gap, with low growth accompanied by low unemployment and high inflation.

This is the key to the fact that China’s actual GDP growth rate is faster than that of the US, yet it gives the impression that China is “cold” while the US is “hot.” However, it also means that China’s potential economic growth remains at around 5 percent, which is still about 3 percentage points higher than that of the US.

The impact of exchange rate factors on the comparison of the economies of two countries is also non-linear. In the case of flexible exchange rates, there are no currencies that only rise without falling or only fall without rising. Moreover, when a currency rises too much, it may fall, and when it falls too much, it may rise. 

If the Chinese economy continues to recover and return to its potential output level, it will help achieve growth targets smoothly, and at the same time, the stabilization and rise of the yuan against foreign currencies will also be a natural outcome.

In addition, when comparing the economies of different countries, apart from using market exchange rates, purchasing power parity (PPP) exchange rates can also be used. PPP is based on the law of one price, which states that the price of the same goods and services in different countries should be equal, reflecting the proportional relationship of the overall prices of goods and services in each country. 

Using PPP as a currency conversion formula for international economic comparisons can eliminate differences in price levels between countries, providing a more accurate reflection of the actual size and development changes of each country and the world economy. Compared to market exchange rates, PPP is less affected by short-term factors and has greater stability.

According to International Monetary Fund (IMF) calculations based on PPP, China’s economic aggregate has exceeded that of the US, and over the past two years, this lead has only continued to widen instead of narrowing. 

Benefiting from low domestic inflation, the PPP exchange rate for the Chinese yuan in 2022 was 3.99 yuan per international dollar, and 3.81 in 2023. During the same period, China’s nominal GDP was equivalent to 28.35 trillion and 29.84 trillion international dollars, compared to the US’ nominal GDP in terms of international dollar, resulting in ratios of 117.3 percent and 121 percent, with increases of 0.7 and 3.6 percentage points year-on-year.

The market exchange rate and PPP exchange rate each have their own advantages and disadvantages, and serve different purposes. They are difficult to replace each other, but can complement each other. Therefore, international organizations such as the IMF and the World Bank usually provide estimates of the total economic output of countries and the world economy using these two methods.

We should take a rational view of the fluctuations in the size comparison of the Chinese and US economies in recent years, neither taking it lightly nor exaggerating it. China should maintain strategic composure, adhere to the emphasis on macroeconomic regulation and structural adjustment, deepen reform and opening-up, and lead innovation in science and technology, focus on promoting high-quality development and improve total factor productivity. China should strive to bring its actual economic growth rate back to its trend value and maintain the potential growth rate in the medium to high-speed range for as long as possible.

The author is global chief economist at BOC International under Bank of China. [email protected]