ARTICLE: The great fall of China, By Walter Russell Mead, Los Angeles Times, December 30, 2007
This is interesting stuff for the PPP [purchasing power parity] weenies, but hardly earth-shattering. It is an equivalency statistic, an all-things-being-equal notion.
No one conducts business or cuts contracts in PPP. If you were one of the Fantastics who predicted China's economy would soon surpass America's, then you are shocked--SHOCKED--to discover it won't happen.
Say you come to my neighborhood and I make a lot more money than my neighbor. But say everything in his house costs less, so his money goes a lot further than mine, because stuff costs more in mine. We could develop a calculation to take into account my neighbor's cheaper lifestyle and on that basis, we could equate the purchasing power of his buck versus mine.
Could we then extend that analysis and say his household economy is actually larger (more bang for buck?)?
Yeah, sort of.
But at the end of the day, I still have more income, despite my more expensive lifestyle, so you don't want to take that equivalency argument too far.
If I make 100,000 and my neighbor makes 50,000 but everything he buys costs half as much as my purchases, but they're basically the same goods and services with differences according to our households, then we basically have parity in purchasing power.
But again, that doesn't exactly makes our household incomes equivalent by most people's understanding. It just means we live similar lives in different circumstances.
Again, at the end of the day, the absolute amounts involved are dissimilar. We're just calculating a rough equivalency, as in, this is a middle class life in the States and this is roughly the same lifestyle in China.
So what this new calculation says is that money and income doesn't seem to go as far as we previously thought. Before we had one calculation and now it's 40 percent less. What we had previously was too high and I'll bet we soon decide that this current calculation is somewhat low. The guessing part comes in comparing the goods and services, because expectations differ. The acceptable meal in China differs from the one here, and so on.
But, again, understand this: no one conducts business or investment in PPP calculations. At the end of the day, the money needs to make sense in your own currency, not just his "equivalent" purchasing power.
So while these estimates are interesting to the rank-ologists, and while they give businessmen a sense of what price expectations are in any market (this is what the average Chinese expect to spend on this sort of thing), taking these new figures as somehow indicating China's economy is far smaller is misleading. What the PPP estimates is the power of China's purchasing function in relation to our own ("If China's economy was like America's, it would really be worth this much."). While "students" of global economics love this sort of stuff, actual practitioners are less impressed.
China's economy is the same. What is different is how we construct a sense of equivalency to our own economy. The 1800 or so in real bucks that we know the average Chinese makes doesn't equate to something like $7k in U.S. spending but something more like $4-5k (I do this from memory, so I may be off).
What really matters in China is demand and investment and how both will be met. At the end of the day, we can now say that China's current income travels less far, so we can ditch a lot of the crazy hypology of China's imminent "global domination," but overhyping in the other direction now is equally unwarranted, because most of our assumptions of how China will cost out future challenges will likely be significantly off base.
Mead may think he's uncovered a "shocker," but BusinessWeek and the WSJ already covered this news, and neither lost their grip on reality over it, so neither should we.
(Thanks: Bill Millan)