I have often argued that China is the largest economy in the world, at least when measured in PPP terms. (Of course, in per capita terms they are still only a middle-income country.) Others insist on using market exchange rates, which suggests that the U.S. economy is still significantly larger . Fair enough.
But you need to be careful when drawing implications using market exchange rates. They tell us something about China versus the United States, but they tell us nothing about China. China in absolute terms. It is therefore a mistake to look at graphs showing Chinese GDP (in US dollars) stagnation in recent years and assume that the Chinese economy has stopped converging towards developed country status. After all, there are several exchange rate pairs. So now let’s do Japan.
The following chart shows the ratio of China’s GDP per capita to Japan’s GDP per capita. In 1994, I got married in Beijing. At the time, China’s GDP per capita was about 1% of Japan’s. It’s really low. In 2022 (latest year shown), this figure was more than 37% of Japan’s and continues to increase rapidly. Now it’s almost 40%. So if we truly believe that market exchange rates are the right way to view China’s growth (which they are not), we should conclude that China is rapidly converging toward developed country status . Since 2010 alone, it has increased from around 10% to 40% of Japan’s per capita income.
Of course, the weakness of the yen overestimates China’s progress. But just as the yen is an outlier on the low side, the US dollar is an outlier on the strong side. Most other developed countries have relatively weak currencies relative to the US dollar, and so it makes more sense to view the dollar as unusually strong – we are the exception.
This leads to some quite misleading graphics if you base your comparisons using market exchange rates:
Note that Japanese workers have gone from being paid almost twice as much as American workers in the mid-1990s to being paid just over a third less today. To be clear, I state publicly that the poor performance of the Japanese economy is partly real (and not just demographic), but that greatly exaggerates the problem. The yen has weakened significantly, especially in real terms. The Japanese economy is mediocre, but not horrible.
PS. Some have argued that Chinese data is unreliable. But any tourist who visits China (both in the cities and in the rural areas) quickly discovers that the country is very much like richer than the official GDP per capita suggests (around $13,000, compared to $85,000 in the United States). And China is now about 70% urban, so poor rural areas (which are no longer as poor as they used to be) are no longer a plausible explanation. China as a whole is still a middle-income country, but significant parts of the country appear quite developed. (New airports, subways, highways, shopping centers, wealthy urban neighborhoods, etc.)
