Fri, Nov 16, 2007 - Page 1 News List

China's economy 40% smaller than believed: economist

AFP , WASHINGTON

China's economy is 40 percent smaller than most recent estimates, a US economist said on Wednesday, citing figures from the Asian Development Bank (ADB) and guidelines from the World Bank.

Albert Keidel, a senior associate at the Carnegie Endowment for International Peace and a former US Treasury official and World Bank economist, made the comments in a report published by the US think tank and in a commentary in the Financial Times.

Keidel said he made the calculations based on a recent ADB report that made its first analysis of China's economy based on purchasing power parity (PPP), which strips out the impact of exchange rates.

"The results tell us that when the World Bank announces its expected PPP data revisions later this year, China's economy will turn out to be 40 percent smaller than previously stated," Keidel wrote.

"This more accurate picture of China clarifies why Beijing concentrates so heavily on domestic priorities such as growth, public investment, pollution control and poverty reduction," he said.

The ADB data was the first using purchasing power analysis, Keidel said.

Based on this new analysis, he said "the number of people in China living below the World Bank's US$1-a-day poverty line is 300 million -- three times larger than currently estimated."

Keidel said that under these calculations, China's gross domestic product would have been roughly US$5 trillion in 2005, compared with some US$12 trillion for the US on the same basis.

This would still mean China's economy is moving ahead of Japan as the world's second-largest economy, but might not overtake the US until around 2030.

"These calculations are not just esoteric academic tweaks," Keidel said.

"Based on the old estimates, the US Government Accountability Office reported this year that China's economy in PPP terms would be larger than the US by as early as 2012. Such reports raise alarms in security circles about China's ability to build a defense establishment to challenge America's," he said.

The use of PPP began in the 1950s in an effort to compare economies without the distortion of exchange rates that could be influenced by trade or investment flows.

Keidel said his analysis has little meaning for the debate on whether China's yuan is undervalued, as many economists say.

"The PPP shouldn't be used to check whether the commercial exchange rate is valid," said Keidel, who has argued that it is not clear whether the yuan is vastly undervalued.

But he said the data helps explain why Chinese authorities are paying little heed to calls by the US and Europe to boost the yuan.

"Our focus in the US on trade and exchange rates is secondary or tertiary in their view," he said.

Keidel said the US Congress and administration officials "should recognize the limitations and opportunities revealed by these more accurate data."

"For example, risks to its impoverished rural hinterland from a sudden large revaluation of its currency loom larger in Beijing's eyes than in Washington's," Keidel said.

Based on the new data from ADB, Keidel said the World Bank is in the process of revising its estimates on the Chinese economy.

He said the ADB report earlier this year drew little attention but that "the Chinese have never before participated in a survey that allowed these comparisons."

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