Forecasters are clamouring to predict when China will surpass the US to become the world's largest economy, the rush increasingly resembling an Olympic 100-metre dash, with the big Wall Street houses as the front runners. These forecasts are based on a comparison of the economic size of China and the US, using market exchange rates to convert the value of nationally produced goods and services into a common currency, the US dollar. So every time the renminbi exchange rate goes up a notch, the end of the 'Age of America' is said to be an inch closer.
The International Monetary Fund, which sets its own rules wherever it goes, decided to change the forecasting rule. In a table posted quietly on its website last month, it forecast that China's gross domestic product based on purchasing power parity (PPP) estimations would surpass that of the United States by 2016. After the posting was quickly seized on by the media, the IMF hastily issued a statement saying: 'Comparing the US and Chinese economies using purchase power parity is not the most appropriate measure ... because PPP price levels are influenced by non-traded services, which are more relevant domestically than globally.'
All this reminds me of a joke in Moscow which says there are two political camps right now vying for the presidential post in Russia, the Vladimir Putin camp and the Dmitry Medvedev camp, and Medvedev hasn't yet decided which camp he will join.
Gauging economic size based on PPP is not really an IMF invention. Actually, a report issued earlier this year by the Peterson Institute for International Economics already put China's GDP of US$14.8 trillion ahead of the US. The Peterson Institute, led by Fred Bergsten, is the think tank that made its name last year by providing much of the congressional ammunition for the accusations against China that the renminbi was undervalued.
The year 2016 is becoming a key year in the eyes of top policymakers in Beijing, as it's believed that the economy will undergo seismic changes then. Aside from the IMF prophecy about the beginning of the 'Age of China', a recent speech by a top National Development and Reform Commission official talked about the 'Lewis turning point' occurring by 2016. This turning point, named after economist Arthur Lewis, signals the exhaustion of rural farm labour as an economy industrialises, which of course explains much of the productivity gains in China over the past 20 years. China will no longer be a low-cost country, and will have to compete globally based on innovation drives. At the same time, China's market economy status was expected to be resolved by 2016, he said.
