2020 leaves China as the undisputed new economic superpower. IMF Admits it.
The world is waking up to a new reality post the devastating pandemic that brought everything to a grinding halt. One of them is the rise of China as the undisputed new economic superpower.
According to the IMF’s World Economic Output 2020 released recently, China has now overtaken the US to become the world’s largest economy.
Yes, you read that right. The International Monetary Fund (IMF), using the more reliable and now widely accepted yardstick, called the Purchasing Power Parity (PPP) that both the IMF and CIA now judge to be the single best metric for comparing national economies, has determined China’s economy at $24.2 trillion compared to America’s $20.8 trillion. According to the IMF Report, China’s economy is one-sixth larger than America’s.
The PPP calculation method used by the IMF enables you to compare how much you can buy for your money in different countries. The economists have traditionally been using MER (market exchange rates) to calculate GDP, which doesn’t reflect the real figures.
The MER method is being viewed with extreme suspicion because it underestimates the buying power of the currencies of many countries. As a result, the currencies of many nations are undervalued against the dollar.
With PPP adjustment, IMF estimates China’s economic output outmanoeuvring the US’s by a huge margin. IMF is clear in its report, it says the PPP “eliminates differences in price levels between economies” and thus compares national economies in terms of how much each nation can buy with its own currency at the prices items sell for there.
After the IMF, the CIA also decided to switch from MER to PPP in its annual assessment of national economies. The CIA Factbook notes that “the official exchange rate measure of GDP is not an accurate measure of China’s output; GDP at the official exchange rate (MER GDP) substantially understates the actual level of China’s output vis-a-vis the rest of the world; in China’s situation, GDP at purchasing power parity provides the best measure for comparing output across countries.”
To tide over the inconsistencies with traditional methods, The Economist invented a new method called The Big Mac Index to determine whether the currencies were at a correct level. The fact is one US dollar can buy nearly twice as much in China than in America itself, and the current market exchange rates hardly acknowledge that.
According to The Economist, “In 2019 China’s workers produced over 99 trillion yuan worth of goods and services. America’s produced $21.4 trillion-worth. Since 6.9 yuan bought a dollar last year, on average, China’s GDP was worth only $14trn when converted into dollars at market rates. That was still well short of America’s.
“But 6.9 yuan stretches further in China than a dollar goes in America. One example is McDonald’s Big Mac. It costs about 21.70 yuan in China and $5.71 in America, according to prices collected by The Economist.
By that measure, 3.8 yuan buys as much as a dollar. But if that is the case, then 99trn yuan can buy as much as $26trn, and China’s economy is already considerably bigger than America’s,” The Economist adds.
Bloomberg did its own calculations of the IMF data, which shows the proportion of worldwide growth coming from China expected to increase from 26.8% in 2021 to 27.7% in 2025. “That’s more than 15 and 17 percentage points, respectively, higher than the U.S share of expected global output,” the report adds.
According to the IMF estimates, China will grow by 8.2% next year, down a full percentage point from the IMF’s April estimate but strong enough to account for more than one-quarter of global growth.
China’s economic growth rate has been growing at a mind-boggling rate of around 10% for almost the last 30 years. The country has witnessed startling growth in every sector, with the manufacturing sector being the engine of overall resurgence.
The world can no longer deny China’s superpower. It’s now the world’s most powerful economy, a fact we can no longer brush under the carpet. The country’s rise to the top was inevitable, but no one had expected it to be so swift.
The catastrophic Covid-19 pandemic that devastated countries around the world has only made China stronger, which ironically was the place, where the virus originated.