Transterrestrial Musings

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I assume these numbers are based on the current weak, fixed renimbi/dollar exchange rate of about 8 to 1. If the Chinese economy were truly a free economy(enforceable contracts in a real court system, legit accounting standards, et al.) and the renimbi was allowed to float, these numbers would be even more interesting.

Most agree the free float rate would not be 8 to 1. Some currency traders I know think 3 to 1 is the level of support in free float environment(I have even heard 2 to 1). If you use an exchange rate of 3 to 1 then you could make the argument that their economy is already larger than ours. Problem is that their per capita income would also be larger than ours and anyone who has been to China lately can attest they are not even close. Thats the folly in using dollar comparisons of economies.

The scariest thing about the free float rate is that if indeed it floated and moved to 3 or 4 to 1, this would wreak havoc on the chinese economy. The cost advantage of chinese labor would disappear and foreign investment would shrivel up.

Posted by Jardinero1 at June 28, 2005 08:02 AM

"Renimbi"? I thought the Chinese currency was the yuan. Did they change it?

Posted by McGehee at June 28, 2005 08:24 AM

It's CIA's estimate purchasing power parity so exchange rate should not matter. I disagree there is any advantage to China associated with the exchange rate. All it is doing is causing them to buy massive bonds.

Posted by Sam Dinkin at June 28, 2005 08:38 AM

This analysis, like all flawed predictions including those of the Malthusian variety, assume that there are no controlling factors.

In the Malthusian case, war and famine due to overcrowding limit actual population increases.

In the Chinese case, the same factors that limit Western economies begin to apply as per capita income approaches Western amounts.

Given the controlling factors of corruption, social-ism, militarism, resource limitations and the like, it would be reasonable to assume that in the long term, Chinese GDP would asymptotically approach that of France.

That means that present growth rates will slow down over the long run as control feedback factors become the dominant influences.

Posted by M1A1 at June 28, 2005 09:22 AM

Yuan is a slang term like "bucks", renimbi is the name of the currency like "dollar".

Dr. Dinkin,

Can you argue that there is not a huge advantage to the Chinese with an undervalued currency? Their labor and goods are one fourth to one half as cheap to the American consumer and investor as they would be under a free float. If there is no advantage why do they work so hard to prop up the dollar through the purchase of Treasuries and other US securities?

Do you see any problem, long term, with their purchases of bonds. The way I see it, they can only buy bonds as long as they have something to liquidate i.e. sell in exchange. All they have to sell is cheap goods and labor. They keep their goods and labor cheap by fixing their currency through the purchase of bonds and other U.S. securities. This sounds like a vicious cycle.

It's fine for me as a consumer because everything is so cheap. But pity us all the day when the Chinese can't keep up their exchange rate shenanigans and bond prices crash and Chinese goods are suddenly not so cheap and the Chinese economy falls in because they can't export at the prevailing market exchange rate.

That, to me, is the real problem. Not that they will pass us but that they will drag every one of us down with them if they go down.

Posted by Jardinero1 at June 28, 2005 09:50 AM

Does anybody remember that in the late 1980s people were projecting that by 2020 Japan's GDP would be greater than that of the United States? They projected straight-line growth rates out for decades and--voila!--we're doomed!

And then a year or two later the bubble burst. Anybody projecting Japan to surpass the US in GDP now?

And in 1998 or so both the CBO and the OMB were projecting that the United States government would be running budget surplusses until at least 2008. What happened there?

So, hey, here we are today and somebody is projecting that China is going to crush us, except that it's going to happen in ten years, not 30.

It is impossible--I'll put it in big letters to stress the point--IMPOSSIBLE to make reliable economic projections beyond five years, and extremely hard to make projections beyond only a couple of years.

So the sky ain't falling. Yet.

Posted by Joe Athelli at June 28, 2005 10:21 AM

> Does anybody remember that in the late 1980s people were projecting that by 2020 Japan's GDP
> would be greater than that of the United States?

Throughout the Cold War, the CIA repeatedly published estimates that the Soviet economy would overtake the US.

Posted by at June 28, 2005 11:08 AM

That depends on what and who makes the projections. For example, your examples are seriously flawed. First, just because someone made a prediction and it turns out wrong doesn't mean that reliable predictions are impossible. Second, of the groups you mention, who has incentive to make a correct prediction? The doommongers who profit from US hysteria about Japan? The CBO and OMB whose projections depend on who's in power and what the agenda is?

Do you have a reason to believe Sam Dinkin's predictions are unreliable or just wrong?

Posted by Karl Hallowell at June 28, 2005 11:37 AM

The purchasing power parity numbers the CIA gives are not the same as real GNP or GDP.

Purchasing power parity not only looks at how many dollars their economy produces, but also corrects for the fact that a dollar will buy more Chinese engineers or infantrymen (or anything else) than it will buy of American engineers or infantrymen. Yes, China has a lower standard of living and so things and labor are cheaper there. But it is not just less expensive, it really is cheaper. An hour of Chinese engineering simply isn't worth as much as an hour of American engineering. I'm speaking from 1st hand experience, btw. International trade isn't done based on local cost of living, so China buys oil and other non-local resources at the same rate we do. Similarly, UNOCAL or Matag have to be bought in our dollars.

Instead of PPP adjusted GDP, I suggest using real GDP based on the current currency exchange rate. Using that you can see that Japan is still the 2nd largest economy, at more than twice the size of China's.

http://en.wikipedia.org/wiki/List_of_countries_by_GDP_%28nominal%29
China: $1.8 trillion
U.K.: $2.3 trillion
Japan: $4.8 trillion
U.S.: $12.4 trillion
Taiwan: $0.3 trillion

Posted by J Random American at June 28, 2005 03:13 PM

"The CBO and OMB whose projections depend on who's in power and what the agenda is?"

Do you happen to know anything at all about these organizations? Clearly you don't.

Posted by Joe Athelli at June 28, 2005 05:11 PM

Personally, I hope that the Chinese economy does implode, in spite of the bad economic effects this will have worldwide.

My reasoning is that I'd sure as heck prefer a recession caused by a Chinese economic implosion to a China with the world's #1 economy. Remember, it's economic power that translates into military power, so Chinese economic dominance would likely equate to Chinese military dominance, and that's worse than any economic consequences I can envision.

Posted by Chris at June 29, 2005 01:29 AM

I agree that China will not be creative and well governed enough to surpass US per capita GDP and topping out at France's is probably right. France's GDP is $28,700 and China's will be about half that in 2015.

I agree that straight line predictions are usually wrong. Here, I am not sure which direction they are wrong. China has 1300 million people to US's 300 million so China's GDP needs to be less than 1/4 ours to match our total GDP.

As for exchange rate being an advantage, if it was a net advantage such that they could get $1.10 of productivity out of their economy with an exchange rate of x and only a $1 at an exchange rate of y, they could use the tax on the $0.10 to preserve the exchange rate as a currency board forever. No, the only reason the exchange rate would ever be unsustainable is if it is a net disadvantage.

My estimate is that it is a sustainable modest tax on Chinese output and the US is the main beneficiary getting stuff in exchange for promises and getting people to buy its bonds at below market prices. China has to buy bonds to prop the currency rate up and they depress Chinese domestic consumption MORE than they grow export sales. A free floating currency balances supply and demand and avoids the deadweight social loss they are creating.

Posted by Sam Dinkin at June 29, 2005 03:28 AM

I am not sure whether PPP or monetary GDP is the right value to use. What I care about is space development. A Long March rocket costs about $2000 per pound versus $5000 for an Atlas or a Delta. We will see if Musk can get the price down to $500 in which case the Chinese will have another few years to go to get to half our per capita GDP deflated for space access prices.

Posted by Sam Dinkin at June 29, 2005 03:37 AM

Chinas GDP will surpass that of France in the long run for certain. Just look at their population sizes, there is no comparison. China has 1 306 313 812, France has 60 656 178. All wealth basically comes from work, and people are the ones doing the work. Machines are just tools, force multipliers. Assuming there are trained engineers and an industry to pay them, the tools will eventually come from somewhere. Their major obstacle to a high GDP is how to get enough cheap energy to feed their economy upon. In case you have not noticed, the Chinese have tried to put their hands on every possible source of power, coal, gas, oil, nuclear, hydro, wind. Just for nuclear, they have constructed, or are in process of constructing, LWR power plants of each of the main types in use in the world (European, Japanese, Russian), and some new types which did not exist elsewhere. This seemingly vast expansion is just the first step. They are just testing which solutions are better, then they will massively invest and ramp them.

As they continue their transition from a backwards agricultural nation to the major industrial power in the world, their GDP is certain to increase, just like the USSRs GDP did at the time.

As for resource limitations, they hardly have more resource limitations than Japan. Try multiplying the Japanese GDP/capita by the number of people in China and then see which number pops out.

The only possible obstacle to this scenario would be political problems.

Posted by Gojira at June 29, 2005 10:37 AM

I don't think the current bizarro "Communist Capitalism" system the Chinese have is highly scalable. In fact, I'd expect the breakdown to occur within the next five years.

Posted by Toren at June 29, 2005 12:16 PM

One thing I rarely see mentioned in the various China scenarios: Their artifical Malthusian problem. The "one child policy" has done very bad things to their demographics.

The Chinese population is aging FAST. And there are far more men than women (I've read 7 to 1) in a society in which marriage is supremely important.

Let's see if I can find the link... Found it:
Power and Population in Asia

Posted by mrsizer at June 30, 2005 05:51 AM

Jardinero1,

Let us say 4 to 1 is reasonable for the sake of argument. That means they are having a continuous 1/2 price sale.

How long you stay in business that way?

Typically, social-ist economies need new "slaves" and looted wealth or they collapse. Hitler had that problem.

I'm betting they are very close to falling apart.

Did I mention the pollution problem? The excess male problem. Unrest in the countryside. etc.

Posted by M. Simon at June 30, 2005 08:25 AM

But from the space perspective, when foreign countries can produce space systems with most of the capabilities of the US systems for 1-2% of the cost (e.g. German SBR vs. US SBR), then what does it matter what the PPP is?

Posted by Kevin Parkin at June 30, 2005 11:25 AM

SBR = space based radar (now just space radar I think)
PPP = purchasing power parity

Posted by Kevin Parkin at June 30, 2005 11:26 AM

"That means they are having a continuous 1/2 price sale.

How long you stay in business that way?"

You don't, but you start growing FASTER when you stop the sale.

"One thing I rarely see mentioned in the various China scenarios: Their artifical Malthusian problem. The "one child policy" has done very bad things to their demographics.

The Chinese population is aging FAST. And there are far more men than women (I've read 7 to 1) in a society in which marriage is supremely important."

The children that would have been born 20 years ago are just now beginning to not enter the labor force. This will be a drag on the Chinese economy to the extent they work through their hundreds of millions of under employed. There will be slightly less innovation than a China of 1.5 Billion. They still have a huge labor force that is becoming ever more productive.

Food and energy have been getting cheaper over the last 50, 100 and 150 years. Human productivity has been growing. What would be the vector of their failure if they fail?

Posted by Sam Dinkin at July 1, 2005 05:15 AM

You can argue about projections, but there is no argument that they are growing... and growing as a threat. If their excess supply of men were just going to be cannon fodder in the future, that would be one thing; but as they modernize their military it becomes quite another.

They are building their manufacturing infrastructure, securing supply of resources, and may just be waiting for the tipping point where they feel able to take military risks.

Perhaps the Chinese people themselves will defuse the threat, but it's a race they may not win. If we're not prepared, we will share in the loss.

Posted by ken anthony at July 2, 2005 08:00 PM

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