Comparing Apples With Oranges On China

Paul Kedrosky expresses doubt over the forecast that China's economy will become larger than the U.S. economy arguing that:

"(a 6%-plus pro-China delta in GDP growth for 20 years is wildly unlikely)"

Actually, first of all, I wouldn't call that projection "wildly unlikely" as the growth differential has been higher (7.5%) during the latest decade.

And secondly, and more importantly, Kedrosky is engaging in an apples and oranges comparison with regard to growth of the purchasing power of GDP and the differential in GDP at current exchange rates.

At current exchange rates, U.S. GDP was 2.86 times larger than China's GDP in 2009. But just about all economists agree that at current exchange rates, the domestic purchasing power of the yuan is far greater than that of the U.S. dollar. As a result, the difference in purchasing power adjusted GDP is much smaller, more in the order of a multiple of 1.5-1.6.

To get an "apples to apples" comparison you should either base your result on current differentials in purchasing power adjusted GDP and growth differentials, or compare differentials in GDP at current exchange rates and growth differentials plus movements in real exchange rates.

Kedrosky's analysis are based on the view that the GDP differential at current exchange rates is the correct one, while implausibly assuming that no appreciation of the yuan will take place despite the Penn effect and despite the great pressure to increase the value of the yuan.

Assuming a differential of 1.6, equality in purchasing power adjusted GDP would come in 2025 at a very modest growth differential of 3.2% per year, and in 2020 at a growth differential of just 4.8%.

And as I explained in a previous post on the subject, equality of GDP at current exchange rates will come as soon as 2024 if we just assume a growth differential of just 5% and an average real appreciation of the yuan by 2.5% per year.