China, the Economic Pipsqueak

How many times a day do we hear that China is the world's second largest economy? Or even that China has already knocked the United States from the top perch?

Just because something is said a lot doesn't make it true.

The first problem is we use the wrong metric to measure economic size -- GDP -- which reflects how much a country spent in a given year. If you wanted to measure your household wealth, would you add up everything you spent from the year before? So if you spent $100,000, that would be a good indication of your total wealth? Not really. You would tally up your assets and liabilities -- how much you own and how much you owe. That would give a truer picture of wealth.

If we do the same exercise with the United States and China -- adding up household, corporate, and government assets and liabilities -- America is $40 trillion AHEAD of China! So no, China is nowhere near America in economic size, nor is China about topple us from the top spot.

But aside from the fact that we use the wrong metric to compare China's economic size to ours, China's GDP numbers are so famously fictional, even top Chinese officials disregard them. Every year, the GDP numbers from the provinces exceed the national GDP by hundreds of billions of dollars. And this delta is growing, not shrinking. At last count, the gap was nearly $1 trillion. Same goes with China's famous GDP growth. Each year, the provinces in total are growing faster than the country as a whole. Of course, the parts can't add up to more than the whole -- or grow faster than the whole. Unless you work at Enron. Sure, bean counters in Beijing know this. But since party officials are promoted or demoted based almost entirely on GDP growth, it's no wonder the numbers are so inflated.

Curiously, while China's own top officials scoff at their economic statistics, the World Bank, IMF, and leading economists take these phony numbers at face value, giving credence to the China-is-the-world's-largest-economy canard.

Let's take a deep breath. If you consider national wealth, a much more accurate indicator of economic size than national spending, the United States is still $40 trillion ahead. And given China's unfavorable demographics (like Japan's -- more old people than workers), we're probably going to see China relegated to economic stagnation, not vaulting to the world's top economic perch next Tuesday.