Is China's economy more powerful than the US?

The Obama administration has repeatedly called China 'America's banker'

A recent Pew Research survey included a bizarre result: 44 percent of Americans believed China was the world’s top economic power, against only 27 percent picking the United States.

Tough times have made people pessimistic and the media has picked up that pessimism and run, to the point of saying the United States is economically subservient to the PRC. But the belief that the United States is inferior economically to China is way, way off the mark.

Individual wealth is easy. In a very hard 2008, the average American earned about $47,000. The average Chinese citizen earned $3,400. Things in the PRC are generally cheaper so the World Bank multiplies the China number by two and a half. That puts the average Chinese at $8,500. Advantage: the United States, by a country mile.

The pure size of the economies seems like it would be a close call, as the PRC has a billion more people. Plus China has been growing quickly. Yet the American economy is more than three times bigger.

In fact, the United States by itself has over one-fourth of the world economy. We have held near that level for 35 years, despite our current problems. That’s about the same as China, India, Japan, and the rest of Asia combined. With sounder policies than we are presently following, the United States will be by far the world’s biggest and most powerful economy for a long time.

What the Pew poll is probably tapping into is the widespread idea that China is America’s banker. The Obama administration repeated this early on. The Administration has stopped but the press still can’t quite figure things out.

As with many mistakes, it’s based in part on a correct perception: America is running a huge and dangerous budget deficit. It has done nothing to help our economy and is a hotbed for political corruption. It contributes heavily to economic imbalances within the United States and globally. One of those imbalances is the PRC’s purchases of our bonds, which include $800 billion in Treasuries and several hundred billion in other government bonds.

While our budget deficit is a bad omen for America’s future, the fact that China buys our bonds is not. In fact, it’s an endorsement of our future.

The PRC takes in a great deal of money from the world, through its trade surplus and other things. The same set of rules that keeps the Chinese currency undervalued means Beijing can’t spend its huge pile of foreign cash within China. It physically can’t - by law, nearly all foreign money must end up right back with the Chinese government.

So what does Beijing choose to do? It certainly isn’t buying our bonds as a favor. China does so because ours is the only economy large and sound enough to absorb the amount of money (and their economy isn’t). It’s not a loan, it’s an investment and the best choice they have. On exactly the same lines, the PRC ties its currency to the dollar. Linking themselves closely to the U.S. economy that way is also the best choice they have right now.

The recession and the deficit are big problems, no question. Still, there’s no doubt at all about who has the world’s most powerful economy. Just ask China.

Derek Scissors, Ph.D., is Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation.

The views and opinions expressed herein are those of the author only, not of Spero News.
Filed under economics, geopolitics, us, china, Economics

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