China Gets a Haircut

China Gets a Haircut

Here’s one of the biggest stories of 2007. It’s truly amazing. It raises all sorts of questions.

According to new World Bank figures, China’s GDP is overestimated by 40 percent.

China is a much smaller economic power than once believed. It’s not nearly as big, not nearly as important, not nearly as imposing.

The figures that the World Bank and others had been using to estimate China’s economy compared to ours based on purchasing power parity (PPP) were forty percent too high (India too). As Walter Russell Mead from the Council on Foreign Relations explained on last night’s Kudlow & Company, this means the balance of power in Asia is probably more secure than once believed.

Under the old PPP numbers, China was poised to pass the U.S. as the world’s largest economy in 2012. That isn’t going to happen. China is much smaller than we thought. It will not be overtaking the United States anytime soon.

This story reminds me of how, for many years, intelligence estimates vastly overrated the strength of the old Soviet Union economy.