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10 China Myths for the New Decade- Myth #3: China’s economy

Posted by Author on February 1, 2010

Derek Scissors, Ph.D., Research Fellow in Asia Economic Policy in the Asian Studies Center at The Heritage Foundation, via, January 28, 2010 –

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Myth #3: China will surpass Japan as the world’s second-largest economy in 2010.

Truth: China probably surpassed Japan several years ago.

As soon as February, the media could report that China has finally surpassed Japan. If not in February, then certainly over the course of 2010.

Every discussion of the Chinese economy, including this one, should be taken with a truck’s worth of salt. The officially stated unemployment rate is acknowledged to have little to do with true unemployment, announced sales volumes include millions of items never sold, and much announced foreign direct investment (FDI) is not foreign. The central government does not agree with the provinces and the provinces do not agree with their counties concerning GDP, FDI, and many other indicators.[5]

Evidence for many economic statements is weak; but what there is suggests the PRC surpassed Japan several years ago.

In 2004, China conducted a nationwide census and discovered its economy was almost 17 percent larger than previously stated. The service sector was found to be larger than previously thought, as was also the case in the 1993 census. In fact, the 2004 census discovered an even larger gap than found in 1993. At the end of 2009, China revised its 2008 GDP upward by 4.5 percent, again citing a larger service sector, and indicated GDP growth from earlier in 2009 would also be revised upward.[6]

There is little reason to believe the PRC has its numbers right now. More likely, it is still undercounting–services are especially hard to measure due to pervasive state activity that elevates some economic exchange and drives some into the shadows. A proper census would show that China’s economy has been larger than announced at the time for every single year in the reform period. That suggests the PRC passed Japan no later than 2007.

Finally, using a concept known as purchasing power parity, which tries to even out price differences in different economies, China passed Japan inthe 1990s. As media headlines reflect, China has been number two for a while.(to be cont’d)

Original from The Heritage Foundation

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