In the latest World Economic Outlook published by the International Monetary Fund, China will overtake the U.S. in terms of world gross domestic product in 2016.
Depending on the way economists measure output, the U.S. may still be the number one economy if China keeps propping up its currency by holding large reserves of U.S. dollars to make its goods cheaper worldwide.
China will overtake the U.S. economy if output is measured with something called Purchasing Power Parity, which is a measure of how many goods one can buy with dollars in China.
“The IMF considers that GDP in purchase-power-parity (PPP) terms is not the most appropriate measure for comparing the relative size of countries to the global economy, because PPP price levels are influenced by non-traded services, which are more relevant domestically than globally,” the IMF said.
“China actively suppresses the renminbi on the currency markets through massive dollar purchases. As a result the renminbi is deeply undervalued on the foreign-exchange markets. Just comparing the economies on their exchange rates misses that altogether,” said MarketWatch columnist Brett Arends.
“Purchasing power parity is not a perfect measure. None exists. But it measures the output of economies in terms of real goods and services, not just paper money. That’s why it’s widely used to compare economies. The IMF publishes PPP data. So does the Organisation for Economic Co-operation and Development (OECD). Many economists rely on them,” he said.
Economists say the U.S. still outranks China in terms of per capita income and many social and structural issues are becoming big problems for the Chinese economy.