World Bank asserted in a recent survey that for 2003, Japan's GDP is three times higher than China's in terms of nominal exchange rates but China is economically powerful than Japan doubly in terms of exchange rates based on purchasing power parity. International Monetary Fund, or IMF echoed that, saying that China's GDP per capita, if calculated on effective rate, was actually far beyond 1000 USD. Based on this judgement, IMF even declared that China should not have had been regarded as a developing country long ago.

It sounds like that China had got rich over a night !Is China really that rich? The figures look intriguing. But debates about how wealthy China is have been there for a long time.

The concept of purchasing power parity was proposed when economists found the nominal rate playing a misleading role in making comparisons between countries. Purchasing power parity is used as a basis for comparisons in output, revenue and other variables. According to this theory, China's GDP per capita reached 2,700 USD in 1990 and if China and US kept their growth rate since then, 9 percent and 2.7 percent respectively, China's economy should have run neck and neck with US in ten years.

This result obviously does not reflect the real situation.10 years has passed and US economy is still predominate in the world. China has scored remarkable achievements for its economy but there is still a long way to go to have a powerful economy and an affluent population.

There are rationalities in the theory of purchasing power parity. However, it has been criticized for its loopholes. Firstly, this calculation method involves data of output and prices of products with thousands of specifications in 150 to 250 categories. The result is not convincing enough given the various statistics parameters and accessibility of the data. Secondly, the adjustment based on purchasing power parity fails to take deference in products and service quality into consideration. Thirdly, the methodology is likely to lead to distortion in countries where income gap is quite wide as purchasing power parity does not pay attention to the disparity of buying power of a currency between different areas within a country. And fourthly, the purchasing power parity system does not allow for non-market factors. Distorted statistics takes place due to the diversity between countries in political, economic and legal systems as well as culture.

In addition, even if the purchasing power parity system is seen as rational enough and China's GDP is revised up as a result, it does not necessarily mean that China has so strong purchasing power in the world market. Payment is still based on officially issued nominal exchange rates in the international market. The significance of a GDP geared up by purchasing power parity is confined at the extent that the living standard of Chinese people is higher under purchasing power parity system than under the nominal rates system.

Any overestimation of China's GDP will bring nothing but damages to the country. By exaggerating China's national strength the truth is covered up. It will also unfairly bulge China's bills in international organizations in which China has a membership. And the access to international loans and special treatment with favorable terms will be more difficult for China.

China should never loses its senses when fanfare is launched intentionally by someone. Instead, it is wise of China to have a clear understanding about what has to be done. For instance, China has actually used foreign direct investment up to 500 billion plus USD since the country adopted reform and opening-up policy. Output generated by foreign direct investment has been represented by China's GDP. This is contrasted with Japan whose GDP in no way reflects any of its overseas assets or output yielded by foreign capital inflow into the country.

That China has much fewer home grown enterprises of strong power compared with developed countries is another fact that deserves our attention. Out the World's top 500, 189 are from the US, 82 from Japan while only 16 are from the Chinese mainland.

(People's Daily  August 11, 2004)