45 Trillion Reasons Why China Can't Challenge America’s Economic Might
There’s been tremendous amounts of discussion recently concerning the “Thucydides trap.” The trap occurs when the leading power becomes frightened of a rising power and war ultimately results. The candidates today who could spring such a trap are the United States and the People’s Republic of China, where Beijing is said to be rising and capable of threatening Washington’s global position.
Thankfully, there is an important weakness in this argument: China is not capable economically of threatening the U.S. It’s too early to be sure but Beijing may no longer even be catching up economically to Washington.
For the last 15 years, Credit Suisse has been compiling data on where global private wealth is located. The data do not perfectly capture a U.S.-China economic comparison but they do not need to, they just need to be just somewhere in the ballpark. The reason some imprecision is acceptable is the stunning size of the gap they show between the U.S. and China. As of the middle of 2015, Credit Suisse puts the stock of American private wealth as $85.9 trillion and Chinese private wealth at $22.8 trillion.
There are many things to be said about this but they all pale before the number itself. What notion of China as peer or genuine challenger stands up to a $63 trillion private wealth gap? What information can compensate for $63 trillion?
An obvious possibility is that Credit Suisse is just wrong. Compiling global wealth numbers is a considerable task. However, the series for wealth for both countries (and others) is both consistent and sensible over time. In addition, the Credit Suisse numbers for the U.S. are close to the Federal Reserve’s series on household net worth.
Calculating net private wealth for China is more difficult but Credit Suisse at least has the distinction of not being a tool of the Communist Party. Even if Chinese private wealth is underestimated by $10 trillion, it does not matter too much. China is still not in the same league as the U.S.
That’s the private sector, but perhaps China’s large public sector cuts deeply into the American advantage. Measuring public sector net assets involves such tasks as estimating the value of Chinese state-owned enterprises and U.S. federal land (as well as federal, state, and local debt). A rough calculation for the U.S. leaves mid-2015 net national wealth at over $73 trillion.
Chinese state-owned enterprises have very hefty assets. However, China’s debt is very high, has been rising rapidly, and is largely attributable to the public sector. Unlike the U.S., China’s net public sector position is positive but it is also deteriorating. Mid-2015 net national wealth for China is near $28 trillion. The more comprehensive, national wealth gap between the U.S. and China is $45-46 trillion, still a staggering amount.
Much of the talk about a Thucydides trap is driven by the idea that China, while much poorer on a per-person basis and not as advanced technologically, has in fact caught up economically. This somewhat odd claim is based heavily on the notion of gross domestic product (GDP) adjusted by purchasing power parity, as popularized by the International Monetary Fund (IMF).
To be blunt, the comparison of the U.S. and China on the basis of GDP adjusted by purchasing power is fraudulent. The idea behind purchasing power parity is that the same good or service should have the same price in different markets, if the markets are open to competition. To apply this to the whole of China’s GDP requires that the vast bulk of transactions – not just consumption but also investment and government acquisitions – are conducted in open markets.
But the IMF itself does not believe this, correctly advising China for years to pursue pro-market reform. It is simply wrong to apply a purchasing power correction based on competitive markets to the whole of or even most of Chinese GDP. (This fundamental problem relegates to a secondary matter the very difficult task of calculating price levels for the U.S. and China in order to compare them.)