China was promoted to the largest economy in the world last week, at least according to the implications of a new data set released by the World Bank. The new figures, which were not warmly welcomed by the Chinese authorities, involved a downward revision to the prices of non traded goods and services in China, therefore increasing the real value of GDP measured at purchasing power parity exchange rates. In 2014, China will overtake the US on this definition.
While the absolute size of the Chinese economy is clearly of interest (see Martin Wolf’s lucid analysis here), it was inevitable that China would overtake the US on the basis of PPP measures within a few years, so the latest revelation was not exactly a shock. Furthermore, PPP-based comparisons have many drawbacks, as Michael Pettis explains here.
The new price data are, however, important in another respect. This concerns the valuation of the yuan, and has direct implications for Chinese exchange rate policy, which could be on the verge of a profound change. In fact, Beijing’s attitude towards its currency could turn out to be the most important change in global macro economic policy so far in 2014. Read more