The U.S. has been the biggest economy in the world for over a century. But China is closing in fast, as it overtook Japan to become the world’s second-largest economy in August 2010. It’s going to overtake the U.S. within the next 15 years.
Since 1990, China’s economy has been growing at an average rate of 9.8%. The U.S. economy has been growing at 2.4% per year over the same period. By one measure of economic growth, China overtook the U.S. in December 2014.
There are two ways to measure the economic output of a country. Gross Domestic Product (GDP) and Purchasing Power Parity (PPP). GDP is more widely used, and puts a dollar figure on a country’s economic activity by measuring how much consumers, companies and governments spend and invest. By this measure, the U.S. is still well ahead of China, with a GDP of $17.4 trillion versus $10.4 trillion for China in 2014.
PPP adjusts GDP for differences in the cost of living between countries. Since the same amount of money goes further in a country with cheaper prices, that country’s effective spending power is higher than is reflected in GDP measurements.
For example, $50 in the U.S. buys 10 Big Macs at McDonald’s. But in China, the same US$50, converted into Chinese renminbi (RMB), would buy 19 Big Macs at a local McDonald’s. Big Macs are substantially cheaper in China. PPP reflects this adjustment.
According to PPP-adjusted GDP figures, in 2014 China’s economy was larger than the American economy – $17.6 trillion to $17.4 trillion. In other words, the same amount of money in China goes further in terms of buying power.
But the absolute size of each economy doesn’t matter as much as the wealth of the average person. China has four times the population of the U.S. So using PPP figures, GDP per person in China stands at $12,900, compared to $54,570 in the U.S. The average American has more than four times the buying power of the average Chinese citizen.
Neither PPP nor GDP reflect actual net wealth. Net wealth explains how much money people have – that is, assets minus everything that they owe.
For example, a person with no assets except for a house worth $400,000, and a mortgage on that house for $100,000, has a net worth of $300,000. That’s what’s left after liabilities, or debts, are subtracted from the market value of all assets.
This means that Americans are a lot poorer than GDP or PPP figures suggest. A recent study of global wealth by investment bank Credit Suisse showed that there are more poor people (people in the bottom 10% of net wealth globally) in North America than in China (where there are almost none at all). And that’s even though China has four times the population of North America. (90% of the population of North America, as defined by the report, is in the U.S.) That means many North Americans – far more than Chinese – owe more than they own. They have negative net wealth.
That’s because more people in the U.S. and Canada borrow money than people in China. Americans can easily borrow money for houses and cars and education – and they do. However, in China people usually have less debt and pay for things in cash, which boosts their net wealth position. Someone in China with a positive net wealth – having just enough money for a few movie tickets – is richer than 25% of North Americans. That’s because so many people in North America are financially under water.
As China’s debt markets develop, Chinese citizens will have more access to debt. That will ultimately hurt their net wealth. But in the meantime, China has the advantage in positive net wealth.
At the other end, there are a lot more rich people in the U.S. than in China. And the U.S. still has by far the most millionaires in the world. Average this out, and the U.S. is still wealthier overall.
It’s only a matter of time before China’s economy grows to be larger than that of the U.S. And already, its people are, by some measures, richer.