(China Daily)
Updated: 2007-12-20 14:15

The finding that the Chinese economy, the world's fastest-growing major economy, may be 40 percent smaller than previously estimated will surely interest a lot of people around the globe.

In a report ranking the world's economies for 2005, the World Bank said its updated survey using purchasing power parity (PPP) shows China's GDP stood at $5.3 trillion and not the $8.8 trillion cited in prior World Bank surveys.

Though the recalculation does not change the fact that China remains the world's second largest economy in terms of PPP, the drastic "shrinking" is enough to inspire speculation about State policy and the political implications.

For instance, the new figure could mean that poverty is more deeply entrenched than previously thought. A lower per capita GDP would mean more people live below the World Bank's poverty line of $1 a day. Robert Zoellick, the bank's president, was right to call for caution when drawing conclusions from these statistics because the numbers are not complete.

The finding incorporated new price data gathered in conjunction with the Asian Development Bank and the Chinese government in 12 urban areas. The price survey will be subject to further adjustments if it includes rural prices.

As the most extensive and thorough effort ever to measure PPP across countries, the new global report will give us a useful perspective for understanding the world's economic reality. PPP, rather than market exchange rates, provides a better measure of the relative cost of living since it is based on the goods and services that households can buy with their domestic currency.

However, though China's GDP is higher when measured in terms of PPP than at market rates, policymakers should still pay attention to the underlying implication of a steep drop in the wealth of the Chinese people.

The size of the Chinese economy in PPP does not matter as much as people's real buying power.

The country has been trying hard to elevate domestic consumption into a key engine for economic growth. But if the people's buying power in US dollars is substantially smaller than previously thought, the government will have to think twice before encouraging people to consume more.

The absolute income level has risen significantly across the country in recent years, but price increases have eroded a considerable part of people's gains.