Schork Oil Outlook: Will China Bury the US?

Red Scare?

Much ado was made in the market yesterday regarding Tuesday’s release of The Conference Board’s Global Economic Outlook. Of particular interest, especially to Yankeephobes from the schadenfreude swamps of the Left, was the finding that China may overtake the U.S. as the world’s largest economy by 2012… with may being the key auxiliary verb.

What The Conference Board said (and what was glossed over in the headlines) was China may have a larger GDP (PPP-converted) than the U.S. two years hence. That is a far cry from saying China will unseat the U.S. as the largest economy before Obama leaves office.

In nominal terms, China is far from hailing distance of the U.S. For instance, nominal GDP implies that one dollar buys as many haircuts in Los Angeles as it does in Guizhou Province. Of course, that is absurd, as prices for non-traded goods and services are going to be lower where incomes are lower. In this vein, nominal per capita GDP in the U.S. is around $46,000 per year; in China it is more like $3,700 per year.

The analysis in today’s issue of The Schork Reportis not meant to belittle China’s capitalist police-state, which would be foolish. Rather, it is meant to keep things in perspective and hold the Sinophiles in check. More to the point, PPP-converted GDP is subjective. By The Conference Board’s own explanation, methodology, price measures and weighting systems to compute PPP vary amongst researchers, the World Bank, IMF et al. Thus, “…major discrepancies [arise] between different measures of PPP-converted GDP, especially for the case in China [emphasis ours]."

To wit, per The Conference Board’s findings: “…average GDP per capita in China in 2010 was still only 21 percent of the U.S. level, and it will rise to 40 percent in 2020 in the base scenario and to 32 percent in the pessimistic scenario. Despite China’s coming leadership in terms of the size of its economy, it remains far behind the United States and other advanced economies in terms of average living standards, even with the significant narrowing of the per capita income gap in the next decade.”

In other words, China still has a long way to go and the country’s lack of potable water, surplus of pollution, lack of domestic energy resources and aging population, which will be compounded by massive gender-distorted demographic ratios, present considerable roadblocks along the way.

As cited in today’s report (request it here), according to the CIA’s World Fact Book, the number of Chinese males for each female under the age of 15 is 1.17 and for the total population it is 1.06. In the United States those figures are 1.047 and 0.97 respectively. Bottom line, while China may indeed surpass the U.S. at some, as yet to be determined, point in the future, it may also grow decrepit first.

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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.