Why China does not want the world’s biggest economy crown ..?

Few countries would turn down the title of world’s largest economy. You can count China among them.

Only the United States has enjoyed the immense power and prestige conferred by this position in the last 140 years (the U.S. surpassed Great Britain as the world’s largest economy in 1872 and has held the spot ever since). But last week, the Chinese government reacted with thinly disguised animosity to an authoritative economic report announcing that China would overtake the United States in 2014 as the world’s largest economy in terms of purchasing power parity (PPP).

According to the International Comparison Program of the World Bank, in 2011, the Chinese economy totaled $13.5 trillion in purchasing power parity. It is on target to grow 24% between 2011 and 2014, compared to 7.6% cumulative growth for the U.S. For its part, the U.S. had $15.5 trillion in PPP in 2011. The Chinese economy at the end of this year is expected to have $16.7 trillion in PPP, slightly bigger than the $16.6 trillion projected for the U.S.

Before the release of the latest World Bank report, the consensus estimate among economists was that China would surpass the U.S. as the world’s largest economy in PPP terms in 2019. That China has managed to catch up with the U.S. five years sooner is largely due to the effects of the financial crisis and the Great Recession, which caused anemic growth in the U.S. but affected the Chinese economy only moderately.

Instead of bragging about its coronation as the world’s No. 1 economy, China first tried to delete the reference to the new PPP estimate of its economy in the World Bank report and then all but suppressed its coverage within China’s domestic media.

On the surface, Beijing’s unfriendly reaction makes no sense. Ever since the Tiananmen crackdown in 1989, the Chinese Communist Party has relied on economic growth as the most important source of its legitimacy. Being crowned the world’s largest economy should only help reinforce the party’s claims of credit for bringing prosperity and international respect to China. And Chinese foreign policymakers have been skillfully playing the expectations game around the world. By pointing to the inevitable rise of China as the world’s largest economy and the relative decline of the U.S., Beijing has had considerable success in changing the economic and geopolitical calculations in many capitals, notably in Africa, Latin America, and the Middle East.

So, why does Beijing dislike being called No. 1 now?

Two contradictory emotions are at play here. Yes, the Chinese government craves the bragging rights and the political legitimacy conferred by dethroning the U.S. as the largest economy in the world. But at the same time, Chinese officials are pragmatic souls. They understand that cumbersome international obligations would come with the title. For example, China will now be likely called upon to contribute more to development aid and pay more dues at the United Nations (at the moment, China pays only 5% of the U.N. budget, making it the sixth-largest contributor). Most concerning, China’s newfound superpower status could undermine its negotiating position in climate talks — Beijing will find less justification in insisting that, as a developing country, it should not bear substantial financial burden in reducing greenhouse gas emissions.

On the geopolitical front, the risks of being at the top of the economic heap are considerable. The U.S. and its allies, driven by fears of Chinese power, might balance against China. Because the Chinese economy is less than half that of the West (including Japan), China is no match against a potential anti-China bloc.

Domestically, the Chinese government also sees no upside in letting its people know the World Bank’s latest pronouncement (no major official Chinese news outlets carried the story). Beijing understands all too well that the World Bank’s report is at most an accounting exercise. It does not change anything on the ground — ordinary Chinese people are unlikely to feel suddenly wealthy, or grateful to the party, because their per capita income rose more than 40% overnight if switched to the PPP measurement. The likely reaction among the Chinese public to such a revelation would be to demand that Beijing spend more on social services and the environment.

For the business community, the implications of China’s accelerated ascendance to the top may be a bit academic as well. For those doing business with China, two things matter more than others. One is per capita income, which determines the effective consumption power of individuals. On this score, Chinese per capita income, even based on PPP, is only one-fifth that of the U.S. What this means is that the aggregate Chinese market may be large, but the real consumption power, which is determined by disposable income, is going to be relatively low for decades to come. The other factor is overall competitiveness, a function of political institutions, technological sophistication, innovation, and financial sector development. Here, again, China may have made huge strides in the last three decades, but it still remains way behind the U.S.

So, don’t expect Beijing to break out the party favors anytime soon. Source: FORTUNE