Hardly a day passes without some mainstream western media publishing another article about China’s coming economic collapse. Even the empirically debunked, much ridiculed China doomsday-sayer Gordan Chang seems to be getting a new lease on life as a Fox News commentator and frequent panel guest elsewhere.

No doubt there are many challenges in the Chinese economy, from a busted real estate sector to consumption slowdown to a wobbly stock market.

However, the reality is that bursting the overpriced and over-leveraged real estate bubble is a necessity and arguably long overdue; consumer tech is absorbing too much resources and leading to short-sighted oligarchies and unsustainable wealth disparity; and the stock market is never a reliable indicator of either overall Chinese economic performance or individual business performance anyways. BYD, the EV maker, now trades lower than 5 years ago despite the fact it dethroned Tesla as the global EV leader in early 2024 and its sales have grown severalfold.

The Chinese economy is going through a transition rather than a collapse. It is an engineered transition as economic planners intentionally burst the real estate and consumer tech bubble and redirect resources to more important strategic industries and hard tech sectors.

Still many argue that the Chinese GDP performance in the last 2 years is lacklustre when compared with US and China is falling behind in the economic race. This has led me to take a deeper look into what is behind the headline numbers and compare the two GDPs for clues of which has the better future growth potential and real national power.

Ignoring the obvious difference in nominal market exchange GDP vs. Purchasing Power Parity GDP which puts the size of Chinese economy a third bigger than the US already, I have focused only on nominal GDP comparison for simplicity.

Here are some interesting factoids I uncovered (everything can be referenced from sources such as Statista, US Bureau of Economic Analysis, China National Bureau of Statistics):

1. Imputations: this refers to “economic output” that is NOT traded in the marketplace but assigned a value in GDP calculation. One example is the imputed rental of owner-occupied housing, which estimate how much rent you would have to pay if your own house was rented to you. This value is included in the reported GDP in the US. Another example is the treatment of employer-provided health insurance, which estimates how much health insurance you would pay yourself if it was not provided by employer. Again, this imputation is included in GDP calculation in the US.

As of 2023, such imputations account for $4 trillion in US GDP (round 14% of total).

In China, imputation to GDP is ZERO because China doesn’t recognize the concept of imputed/implied economic output in its statistics compilation. Too bad your house is not assigned an arbitrary “productive value” once you buy it in China☹

2. Construction: in the US, construction contributes to 4% GDP (roughly $1.1 trillion) while in China, construction contributes to 7% GDP (roughly $1.2 trillion). However, China pours the same amount of concrete in 3 years as the US did in the last century. China imported $128 billion worth of iron ore in 2022 and US imported $1.15 billion in 2021. China produced 1.34 billion tons of steel in 2022 vs. 97 million tons by the US in the same year. China built 45,000 km high speed rail in the past decade and US built none.

Considering all the ports, highways, bridges, apartment buildings China builds every year vs. the US, the almost identical construction value in GDP seems laughable.

This shows the non-sense of comparing US GDP vs China.

3. Professional services: services such as law, accounting, tax, insurance, marketing, etc. account for 13% US GDP ($3.5 trillion) while it accounts for 3% Chinese GDP ($0.5 trillion). There are 1.33 million lawyers in the US vs. 650,000 in China; 1.65 million accountants and auditors in the US vs. 300,000 in China; 59,000 CFAs in the US vs. 4,000 in China. 20,000 lobbyists are registered in Washington DC alone while China has no such profession. And of course, the pay for these jobs is much better in the US, ergo the higher GDP value. There are definitely more lawsuits, insurance transactions, annual tax auditing, and congressional lobbying happening in the US vs China. But it is unclear how that translates into national power.

4. Manufacturing and services: 38% of Chinese GDP comes from manufacturing and 55% from services. In the US, 11% and 88% respectively. Very literally, China is a much more productive force of “hard goods” while US is a post-industrial economy tilted overwhelmingly as a “soft goods” producer. If the day comes for a hot war between the two countries, China is far better prepared for a hard power confrontation.

In summary, the headline news about China’s economic problems is overhyped to match a narrative in the typical fashion of today’s “mainstream” western media. “News” reporting these days is more about narrative than facts. China’s economic “collapse” should be considered as the famous Mark Twain quote “the reports of my death have been greatly exaggerated”.

Regardless of the nominal GDP reporting, China has the hard national power and industrial base to overwhelm its nominally bigger opponent. In the Ukraine war, deindustrialized west is collectively outproduced by Russia in ammunition production. On the other hand, China has an order of magnitude bigger industrial and technological capacity than Russia.

I would argue the concept of nominal GDP comparison is fundamentally flawed. The objective of GDP reporting is to capture the economic output of an economy. However the current methodology for GDP calculation is a better reflection of the cost incurred in an economy rather than an output of an economy, let alone a reflection of the standard of living of an economic entity.

For example, the cost of COE (certificate of entitlement, essentially a licence plate fee for cars) in Singapore now averages $70,000 for a medium sized vehicle when the cost was $25,000 less than 5 years ago. Such transactions are recorded as a double-digit annualized GDP growth rate. Rather than reflecting a higher standard of living, it is a painful increase of cost of living. Similarly, more prisons and guards for more prisoners incarcerated in the privatized US prison system do not represent economic growth but the opposite.

The best way to approximate a nation’s wealth and power should be a comparison of the economic value of the total output of goods and services, for example amount of energy produced, cars produced, electricity consumed, college students graduated, number of patients served, etc. This granular analysis of an economy is hard, maybe even impossible, but certainly more reflective of reality than the fanciful GDP financial accounting used today.

A side note, I also ran across some less wholesome facts when doing research on the subject. I refer to a Financial Times report just for a laugh. In 2014, UK started to include prostitution and illegal drugs in its GDP reporting to the tune of 10 billion pounds a year. This raised the reported UK GDP by 5% in an effort to help the government raise its debt ceiling.

To derive at this number, the statistics bureau had to make some assumptions: “The ONS breakdown estimates that each of the UK’s estimated 60,879 prostitutes took about 25 clients a week in 2009, at an average rate of £67.16. It also estimates that the UK had 38,000 heroin users, while sales of the drug amounted to £754m with a street price of £37 a gram.”

This Sex, Drugs and GDP exercise must have added some much-needed color to the accountant’s day.