Don’t Underestimate China

By John Hulley

John Hulley is an international accountant living in Jerusalem.

The old accounting system being used grossly underestimates China’s growing economic and military threat to the West.

Many Bible-believing Christians must be pondering the prophecy about the deep water of the Euphrates being “dried up, so that the way of the kings of the east might be prepared.” (Revelation 16:12)

The purpose presumably is for armed forces to cross from the eastern to the western bank. As they move forward, an important question will be: what sort of weapons will they have?

On January 11 the Chinese proved their ability to shoot down one of their own satellites 500 miles up. And last September they used a ground-based laser to “paint” a US satellite, conveying the message that they should have little problem blinding America’s “eyes in the sky” if they choose.

Both events seem to have surprised Washington. These and similar surprises in the past could be the result of an extraordinary underestimation. The Chinese are probably four – yes, four times stronger than officially acknowledged by the US Department of Defense!

My slight experience in warfare doesn’t qualify me as a military expert, but I am an international economist, and worked for some years at the World Bank, which manages the International Comparison Program. Said to be the world’s largest statistical initiative, the ICP compares economic and social data from more than 100 countries. For further assurance I have checked my statistical analysis with a couple of former colleagues at the Bank. They endorse it.

There are at least 1.3 billion Chinese – more than four times the American population. Result: average income in China only reaches one quarter the US figure and the whole economy will exceed the American. And China can then also support defense expenditures bigger than those of the US.

Languishing in poverty, this supernumerous people used to be no threat to the great powers. But after the death of Chairman Mao Zedong in 1976, that all changed. A radical economic reform – from altogether socialist to largely capitalist – soon led to record rates of progress. During the past 30 years the Chinese economy has grown nearly four times faster than the American (averaging 8.2% compared to America’s 2.2% per year).

And their military program has been expanding proportionately. In fact, they put a bigger share of their economic output into defense than does the US. As a result, the gap between the two countries is rapidly narrowing. Total Chinese military expenditure could surpass America’s less than five years from now. After that it might take a few more years to build up reserves of weapons such as those held by the US, and China would then be the world’s greatest military power.

How much further the process could go is anyone’s guess. Traditional disciplines of hard work and obedience have brought Hong Kong, Japan, Singapore and Taiwan to levels of average income comparable to those of northwestern Europe – about ¾ that of the US. Suppose the Chinese reach the same level: with a population more than four time the American, they would then command an economic output more than three (3/4x4) times bigger. If the same share of that economy goes into defense as at present, the Chinese military will be three times the size of the American.

Of these dangers Washington seems blissfully ignorant. The economic growth of China in the 1980’s and 90’s did lead a concerned Congress to ask the Department of Defense for an annual report on its military strength, including as assessment of prospects 20 years ahead. And in 2002 the DoD did start submitting such reports. But these portray Chinese power as far smaller than it really is or is likely to be.

The problem is in the accounting method. The old OER (official exchange rate) or MER (market exchange rate) method is much easier to figure, but it is far less accurate in this case than the modern PPP (purchasing power parity) method. Using the old system would work reasonably well in comparing countries at roughly the same level of income, such as Sweden and Denmark. But the larger the gap between the income levels of countries being compared, the larger the error.

For example you can hire at least six Chinese soldiers for the price of one GI. Also, available at lower prices are land and buildings, medical and other services, pensions and local manufactures such as transport vehicles, clothing, furniture and much other equipment. Higher prices apply primarily to imports – fuel and hi-tech items, including advanced weaponry. But these are only a small share of total defense expenses. As a result, $100 billion will get you a much bigger army in China than it will will in the US.

To make a reasonably accurate comparison of the size of the Chinese economy and military effort with the American, it is therefore necessary to make corrections for the differences in wages and other prices. This is the PPP method, which economists and statisticians have been using for decades.

The DoD, however, has chosen the easier path – assuming that the same amount of money, according to the exchange rate, will get you the same amount of defense in both countries. The difference is enormous – about 4 to 1! Thus, according to the DoD, the Chinese economy in 2006 was $2.5 trillion – less than 20% of the American. By the more modern method of accounting, however, it was $10 trillion – more than 75% of the American. In 20 years, according to DoD, the Chinese economy will still be less than $7 trillion. By the modern method, it already exceeded that size some three or four years ago!

The difference in the results of the two methods of accounting should have major implications for American policy. According to the old method, the US may be free to focus most on trying to export democracy to Iraq. But according to the modern method, the number one problem is defending democracy against the greatest threat in history.

Officially the National Security Strategy of the US is to deter potential adversaries from seeking to surpass or even equal American power.  But the Chinese challenge to the military superiority of the US is more real and imminent than Washington seems to realize. Any effort to limit the quantities and types of Chinese weapons is more likely to succeed if done sooner rather than later.

The difference in perception of reality is amazing – but not amusing – when you consider what the world would be like under Chinese domination. If China becomes the greatest power in the world, it could push its interests and way of life wherever it wishes. How it would do so can be inferred from what it has done to date. In countries China controls, it has applied such practices as overwhelming force in support of one-party rule; censorship of all media; regimentation of religions to bring them in line with Communist beliefs; persecution, torture and killing of dissidents.

North Korea is reported to have concentration camps the size of cities. In Laos, about 30% of the population is estimated to have been killed, in Tibet 15% and in China itself about 15%.

Figure it out: with a population of 400,000,000 at the time, the total number of Chinese executed was awesome. Even now, with 20% of the world’s population, China routinely executes far more people than the other 80% of the world combined.

The Chinese are placing missile batteries along the shore opposite the democratic island of Taiwan. And at the UN they are using their veto power to protect the efforts of North Korea and Iran to develop nuclear weapons.

Meanwhile the leader of one of these countries – Iran – has announced his hopes of terminating Israel. Fulfillment of the prophecy quoted could be involved; for that country also lies east of the Euphrates, and the verse does say kings of the east, in the plural. -