Although China’s economic size on an exchange rated basis has passed Germany this year and will pass Japan in 2009 and will probably pass the United Statesin 2016, China is still classifed as a lower middle income country by the World Bank. This means that using a 3 year average of exchange rates and looking at the GDP according to the Atlas method on July 1st of a year, that China has per capita GDP between $906 – $3,595.
At the end of 2009, China’s currency could have appreciated and the size of its economy grown so that it has $4153 per capita of GDP. But the level at the middle of the year not including Hong Kong and Macau would be about $3500. So it would take until 2010 to get to $3890 per capita using the 3 year average of currency appreciation if this sites forecast for growth and currency were correct. When China passes the United States it will probably not be what the World bank considers a high income country with per capita income at $11,116 or more.
This causes inflation pressure and requires that China mass sterilization. Excess liquidity is mopped up by by issuing bills (as “sterilisation”) or by lifting banks’ reserve requirements. But all this complicates monetary policy.
To curb future inflation, China therefore needs to stem the flood of capital.
One solution would be a large one-off appreciation of the yuan so that investors no longer see it as a one-way bet. This, in turn, would give the PBOC room to raise interest rates. The snag is that the yuan would probably have to be wrenched perhaps 20% higher to alter investors’ expectations, and this is unacceptable to Chinese leaders, especially when global demand has slowed and some exporters are already being squeezed.
This implies that monetary policy will remain too loose. The longer that the torrent of hot money continues and interest rates remain too low, the bigger the risk that underlying inflation will creep up.
Thus the constant appreciation at a rate as fast or slightly faster than the 7% of the first half of 2008 seems likely. Perhaps 20-25% over the next 18 months. This would put the exchange rate with the US dollar of 5.15 to 5.5 at the end of 2009.
Achieving World Bank Upper middle income per capita income levels would be getting up to the level of Jamaica and a little better than Thailand in 2006. High income is getting up to the level of Hungary in 2006 or better.
When people say that China cannot catch up the overall size of the US economy then they are saying that China cannot raise per capita income to the level of Hungary.
China is a massive country with a population several times Europe. So the move to different income levels is and will be uneven. Shanghai is passing into High income levels. Hong Kong and Macau area already high income. The coastal cities and provinces are already upper middle income and will move to high income levels first. The rural and interior areas will lag at low income and lower middle income levels.
The 2006 list of upper middle income countries
American Samoa, Argentina, Belize, Botswana, Brazil, Bulgaria, Chile,
Costa Rica, Croatia, Dominica, Equatorial Guinea, Gabon, Grenada,
Hungary, Kazakhstan, Latvia, Lebanon, Libya, Lithuania, Malaysia,
Mauritius, Mayotte, Mexico, Montenegro, Northern Mariana Islands, Oman,
Palau , Panama, Poland, Romania, Russian Federation, Serbia,
Seychelles, Slovak Republic, South Africa, St. Kitts and Nevis,
St. Lucia, St. Vincent and the Grenadines, Turkey, Uruguay,
China will have an installed nuclear power capacity of 40 million kilowatts on the mainland by 2020, or four percent of the total installed power generation capacity. New official projects with a combined capacity of 23 million kilowatts are being launched, involving a total investment of 450 billion yuan (about $60 billion).