2014 is a landmark year for the world economy, one when the dominance of the USA appears to be over as China becomes the world’s largest economy. China and the USA may be economic rivals, but beyond the headline figures, divergent trends in both countries are apparent. Everything from living standards, consumption patterns, the business environment, productivity, retail and travel markets differ in China from the USA.
Yet similarities are there, income inequality is an issue in both countries. Both countries are leaders in the development of renewable energy technologies, manufacturing production and, less auspiciously, pollution. The real draw for consumer goods companies is China’s huge population and the rapidly growing incomes of its consumers, whereas in the USA the overall size of the consumer market and the affluence of its shoppers continue to entice businesses operating in the consumer goods arena.
Taken together, the two economies play a crucial role in driving global growth. A strong China in conjunction with a strong USA, whichever is nominally the larger of the two, is central to a stable, well-functioning global economy. The two countries together account for 1-in-3 dollars spent globally, thus a well-researched China strategy, along with a carefully considered USA strategy, is crucial to success.
The purchasing power of Chinese consumers has now surpassed that of American consumers and its overall economy, by some measures, is now the largest in the world. According the IMF, the purchasing power parity measure is a type of cross-country comparison that looks beyond the nominal value of money and focuses more on what you can actually get for it. So for example, if a hamburger is sold in London for £2 and in New York for $4, it would suggest a PPP exchange rate of one pound to two U.S. dollars.
“This PPP exchange rate may well be different from that prevailing in financial markets (so that the actual dollar cost of a hamburger in London may be either more or less than the $4 it sells for in New York),” explained the IMF.
Despite those declarations, the deeply intertwined nature of the American consumer-based economy and China’s role as the world’s leading manufactuter, means the narrative about overall financial strength is never straight-forward. Calculated by looking at gross domestic product (GDP) alongside cost-of-living data, the IMF announced that China is now larger economically than the U.S. for the first time in history with an adjusted GDP of $17.6 trillion compared to a U.S. GDP of $17.4 trillion.