Given the differing economic growth rates of recent years and the size of their populations, it was always a question of when, rather than if, China would snatch pole position from the US as the world's biggest economy, but it still came as a surprise when it actually happened – some five years ahead of schedule.

China’s gross domestic product is worth $17.6 trillion (€13.84 trillion), based on purchasing power parity (PPP). Once adjustments are made for China’s lower cost of living, that means the Chinese economy is slightly bigger than that of the US with $17.4 trillion.

As so often with these things, it is a question of perspective.

Many economists don’t like to use PPP as a yardstick because the prices of goods vary from country to country, and China, for most people living here, is still a lot cheaper than the US.

Not adjusted for purchasing power and cost of living, the US economy comes up as being worth $17.4 trillion, while China’s is $10.4 trillion, still quite a way behind.

Broken down on a per capita basis, China falls even further behind – per capita income in the US is $55,000 compared with less than $8,000 per head in China.

According to Bloomberg's calculations, once adjusted for population, China ranks 86th in PPP gross domestic profit per capita, up 29 places from a decade ago, while the US slips one notch to 10th. The top three by this measure are Qatar, Luxembourg and Singapore.

Changing roles

David Hensley

, JPMorgan

Chase

& Co’s director of global economic co-ordination believes PPP comparisons risk turning everything into a competition but fails to give a real flavour of the bigger changing economic roles.

"Emerging market economies had their day in the sun in the 2000s, and China was the epitome of those go-go days," he told Bloomberg, as growth forecasts were often revised up, policies were aimed at boosting their economies and their markets offered a lot of potential.

“Developed economies by comparison looked pretty stodgy,” said Hensley. “The US remains the biggest by the more common, more widely accepted and in our view, more useful measure,” he said.

Whatever about the size, what about the more immediate direction?

Well, the International Monetary Fund’s latest World Economic Outlook believes that China can continue to expand in line with the government’s expectations once it keeps reforms on track.

China’s growth was 7.7 per cent in 2013 and is expected to be about 7.5 per cent in 2014, in line with the government’s target, the IMF said. “After three decades of remarkable growth, China’s economy has been slowing. The country needs to implement the announced reform agenda and address vulnerabilities to secure a safer development path,” the lender said in the report.

“Much of China’s slowdown has been structural, reflecting the natural growth convergence, but weak global growth has also contributed,” said the IMF.

What the IMF sees is a “web of rising vulnerabilities”.

“To finance rapid investment growth, firms and local governments borrowed from both banks and nonbank financial entities (the so-called “shadow banks”). This has resulted in rising corporate and local government indebtedness, which is the flip side of the large increase in total credit since 2008. In addition, many strands of the web run through the real estate sector,” it said.

As with the Asian Development Bank report covered in Asia Briefing last week, the IMF wants China to implement the reforms announced last year to make growth more sustainable.

Priority areas

The priority areas are the financial sector, state-owned enterprises, exchange rate, and local governments.

“Reforms should aim to eliminate distortions and implicit guarantees, strengthen institutions, and give the market a more decisive role, as the authorities emphasised,” it said.

The US is generally seen as being on the other side of the tunnel when it comes to reform, but China is still heading into the process.

Reform will translate into slightly lower growth in the short run. That will impact on the wider global economy in the form of slightly slower growth, but longer term the positive impact of a stronger and less vulnerable China outweighs these concerns.