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Settle Down, China Isn't Overtaking U.S. Economic Power and Here's Why

Story was updated to reflect 2012 U.S. and China GDP in trillions

NEW YORK (TheStreet) -- Quit worrying about China.

Headline consumers in the past week learned that China's economy this year is passing the U.S. economy, and Chinese e-commerce giant Alibaba finally filed for an initial public offering on American public markets.

The news isn't insignificant for a country that across some 30 years developed into an international heavyweight from a once, literally, starved nation.

But the headlines miss the reality that China, despite its unprecedented growth, remains in the economic shadows of its more powerful and innovative 'competitors, namely, the United States.

TheStreet spoke with three China experts this week to give investors a clearer picture of where the People's Republic of China (PRC) stands among its global peers, and provide critical points that will encourage a more informed discussion at your dinner parties.

Guy de Jonquieres, senior fellow, European Centre for International Political Economy

"To be honest I don't think it matters much, other than the shock value in the U.S.," de Jonquieres said in a phone interview from London.

What may have misled some readers was that an International Monetary Fund report said China will this year surpass the United States in purchasing power parity, meaning that one Chinese yuan will go further in purchasing goods and services in China than one U.S. dollar will in purchasing goods and services in the U.S.

While this is a legitimate way to determine comparative economic power, it doesn't match the way most people think of strength of economies, which is by nominal gross domestic product. U.S. GDP is $16.24 trillion annually, while China's GDP is about half that at $8.23 trillion a year, according to 2012 estimates by the World Bank.

Further, per capita GDP in dollars ranks the U.S. 12th in the world at $51,749, but China is 90th at $6,091, right behind St. Vincent and the Grenadines.

Stats like those may help explain why nearly 60% of Americans still view their country as the dominant economic power, while just 28% say China.

De Jonquieres last year wrote a paper detailing China's lagging innovation compared with the West, touching on the quality vs. quantity of patents issued, engineers trained and various other issues.

Less than a third of China's patents are classified as innovation patents, leaving the remaining two-thirds in the category of lower-quality "design and utilty-model patents"' also called "junk" patents, de Jonquieres said.

Put another way, the research said that China in 2011 earned $1 billion on patent royalties, while shelling out $18 billion for foreign royalties. That means China ran a $17 billion patent royalty deficit, whereas the U.S. posted a $82 billion surplus.

Education also poses another misconceived sector. A few years ago media repeatedly cited a Program for International Student Assessment survey that said Chinese teenagers in Shanghai outpaced their international peers in reading, math and science. A large part of U.S. success in innovation is because of the talent produced by its higher education system -- another area in which it outperforms China.

In his paper, de Jonquieres cited studies by Duke University and professional body Engineering UK, which found that engineering degrees in the U.S. were "generally" of higher standard than those from China and that the United Kingdom trains 2.5 times more employable engineers than China.

And the sizable number of Chinese citizens who attend American universities? De Jonquieres said they're not all returning to China.

"Basically, I think the problem with China is not the people but first of all there are limitations to their education sector," de Jonquieres said on the phone. That limitation, he said, is incentives.

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