China's poverty line: Life at the bottom of the middle kingdom | The Economist . . This week China raised its rural poverty line to 2,300 yuan a year. It's about time. China's official definition of poverty has traditionally been quite miserly. In a 2008 paper Shaohua Chen and Martin Ravallion of the World Bank noted that China's rural poverty line was "one of the lowest lines in the developing world". So how generous is 2,300 yuan by international standards? Some news reports (see here) implied that China's new line still falls below the World Bank's global poverty standard of $1.25 a day. That seems obvious: 2,300 yuan per year is 6.3 yuan per day, or a little less than $1 at today' exchange rate. But the World Bank's poverty line is not set at market exchange rates. It's $1.25 in 2005 Purchasing-Power-Parity (PPP) dollars. By the World Bank's definition, you are poor if your purchasing power (ie, your command over goods and services) is less than that of an America subsisting on $1.25 a day in 2005. That's simplifying a bit, because international comparisons of purchasing power are fraught with difficulties. Fish, for example, is an abundant staple in coastal countries but an expensive treat in landlocked, mountainous regions. If you found a Bolivian enjoying the same amount of fish as a Chilean, you should not conclude that the two are equally well off. Likewise, the hilsa is a middle- class favourite in Bangladesh, but an out-of-stock specialty item in America. Only rich Americans can eat as much hilsa as middle-class Bangladeshis. Nonetheless, in theory, the international poor consume the same amount as an American living on $1.25 a day in 2005. This point is I think still poorly understood. When people hear that almost 1.4 billion ( 1,374m) people live on less than a $1.25 a day, they comfort themselves with the thought that a dollar stretches much further in a poor country than it does in America. They may have fond memories of backpacking around India or Guatemala on a shoestring during their younger days. But that is false comfort. The World Bank knows full well that a dollar packs more punch in a poor country. When it says someone is living on $1.25 a day, it means they are living on what that would buy you in America in 2005, not what it would buy you in Guatemala, India or China. Once that's understood, how does China's new poverty line stack up? To make the comparison, you have to account for differences in purchasing power over time, as well as between countries. China's poverty line is set at 2010 prices. Thanks to inflation, 6.3 yuan in 2010 bought only as much as 5.46 yuan in 2005. That adjusts for time, what about place? According to the World Bank, 5.46 yuan in China in 2005 stretched about as far as $1.33 in America in the same year. (That's using the 2005 consumption PPP rate of 4.089.) So by that calculation, China's new poverty line is eight cents higher than the World Bank's. However, China deems a person poor if their income is less than $1.33 (at 2005 PPP) a day. The World Bank says they're poor if their consumption is less than $1.25 a day. The difference between income and consumption is saving. So if someone consumes $1.24 and saves 9 cents, they are poor by the World Bank's definition, but not by China's. That might make China's definition of poverty more stringent than the World Bank's. But that's not the end of it. In China, the PPP estimates are biased. They are based on an international comparison of prices overseen by the World Bank but carried out by China's National Bureau of Statistics. It looked at prices in 11 Chinese cities. But China's cities are much more expensive than China's villages. Some effort was made to correct for this, but not enough. Shaohua Chen and Martin Ravallion argue that the price level the NBS reported was 37% higher than the rural prices China's villagers face. If that's the case, then China's new poverty line is equivalent not to $1.33 per day, but to $1.83 per day (1.334*1.37) in 2005 $PPP. That is comfortably higher than the World Bank's global standard. But it's still a miserable existence.