Chinese Economy Overtakes Japan

[Ryan Ruck]

Chinese Economy Overtakes Japan

12/26/2009

China has almost certainly overtaken Japan to become the world's second-biggest economy after state officials dramatically upgraded their estimates for the country's growth last year.

The fast-growing emerging economy had been expected to surpass Japan next year, but the transition looks to have happened in 2009, based on China's new growth estimates. Its statistics bureau said that China grew by 9.6pc – rather than 9pc – in 2008, meaning its economic output was 31.405 trillion yuan, or $4.6 trillion (£2.9 trillion), last year.

According to the World Bank, Japan's annual output was the equivalent of $4.9 trillion last year, but it is expected to shrink by 6.6pc this year. Meanwhile, Chinese officials project that its economy will grow by more than 8pc this year. It means it is likely that China became a larger economy than Japan some time in the second half of this year.

Statisticians said the bigger-than-expected expansion last year was fuelled largely by strong growth from the services sector, something which was only uncovered after a detailed census into economic activity during the year. The revisions continue a recent trend of officials upgrading their estimates for previous years' economic growth.

In 2005, its statisticians dramatically upgraded their estimates of the size of the economy, catapulting it over Britain to become, at the time, the world's fifth biggest economy.

Peng Zhilong, the head of the bureau's national economy calculation department, said that the main difference was in the overall size of the economy, rather than its growth rate, adding that China would expand by more than 8pc this year.

David Cohen, of Action Economics in Singapore, said: "The big underlying factor propelling China's growth is the migration of people from the agricultural sector to the more modern economy – industry and services. There's no stopping China."

But although China's breakneck expansion looks likely to continue for some time yet, there are concerns over the country's path.

Some economists compare China's position – with the authorities combining low interest rates with high government investment and rising asset prices – to Japan in the late-1980s, warning that it, too, could fall victim to a crash.

Some worry about the country's demography. The one-child policy means that in the coming years its population is likely to age extremely quickly, increasing the pressure on its public finances and dampening its long-term growth prospects.

Nevertheless, the news about the country's strong growth will add to hopes that it will help support the wider world economy out of recession next year. Whereas 2009 was the year that brought the first worldwide economic contraction since the Second World War, the opening quarter of 2010 is expected to see the major economies back in growth again.

Although Britain contracted by 0.2pc in the third quarter of 2009, according to the latest official statistics, it is expected to move back towards growth in the final quarter of the year.

However, economists said the first quarter of 2010 would be marked by increasing tension over the fiscal position of various countries. Having had to borrow unprecedented amounts in order to prevent a deeper recession, a number of countries have generated large deficits, which may scare off international investors.