China’s relentless growth continues and looks set to push the country from being the number three economy in the world, overtaking Japan to take second place behind the US. China’s National Bureau of Statistics has upgraded the 2008 figure to $4.6 trillion and with growth generally acknowledged as more than 9% for 2009 and while Japan contracts, that should put China above Japan in 2010. 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 6.6% this year said a post in the Telegraph newspaper.
“The big underlying factor propelling China’s growth is the continued migration of people from the agricultural sector to the more modern economy — industry and services,” said David Cohen, an economist at Action Economics in Singapore reported in the Washington Post. In the longer term that is no doubt correct but in the short term growth has been fueled by a massive stimulus program both in terms of infrastructure investment and bank lending estimated to have doubled from a year ago and dangerously set to continue. According to another Telegraph article, Chinese banks pumped 10 trillion Yuan ($1450bn) into the economy this year and they are expected to inject another 8 trillion Yuan in 2010. This might appear like retrenchment, but that is still nearly twice the 4.6 trillion Yuan of the loans disbursed in 2008 according to the article.
As exports have slumped of course the authorities have had to keep the financial tap turned wide open in order to keep growth going and markets hungry for all the massive capacity investments that have come on stream. Steel, cement, aluminum are all running at close to capacity with limited export markets. So an early curtailment of stimulus measures would result in massive over production and widespread unemployment. Which is why the stimulus program will continue well into 2010 and why the risk of inflation will become a more entrenched problem for China over the next two years. There is not much doubt that China is going to overcome Japan as the second largest economy next year, or that once that milestone is passed China will not continue to expand for the rest of the decade. Although global growth is slow and export markets remain weak, China is going to be stoking the fires of internal inflation with its domestic stimulus programs and some day there will be a reckoning. Phenomenal as the last decade has been it is hard to see how a China less reliant on exports can continue to grow at near double digit rates and not fuel an inflationary bubble that is going to be painful to solve.