China: a developing country and the world’s second largest economy

Has China cornered the market in superlatives? The country is now the world’s biggest market for passenger vehicles (an estimated 15 million in 2010), the biggest importer of raw materials, the biggest steel producer and, since 2009, the world’s biggest exporter ahead of Germany. China is also in the process of becoming a major financial power, with Shanghai now the third largest stock exchange behind New York and Tokyo, with market capitalisation of some US$ 3 trillion.

Blistering economic growth

Last year, China recorded the highest number of initial public offerings (IPOs), mainly through the flotation of state-owned giants. The pattern looks set to repeat itself in 2010, after a public share issue by the Agricultural Bank of China raised a record US$ 22.1 bn, making it the biggest share flotation ever. The previous record-holder was Industrial & Commercial Bank of China which raised US$ 21.9 bn in 2007. This confirms the clout of China’s banking sector, now third worldwide. Add to this the US$ 2.4 trillion in foreign-exchange reserves held by China’s central bank that set the money markets quaking with each announcement. Lastly, China is now the world’s fifth largest investor, bankrolling US$ 52 billion in 2009 according to UNCTAD statistics.

In these conditions, the question on everyone’s lips has been not whether China can make it into the top two world economies, but when. Now we have the answer. After passing France, the United Kingdom and Germany, in the second quarter 2010 China unseated Japan from its 40-year run in the number-two spot, with GDP of US$ 1.33 trillion versus US$ 1.28 trillion for Japan. The difference in the two countries’ economic growth explains this particular leap forward. While China steams ahead with 10.3% growth between April and June (+8.7% in 2009 vs. -2.4% for the US), Japan’s economy has been stagnating for years, scraping just +0.1% for the same three-month period. While certain observers have pointed out that half-yearly statistics give Japan the edge, there can be no doubting that China will confirm its second-place position for the full year. The burning question now is when China will pull ahead of the United States, knowing that it accounts for a third of world growth.

A long-running paradox

Despite this, the Chinese “paradox” isn’t about to end. The second largest wealth-creating economy, China must still contend with some of the most impoverished populations with more than 150 million people (11% of Chinese) living below the poverty line. China has per capita GDP of just US$ 4,200 compared with US$ 46,000 in the United States, US$ 41,000 in Japan and US$ 40,000 in France. Average per capita income of US$ 3,800 ranks China 105th globally.

China’s leaders therefore responded realistically to the announcement that their country was now the world’s second biggest economy. “The quality of China’s economic growth must still be improved, whether in terms of quality of life, environmental protection, science or technology,” declared Commerce Ministry spokesman Yao Jian. His words were echoed in People’s Daily: “China’s economy is still that of a developing nation. The world’s second largest economy therefore isn’t the equivalent of the world’s second largest economic power.” Conclusion: it will be another 15 to 25 years before China overtakes the United States as the world’s major economy, and at least twice that before China’s standard of living comes close to that of the United States.