China: Unstoppable powerhouse, or ‘more like us’? | FT Alphaville

China: Unstoppable powerhouse, or ‘more like us’?

Yes it might well be China’s year, or decade – or century, for that matter. But for now, at least, it’s China’s week, with leader Hu Jintao’s visit to the US generating a frenzy of deals and media coverage. And now, figures from Bejing reveal that the economy continues growing at a red-hot pace.

As the FT reports on Friday (emphasis ours):

Concerns the Chinese economy is overheating mounted after offical figures revealed the economy grew faster than expected at the end of last year and inflation remained above target.

Meanwhile, Guangdong added to the fears after China’s biggest provincial economy increased its minimum wage by 18 to 26 per cent, the second big increase in less than a year.

The national economy expanded at an annual rate of 9.8 per cent in the final quarter of 2010, and grew 10.3 per cent for the entire year.

Consumer price inflation, a growing worry for policymakers, fell to 4.6 per cent in December from a more than two-year high of 5.1 per cent the previous month.

However, analysts said the moderation was mostly due to a high base the year before, and that prices would accelerate strongly in the first quarter of this year, complicating efforts to cool the economy without triggering a sharp slowdown.

For the whole year, consumer prices rose 3.3 per cent, above Beijing’s target of 3 per cent. Food prices, the main driver of inflation, rose 7.2 per cent for the year.

The figures seem to pretty well cement China’s position as the world’s No 2 economy, behind only the US – and ahead of Japan.

Japan doesn’t report year-end GDP data until mid-February, but as ChinaRealTime notes, “any suspense that remained over whether China vaulted into the No. 2 spot in the global economic rankings in 2010 is pretty much gone after China’s latest economic growth figures”.

China’s rise in the GDP rankings has seemed likely since last August, when data showed that its economic output topped Japan’s in the second quarter. But this time, outpacing Japan in an early quarter is seen as a good indication that China has the economic oomph to surpass Japan for the full year, CRT notes.

By its calcuations, China’s 10.3 per cent growth in 2010 to Rmb39.798 trillion equates to $5.88 trillion, based on an average 2010 exchange rate of Rmb 6.768 to the dollar.

The IMF forecast in October that Japan’s GDP would total Y477.327 trillion, or about $5.4 trillion this year, making China about 8 per cent bigger, it notes. US output, by comparison, is on track to reach about $15 trillion this year.

In spite of slightly stronger growth in late 2010, Japan has seen industrial output fall as other indicators weaken, and is not showing any sign of delivering the sort of “miraculous late-year economic boom it would need to maintain the global GDP runner-up status it has held since 1968”, CRT concludes.

Indeed, Japan’s newly appointed minister for economy and fiscal policy, Kaoru Yosano, was prompted to say on Thursday that “the Japanese people should welcome our neighbor China’s growth” as he conceded that China’s economy had surpassed Japan’s.

While there’s some debate about the level of Chinese economic growth this year, economists seem to widely agree that some upward pressure on consumer prices – and therefore some more tightening, will be in order.

Hong Kong-based research house Gavekal notes in a client newsletter on Friday that investment remains the biggest contributor to Chinese growth, accounting for 5.6 percentage points of GDP growth in 2010.

But, it adds (emphasis ours):

This contribution was well down from 2009, when capital spending contributed 8.7pp, or 95% of GDP growth for the year. The big reason why China’s economy performed better than expected in 2010 was a huge turnaround in net exports, which contributed 0.8pp, after subtracting -3.7pp in 2009. China’s surprisingly strong export performance (up +31% YoY) reflects both the resilience of global demand and the continued competitiveness of China’s exporters.

As for all the talk of rising wage and material costs in China, Gavekal takes a sanguine view, noting: “costs are rising even faster in other developing countries, so Chinese exporters continue to pick up market share”.

But economic commentator Paul Krugman sees China’s glass as half-full, writing in the New York Times:

With Hu Jintao, China’s president, currently visiting the United States, stories about growing Chinese economic might are everywhere. And those stories are entirely true: although China is still a poor country, it’s growing fast, and given its sheer size it’s well on the way to matching America as an economic superpower.

What’s also true, however, is that China has stumbled into a monetary muddle that’s getting worse with each passing month. Furthermore, the Chinese government’s response to the problem — with policy seemingly paralyzed by deference to special interests, lack of intellectual clarity and a resort to blame games — belies any notion that China’s leaders can be counted on to act decisively and effectively. In fact, the Chinese come off looking like, well, us.

How bad will it get?, he asks. Warnings from some analysts that China could trigger a global crisis seem overblown. “But the fact that people are saying such things is an indication of how out of control the situation looks right now”.

That would make all the talk about China becoming the world’s No 1 economy a rather distant prospect. But — who knows? A pictorial comparison in the Atlantic on Thursday is a powerful reminder of just one small change that China, or more specifically Shanghai, has achieved in 20 years.

Related links:
In-depth report: China shapes the world –
Chinese growth in 2011 – China Financial Markets
Gavyn Davies: China has exceeded its speed limit –
Nicholas Kristoff: The rise of Chinese Cheneys – NYT