With a minimum of fuss and fanfare, the deputy governor of the People’s Bank of China informed the international press on the 1st of August that China had dislodged Japan from its position as the second-largest economy in the world. China’s gross domestic product (GDP) at the end of 2009 stood at roughly $4.99 trillion compared to Japan’s $5.04 trillion. However, with the 11.1 per cent growth that China saw in the first half of 2010, its GDP has already reached $5.54 trillion. Even if Japan were to achieve its growth target of 2.6 per cent this year, it would end the year with $5.2 trillion, considerably behind China. Incidentally, in purchasing power parity terms, China has for a few years occupied the second spot in the global ranking after the US.
The fact that Chinese officials are not quite shouting from the rooftops about this achievement perhaps reflects the myriad problems that confront the economy and that could potentially slam the brakes on growth. For one, China’s political establishment is all too aware of the fact that despite its size, it is way behind Japan or the western industrialised economies in terms of standard of living. For instance, China’s per capita income of $3,600 is still a fraction of Japan’s $37,800. Rapid growth has bred galloping inequality that has brought its share of social tension. Besides, in its quest for maintaining its spectacular growth rate, China has flouted many a textbook rule and canon. Its labour markets have been heavily controlled, banks have been directed to lend to projects that have bred excess capacity (saddling banks with over 20 per cent in non-performing loans) and its central bank has kept monetary policy extremely slack, inflating bubbles in China’s property markets in the process. Doomsayers have been predicting a sharp slowdown if not a collapse in China’s growth rates for at least a decade now but have had to eat crow. However, now there seems to be a niggling fear among the Chinese authorities that they cannot get away much longer with their idiosyncratic ways.
There are two specific issues that are top-of-mind for China’s policy-wallahs. The first is the fragility of China’s banks that have lent rather recklessly both to industrial projects and residential housing. As far as mortgage loans are concerned, some analysts are now pointing out to the risk of the next sub-prime crisis occurring in China’s overheated property markets. Thus, China’s banks are making a mad scramble for capital to plug solvency and liquidity gaps — the behemoth China Agricultural Bank made an initial public offer of $20 billion in July to shore up its capital base. They are also cutting back on lending. The second problem is that of rapid wage escalation, particularly in the interior provinces that have emerged as the new growth engines for China. Wages for garment workers in China, for example, went up by as much as 14 per cent in 2009.This could blunt China’s edge in manufacturing exports and stifle growth. China’s policy-makers are wise enough to know that becoming number two is no guarantor of further growth, as stagnating Japan has shown for the past two decades! China has many developmental challenges to face and it will remain focused on them, even if the hubris of some hotheads makes its political leadership become excessively assertive at times.