China Now the World’s No. 3 Economy, Supplanting Germany

By Don Miller
Contributing Writer
Money Morning

An upward revision in China's growth figures allowed it to leapfrog Germany to become the world's third-largest economy in 2007. Now the Red Dragon is snapping at Japan's heels in the quest to become No. 2 in the world's economic pecking order.

"I think it will take only three to four years for China to overtake Japan as the second-largest economy in the world," Merrill Lynch economist Ting Lu, told the Associated Press. Catching up with the United States could take decades, he added.

In a complicated recalculation, the Chinese government yesterday (Thursday) revised its growth figures for 2007 from 11.9% to 13%, bringing its estimated gross domestic product (GDP) to $3.4 trillion - about 3% larger than Germany's $3.3 trillion for the same year, based on World Bank estimates.

The news came sooner than expected, confirming a seismic shift in global economic power. It took just two years to complete the move from fourth to third after China overtook Britain in 2005.

Germany's per capita GDP, at $38,800, is still far ahead of China's $2,800 per capita GDP in 2007, as the country has wide disparities of wealth and poverty. Chinese officials say more than 100 other countries have a higher income per person, the Associated Press reported.

China set out on the road from communist central planning to a market-style economy in 1979 when its GDP was just $300 billion - one-tenth of the 2007 level - according to the International Monetary Fund.

Now, it has set its sights on Japan. Although the world's top economies - the United States and Japan - are suffering through a withering recession, even the most pessimistic growth estimates for China's GDP in coming years run about 5%.

If China were to maintain its current level of growth, it would overtake Japan - with a current GDP of $4.3 trillion - in just a few short years.

The U.S. economy, the world's largest, was about $13.8 trillion in 2007. At its current rate, it would take China just 18 years to depose the United States as the world's No. 1 economy, according to the Washington Post.

However, the question of whether or not China will continue to grow at its current pace has been complicated by the global recession, which has resulted in massive layoffs and waves of factory closures, especially in southeastern China, the center of its export-driven economy.

Michael Santoro, author of the 2008 book "China 2020," told CNN. China will have other problems to overcome if it is to maintain its rapid expansion.

"It's no longer sufficient for China to become a manufacturer of sneakers or toys and the like," Santoro said. "Now they're looking to become players in the area of pharmaceuticals and foods and other high value-added products, where safety and quality are important characteristics for improving in the global economy."

Independent economists estimate China's economy grew by another 9% in 2008 despite the global downturn. Figures for 2008 are expected to be released this month.

But economists have slashed 2009 forecasts to as low as 6%. That would be the highest of all the world's major economies, but still worries communist leaders who need to satisfy a public already concerned over thousands of recent manufacturing layoffs.

But don't expect China to sit by twiddling its thumbs while the recession hammers its economy.  In a Money Morning Outlook 2009 report we described how the People's Republic has already announced a $586 billion (4 trillion yuan) spending package.

To put that in perspective, this plan amounts to a staggering 20% of China's gross domestic product (GDP). Compare that to the $1 trillion in U.S. bailouts, which equate to about 8% of GDP.

And in further response, China's State Council on Wednesday laid out a new plan to boost its steel and auto industries - including about $1.5 billion to develop alternative-fuel vehicles.

News and Related Story Links:

  • Associated Press:
    China passes Germany for world's third largest economy