China to join top 3 economies

By Don Lee

July 20, 2007 12 AM PT

Times Staff Writer

SHANGHAI —

China’s economy grew at an extraordinary rate of 11.9% in the second quarter, the fastest clip in more than 12 years and a pace that puts the nation on track to overtake Germany this year as the world’s third-largest economy.

For the last 35 years, the United States, Japan and Germany have ranked 1-2-3 in gross domestic product, but as growth in those mature economies has slowed, China’s has accelerated, powered by foreign investments and trade amid a global shift in production activity to the Far East.

Just 12 years ago, China’s economy ranked No. 8, behind Brazil’s, and was less than one-third the size of Germany’s.

But figures released in a report by China’s government Thursday show increasing challenges ahead for Beijing: surging inflation, breakneck investments in factories and a dramatic jump in exports that is stoking tensions between China and its major trading partners, particularly the United States.

For the first half of the year, China’s trade surplus with the rest of the world reached $115 billion, up 85% from a year ago.

In recent months, the U.S., Japan and Mexico have filed or joined complaints with the World Trade Organization that accused China of illegally subsidizing exporters.

Washington has also taken China to the WTO over piracy issues, and members of Congress are threatening to impose hefty tariffs on Chinese imports if Beijing doesn’t change its currency policy, which some believe gives China an unfair advantage in global markets.

While China’s economic transformation has lifted millions out of poverty, its 1.3 billion people have a long way to go before their standard of living catches up with those of the other top economies.

The government’s intense focus on economic growth has led to environmental degradation and violent clashes as farmland is appropriated for development.

Shoddy manufacturing and tainted food products from China have recently damaged its reputation worldwide.

Ordinary Chinese were incredulous at the notion that China’s economy, by any measure, could surpass Germany’s.

“It’s impossible,” said a 42-year-old Shanghai merchant named Wang. “There is no way that China can compare with Germany. For example, I have an electric shaver my friend bought for me from Germany, and I have been using it for many years and it is still working well. But for domestic ones, no matter how many I buy, each one breaks soon.”

Analysts said the latest statistics signaled an overheating Chinese economy that would probably prompt the government to raise interest rates and take other measures to slow growth. But rate hikes in the past and other top-down controls have had little effect.

In the second quarter, China’s gross domestic product, or total value of goods and services generated, expanded by 11.9% from a year earlier, far higher than expectations and ahead of the 11.1% increase for all of last year.

By China’s calculations, its GDP in 2006 was about $2.7 trillion. Germany’s was $2.9 trillion, based on International Monetary Fund data, but its economy, like those of the U.S. and Japan, has been growing at a fraction of the rate China’s has. The U.S. remains far ahead of the rest of the world in GDP, with $13.2 trillion in 2006.

Chinese leaders often have said they want more balanced and sustainable growth.

But at the local level, many officials seem to strive for the highest numbers they can achieve, seeing them as a key basis for their job evaluation and promotion. So they approve new plants and projects, sometimes indiscriminately, in an effort to boost tax dollars, employment and overall growth figures.

Through June of this year, investments in factories, roads and other real estate projects climbed by 26% from a year earlier. The new construction is soaking up more energy and adding to the pollution that is filling China’s air and waters, and sometimes spreading beyond its borders.

In a report released this week, the Organization for Economic Cooperation and Development said Beijing had been ineffective in countering the negative effects of its rapid economic development and industrialization.

China’s “air pollution levels in some cities are among the worst in the world, one-third of water courses are severely polluted, and illnesses and injuries are associated with poor environmental and occupational conditions,” the report said, adding that China was poised to overtake the U.S. as the top emitter of greenhouse gases.

Rising inflation is another worry. Consumer prices jumped by 4.4% in June from a year earlier after moderate increases of about 2% last year.

Food prices have soared, largely a result of higher grain costs, a shortage of pork in the wake of a disease outbreak on pig farms, and greater demand by consumers for meat. Government statistics showed meat and poultry prices in June were up 20% from a year ago, and egg prices were 28% higher.

In the last two decades, economists said, almost every inflationary crisis began with food price hikes. And it is starting to pinch consumers.

“It’s not like food prices suddenly rose, but little by little,” said Qu Xilin, 25, a newspaper vendor in Shanghai who said he earned almost $400 a month but spent less than $1.25 a day on meals. “But what can I do? I have to eat every day.”

It isn’t just food. The cost of textiles, home appliances and services such as education and medical care are moving a bit too fast as well, said Zhu Baoliang, chief economist for the State Information Center Economy Forecast Department, a government-affiliated group.

“There is excessive demand ... we should be wary of such a trend,” he said.

Beijing has taken steps to keep inflation in check, discouraging certain investments and bank-lending through a variety of measures. The government this month cut or abolished a variety of rebates for exporters.

The United States, China’s largest trading partner, reported a $232.5-billion trade deficit with China in 2006, and this year’s figure was expected to be higher.

That has led to sharp calls from some American business groups and politicians to step up pressure on China to revalue its currency, the yuan, which it allows to trade only in a narrow range. The yuan has risen about 7.5% against the dollar in the last two years, but critics say it is undervalued by as much as 30%, giving Chinese exporters an advantage in global markets.

Beijing has insisted on maintaining its currency strategy, not wanting to jolt exporters and risk the loss of jobs and rising incomes.

Despite China’s overall size and growing clout in the global economy, Chinese officials and scholars say the country is still developing and grappling with critical issues of lifting millions out of poverty and reducing the widening income gap between the city and countryside, where most Chinese live.

The figures released Thursday showed retail sales in the first half of the year jumped by 15% from a year earlier. Average incomes after taxes also rose briskly during the period. For the first six months, average disposable income for urban dwellers rose 14% to $921. For rural residents, it rose 13% to about $276, the government said.

“Being the world’s third-largest is not that significant,” said economist Zhu. “It’s the quality of life.”

don.lee@latimes.com

Cao Jun of The Times’ Shanghai bureau contributed to this report.

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Rising dragon

China is among the biggest economies, but with a huge population, individual incomes are low.

2006 GDP (in trillions)

U.S. -- $13.2

Japan -- $4.4

Germany -- $2.9

China -- $2.7*

*China’s estimate