China overtakes Japan as No.2 economy

China overtakes Japan as No.2 economy

Beijing: China has overtaken Japan to become the world’s second-largest economy after the United States, the country’s chief currency regulator said in remarks published on Friday.

The economy expanded 11.1% in the first half of 2010, compared with a year earlier, and is likely to log growth of more than 9% for the whole year, according to Yi Gang, head of the State Administration of Foreign Exchange.

“China, in fact, is now already the world’s second-largest economy," he said in an interview posted on his agency’s website, Yi said China’s growth rate, which has averaged more than 9.5% a year over the past 30 years, was bound to slow over time. If China could chalk up growth this decade of 7-8% annually, that would still be a strong performance.

The issue was whether fast growth can be sustained, he said. If China expands by 5-6% a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history.

He said expectations of a stronger yuan, also known as the renminbi, had diminished. There was no basis for a sharp rise in the exchange rate, partly because the price level in China had risen steadily over the past decade.

“This suggests that the value of the renminbi has moved much closer to equilibrium compared with 10 years ago," he said in the interview with China Reform magazine.

Yi’s remarks carried an echo of a report by the International Monetary Fund on Thursday, which said the Chinese authorities viewed the yuan right now as closer than ever to equilibrium.

“At present, there is no basis for big fluctuations in the yuan. We have the conditions to keep a flexible exchange rate mechanism and we can keep the yuan basically stable at a reasonable and balanced level," he said.

Yi’s comments are unlikely to go down well in Washington, where lawmakers have scheduled a hearing for 16 September to consider whether US government action is needed to address China’s exchange rate policy.

China scrapped the yuan’s 23-month-old peg to the dollar on 19 June and resumed a managed float. The yuan has since risen only 0.8% against the dollar, and economists calculate that it has fallen in value against a basket of currencies.

Beijing had no timetable to make the yuan fully convertible, Yi said: “China is very big and its development is unbalanced, which makes this problem much more complicated. It’s difficult to reach a consensus on it." In the same vein, he said China was in no rush to turn the yuan into a global currency.

“We must be modest and we still have to keep a low profile. If other people choose the yuan as a reserve currency, we won’t stop that as it is the demand of the market. However, we will not push hard to promote it," he added.

China has been encouraging the use of the yuan beyond its borders, allowing more trade to be settled in renminbi and taking a series of measures to establish Hong Kong as an offshore centre where the currency can circulate freely.

But Yi said: “Don’t think that since people are talking about it, the yuan is close to becoming a reserve currency. Actually, it’s still far from that."

China would stick to the principle of holding its $2.45 trillion of international reserves in a mix of currencies and assets. The stockpile -- the world’s largest - was so big that it was impossible to adjust its currency composition in a short space of time, he added.

“We won’t be particularly bearish on the dollar at a given time or particularly bearish on the euro at another time," he said.