China threatened by its dependence on exports
Japan surpassed as the world's second-biggest economy
CHINA faces the threats of faltering demand for exports, rising wages and the risk of bad loans from record lending after surpassing Japan as the world's second-biggest economy last quarter.
The boost to China's "national pride" from the second- quarter milestone may not count for much if it fails to boost domestic consumption and reduce its reliance on exports and investment for growth, said Brian Jackson, an emerging-markets strategist at Royal Bank of Canada in Hong Kong.
The export growth and investment spending that powered China's three-decade rise from Communist isolation to emerging superpower is now at risk as US and European consumers cut back and the nation's 4trn-yuan (€459bn) stimulus winds down. The country's widening trade surplus also threatens to revive trade disputes with the US.
"For the past 30 years China replicated the export-driven growth model that got Japan to where it was in the early 1980s," said Patrick Chovanec, an associate professor at Tsinghua University in Beijing. "Look what happened to Japan then. It failed to adapt and lost its way."
Japan yesterday reported its economy expanded an annualised 0.4pc in the three months ended June 30, pushing it into third place behind the US and China.
The nation is yet to fully recover from a property and stock market crash two decades ago, when the Nikkei 225 Stock Average was four times its current level at its peak on December 29, 1989.
Japan's nominal gross domestic product for the second quarter totalled $1.288trn, less than China's $1.337trn, the Japanese Cabinet Office said. Japan remained bigger in the first half of 2010, the agency said. Japan's annual GDP is $5.07trn, while China's is more than $4.9trn.
China overtook the US last year as the biggest automobile market and Germany as the largest exporter.
The nation is the world's No 1 buyer of iron ore and copper and the second-biggest importer of crude oil, and has underpinned demand for exports by its Asian neighbours.
Four of the world's top 10 companies by market capitalisation are from China, including PetroChina Co, Industrial & Commercial Bank of China, China Mobile, and China Construction Bank.
"In the consumer market, which particularly interests us, we're seeing tremendous growth," Mark Mobius, who oversees about $34bn as executive chairman of Templeton Emerging Markets Group, said yesterday.
"The government has made it very clear that they want to de-emphasise exports as the leader of the economy and move more towards the consumer."
Still, a reliance on exports and investments has caused China's domestic consumption to fall to 35pc of GDP, the lowest of any major economy, from 45pc a decade ago, Societe Generale AG says.The Group of 20 has urged China to boost domestic consumer spending to help offset reduced consumption from debt-strapped consumers in the US and Europe.
"The key risk is that weaker global growth will undermine exports," said Jackson at Royal Bank of Canada.
"If Beijing attempts to offset that with a renewed surge in investment spending it will exacerbate overcapacity and risk overheating." (Bloomberg)