China Overtakes Japan as No.2 Economy

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

China's growth rate, which has averaged more than 9.5 percent a year over the past 30 years, was bound to slow over time. If China could chalk up growth this decade of 7-8 percent annually, that would still be a strong performance. The issue was whether fast growth can be sustained. If China expands by 5-6 percent a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history.

The expectations of a stronger Yuan, also known as the Renminbi. 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.

MODEST AMBITIONS FOR YUAN

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." Comments are unlikely to go down well in Washington, where lawmakers have scheduled a hearing for Sept. 16 to consider whether U.S. government action is needed to address China's exchange rate policy.

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

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. "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.

Source: www.economictimes.com

Thanks,

Minita Aiya

Client Service Associates

DENIP Consultants Pvt. Ltd.