Wednesday, March 27, 2013

China on course to become world's largest economy by 2016: OECD

China is on course to become the world's largest economy "around 2016", according to a survey by the Organisation for Economic Cooperation and Development (OECD).

"From a long-range perspective, China has now overtaken the euro area and is on course to become the world's largest economy around 2016, after allowing for price differences," the Paris-based group said.

Living standards will continue to improve fast, provided reforms are implemented, most of which feature in the 12th Five-Year Plan (2011-15).

With USD 8.3 trillion, China is the second-largest economy. It stands next only to United States which has a USD 15.7 trillion strong economy.

The OECD has predicted that China will grow at 8.5 per cent this year from last year's 7.5 per cent, and that the economy is set to regain momentum.

"The gradual pick-up in activity provides a strong background for the ambitious reforms China needs to put in place to continue on the road to prosperity," OECD Secretary-General Angel Gurria said.

China is well placed to enjoy a fourth decade of rapid catch-up and improving living standards, notwithstanding various risks, the OECD said.

The new economic survey of China examines three closely interlinked sets of issues -- urbanisation,  relation between the central and local governments, and the environment.

To sustain vigorous and socially inclusive growth over the longer run, "renewed reform momentum is required with respect to financial sector liberalisation, open competition in markets for goods and services,education, research and innovation, all are as highlighted in the 12th Five-Year Plan (2011-15)", the OECD said.

China has already overtaken the EU as the second largest economy in the world, and can be expected to surpass the U.S. economy as the world’s biggest economy around 2016, according to the Organisation for Economic Co-operation and Development (OECD).

This is just one of the conclusions the OECD puts forth in the latest edition of its Economy Survey of China report, which was released on Friday.

The update to the OECD’s 2010 Economic Survey of China paints a highly optimistic picture about the prospects for the Chinese economy in the years ahead.

In the near term the Paris-based organization expects China’s economy to grow by 8.5 percent in 2013—up from 7.8 percent in 2012— and even more (8.9 percent) next year. Growth will average about 8 percent over the next decade, the report forecasts.

While noting that the Chinese economy slowed down significantly in 2011 and 2012, the OECD concludes that China’s “rebalancing has made headway and a gradual reacceleration is in train.”

Specifically, the OECD commends the rebalance of China’s economy for pushing the current account surplus down from 10 percent of GDP in 2007 to less than 3 percent today. Inflation has also been brought under control after peaking at 6.6 percent in the middle of 2011 after the enormous financial stimulus package increased the money supply within China by a stunning 30 percent in 2009 alone.

Notably the report concludes that growth in the economy is increasingly coming from domestic consumption compared with investment. To encourage this trend further, the OECD says the country will need to continue to encourage greater urbanization.

More than half the Chinese population already lives in cities, and within China’s cities the per capita income is now as high as some countries within the OECD itself, in no small part due to productivity gains over the past decade.  Furthermore, Premier Li Keqiang has already indicated that accelerating the pace of urbanization will be a top priority of the new administration.

Despite this overall highly favorable assessment of China’s economic prospects, the OECD does highlight a number of potential challenges that could potentially slow growth, including the violate state of foreign markets and the growing environmental costs of Beijing’s economic growth policies.

However, it devotes particularly attention to the risks China’s booming shadow banking industry are creating, and estimates that “taking into account various off-budget forms of debt,” total public debt was 57% of GDP by the end of 2010.