Led by surging exports, China's economy grew by 9.9 percent last year, the government announced Wednesday, underscoring the swiftness by which this once insular communist country has remade itself into a global trading power.
The rapid expansion appears to move China's economy ahead of those of Great Britain, France and Italy to become the world's fourth-largest, although many countries have yet to report their final 2005 economic data. Over the past decade, China's output has more than doubled in size as the country's transition toward capitalism has progressed, turning farmers into factory workers and linking the fortunes of its people to the appetites of shoppers in the United States, Europe and Japan.
Yet the news also increased concern that China could be growing too fast, despite measures aimed at cooling the hottest parts of the economy. Aggressive investment has produced too many factories, heightening trade tensions with the United States as China exports surplus wares such as steel, depressing prices globally. Chinese officials worry that unneeded plants could deliver a crippling era of deflation -- falling prices -- which hurts profits and reduces incentives for companies to invest. Such a syndrome kept Japan mired in recession and unemployment for much of the past 16 years.
"Overcapacity is dangerous," said China's leading statistician, Li DeShui, speaking at a media briefing in Beijing, according to a transcript on the Web site of the official New China News Agency. "It will cause huge waste, and will especially generate huge bad loans for banks. For some businesses, it will cause losses and even closures, which will lead to rising unemployment."
Li emphasized that China is not yet facing this problem, with inflation still at a healthy 1 percent. He pronounced himself "cautiously optimistic" about China's economic prospects this year.
A troubling picture
State data paint a troubling picture. Steel capacity already outstrips domestic demand by 120 million tons a year, and new mills that would add an additional 70 million tons are under construction, according to the National Development and Reform Commission, a unit of China's governing State Council. Chinese automakers saw profit margins plummet last year as ultra-low-priced vehicles came on the market, and as dramatic expansion brought production capacity to 2 million more than China's annual sales.
Still, some say fears of overcapacity are overblown: Even as the supply of everything from aluminum to motorcycles swells, the underlying demand for the trappings of modern life within this land of 1.3 billion people should not be underestimated. China's appetite for new housing, roads and vehicles will eventually put the extra plants to work, some economists say.
"There's no question that there's demand," said Jonathan Anderson, chief economist for Asia at UBS Investment Research in Hong Kong. "Local governments want to build science parks and subways, and people want to build houses. And now [Chinese authorities] are actually letting stuff get built again."
Anderson argues that the growth of manufacturing capacity is slowing -- a sign that it will eventually disappear.
He cites the Chinese steel industry, which saw capacity grow by nearly 40 percent in 2004 and 2005. This year, he said, capacity will continue to grow, but by only 10 percent. At the same time, growth in demand for steel will bounce back to about 18 percent this year, after decelerating to about 7 percent last year as the government clamped down on development.
"You've got spending going on," Anderson said. "Overcapacity is actually going to be going away."
Unreliable economic data
China's economic data is notoriously unreliable, and many say the data fail to capture the true magnitude of the economy. Last year, the government restated several years' worth of economic data when a nationwide census discovered that millions of mostly private service companies had previously been left out of the calculation. In one shot, the government declared that China's economy was 17 percent bigger than it had previously realized -- the statistical equivalent of finding an Austria lying around uncounted.
On Wednesday, speaking at the World Economic Forum in Davos, Switzerland, Zhu Min, an executive at one of China's largest state banks, said the economy remains underestimated.
"There's another 15 percent to 20 percent space for China to grow," Zhu said, according to Bloomberg.
Whatever the real rate of growth, the ceaseless clatter of machinery that has become the national soundtrack and the construction cranes hovering over every urban skyline attest to the dramatic expansion, one that has refashioned China and its relationship with the rest of the world.
Last year's growth was propelled largely by exports, which leapt 28 percent, leaving China with a $102 billion global trade surplus. Manufacturing trade groups in the United States, Europe and developing countries argue that much of this success is a result of China's maintaining its currency, the yuan, at an artificially low value, making its goods unfairly cheap on world markets. Congress is considering a bill that would slap across-the-board punitive tariffs on Chinese goods if Beijing does not significantly raise the value of the yuan. China counters that it is being made the scapegoat for the loss of factory jobs elsewhere.
China's growth has prompted Beijing to dispatch state oil firms around the globe in search of new energy supplies. This has stoked a historic rivalry with Japan for access to Russia's Siberian oil fields. It has sent Chinese investment into Africa, Latin America and Indonesia, and has provoked accusations in Washington that China's thirst for energy threatens U.S. interests. Chinese demand is a key factor behind the recent spike in world oil prices.
Within China, years of rapid growth have sown concern that new wealth is not being shared equally, with much being stolen from the poor via corrupt land acquisitions by Communist Party officials. Recent years have seen sometimes-violent protests around the country as farmers complain they are being pushed off land without just compensation. Last week, Premier Wen Jiabao pledged that more investment had to be directed into poor, rural areas to address the growing income gap.
Growth last year brought China's overall economic output to $2.26 trillion, according to state data. But its rapid growth still leaves China's economy at less than one-fifth the size of the world's largest -- that of the United States, whose output reached $11.7 trillion in 2004.
Special correspondent Eva Woo contributed to this report.