China now world’s second-largest economy, says PBoC’s Yi

China has overtaken Japan as the second largest economy in the world, Yi Gang, a vice governor of the People's Bank of China and the head of the State Administration of Foreign Exchange (Safe), said on Monday.

People's Daily, a state-owned newspaper, reported Yi in an interview with China Reform magazine posted on the State Administration of Foreign Exchange website as saying: "China, in fact, is now already the world's second-largest economy." It was unclear what Yi was referring to as his source of information.

China is already the second largest economy in purchasing power parity terms. Latest estimates from the CIA for 2009 put China's GDP at $8.78 trillion, compared to Japan's $4.13 trillion at purchasing power parity. At the official exchange rate, Japan's GDP for 2009, at $5.108 trillion, edges that of China, at $4.814 trillion.

Stephen Lewis, the chief economist at Monument Securities, a brokerage, told CentralBanking.com it was very likely that China had overtaken Japan this year because they were not far behind last year. "China is growing in double digit terms, while Japan has been doing decently they are growing no more than 3% at a nominal rate, so it wouldn't take much to overtake Japan," Lewis said. "It wouldn't surprise me if China came ahead of Japan when the 2010 figures are compiled," he said.

Mark Williams, a senior economist at Capital Economics, a research consultancy, told CentralBanking.com: "In the context of what happened to Japan and the Asian tigers, it is inevitable that China's long-run growth will slow as it catches up with the developed world."

China's economy has held up remarkably well during the global recession, during which GDP growth rose by 8.7% in 2009. Growth was bolstered by a massive investment-led stimulus package that led by a surge in bank lending. Japan has also benefited from fiscal and monetary stimulus measures introduced in China, which have helped boost exports and led to a 5% rise in GDP during the first quarter of 2010. However, this effect is likely to rescind in the next few months as a sharp appreciation of the yen against the euro is making Japanese products more expensive and less competitive. Japan has struggled to compete with its East Asian neighbour and continues to be blighted by weak domestic demand and deflation.