Services sector plays major role in surging Chinese economy

China is even bigger than anyone thought and after a year of powerful growth, the world's fastest-growing major economy looks set to keep getting bigger next year.

Optimism about China's prospects going into 2006 has been inspired by revisions to the country's gross domestic product (GDP) data, which catapulted China into fourth place in the world, passing France, Italy and Britain, if you factor in Hong Kong.

China's economy is around 17 per cent bigger than previously thought, a wide-ranging new survey showed, and is less reliant on exports and manufacturing than analysts feared.

Crucially, the survey revealed that the services sector is playing a major role in Chinese growth, which is good news for the economy going forward. The statistics bureau raised the size of China's economy in 2004 by nearly 18 per cent to 15.988 trillion yuan (€1.67 trillion). It's the equivalent of adding Austria's annual output to the Chinese economy and puts China into sixth place in the world GDP rankings if you strip out Hong Kong.

Some analysts are forecasting that China will overtake the United States by 2012.

"Based on these figures, we can have even more confidence in our long-term fairly fast and sustained economic growth," was how the statistics bureau chief Li Deshui put it.

Putting a figure on all this growth has proven quite a task, particularly as the services sector was not figuring strongly enough in the data.

The shortcomings in Chinese statistics are largely due to a central planning legacy that put priority on collecting data on the production of physical goods from state-owned enterprises. Also, statisticians have been less successful in tallying the impact of the boom in small and medium-sized industrial enterprises.

So the statistics bureau surveyed 30 million businesses, including the restaurants and karaoke bars, as well as traditional factories.

Analysts say the survey was long overdue and believe the new data put China's economy on a better footing and in an improved position for more sustained growth.

"A higher GDP base means a lower, more realistic investment/GDP ratio, a lower saving/ GDP ratio and a higher consumption share. And with more realistic numbers, the macroeconomy looks much more sustainable - a key part of our 'soft landing' call for the economy," UBS chief economist Jonathan Anderson said in a research note.

For the last 25 years, the engine of development in China has always been industry, but that appears to be slowing, which heralds a more sophisticated economic growth.

Exports, for example, now account for 29 per cent of the economy instead of 34 per cent, which Deutsche Bank analyst Jun Ma said cut China's "very high export dependency".

That said, to see how China's services sector is growing, you only have to open your eyes. The sight of a clapped-out, red Xiali taxi, is a rare one these days on the streets of Beijing, since they switched this year to sleek new Hyundais with green and golden livery - public evidence of strong growth.

The skyscrapers are going up in Beijing and Shanghai, the factories of Shenzhen and Shenyang are humming and there are more and more karaoke bars springing up from Guangzhou to Hangzhou.

Per capita GDP was $4,970 (€4,190), which is $1,457 more than previously thought and getting very close to the magic $5,000 level.

The government expects the economy to grow by a little more than nine per cent in 2005 and by around the same level next year. This is in line with the average nine per cent growth seen in China in the last quarter century since the country began to open up, and over 400 million people have been lifted out of poverty.

Some analysts, such as Jim O'Neill, chief global economist at Goldman Sachs in London, believe China's currency revaluation this year, which has seen the yuan rise about 2.5 per cent against the dollar, means that in dollar terms, China's output has risen very fast.

The fact that Chinese manufacturing is so strong is an irritation to policymakers in Washington, who believe the 2.1 per cent revaluation of the yuan was too little in the light of China's soaring productivity.

Wary of political pressure from the US to raise the value of the yuan even further, the Beijing government is keen to emphasise that China remains a developing country. They say that because of China's huge population of 1.3 billion people, the nation still ranks below the top 100 countries in output per capita.

"The international community shouldn't think that because there's been a little bit of change in the data, China is all of a sudden exceedingly powerful. We still have a long way to go to catch up with the developed countries," said Mr Li.

But it certainly is developing fast. Recent data from the Organisation for Economic Co-operation and Development (OECD) showed that China overtook the US in 2004 as the world's leading exporter of high-tech goods such as laptop computers, mobile phones and digital cameras.

China exported €152 billion worth of information and communication technology goods in 2004, compared with US exports of €126 billion, according to the OECD.

Analysts don't expect any let- up going into 2006 as China - and the rest of Asia - reaps the fruits of strong global demand.

That said, there are uncertainties going into next year, including doubt about how long China's investment boom can keep barrelling along. The headline growth figures are robust, as are the numbers for investment in fixed assets, such as plant and machinery, but foreign investment and some imports have slipped slightly, which some analysts read as a sign that China is past its peak.