Over the Christmas period official data from the Chinese equivalent from our ONS revealed that China had overtaken Japan and is now the second largest economy in the world. On Sunday, more data, this time relating to China’s balance of payments, revealed that China is now the world’s largest exporter, having overtaken Germany.

Yesterday, it emerged that China has become the biggest market in the world for car sales In all 13.6 million cars were sold in China during the course of 2009, compared to a miserly 10.4 million in the US.

Mind you, the US auto market contracted by a horrific 21 per cent, so the US recession hastened the point when China moved into number one.

But from now on in, it seems inevitable China’s market share will just get bigger, leaving Uncle Sam eating dust.

Except, maybe not.

Chinese auto sales were aided by China’s own version of a cash for clunkers scheme, so that’s was a one off.

Then there’s this business of a Chinese investment bubble. Yesterday it was told here how China’s economy seems out of balance. Investment is surging ahead, creating an infrastructure that seems out of all proportion with the current size of the economy. Chinese house prices are going through the roof. See “The Great Bubble of China” http://www.investmentandbusinessnews.co.uk/bubbles/the-great-bubble-of-china/

The leap in auto sales may be a part of this bubble story. Van sales, for example, made up a high proportion of the growth, and this may be indicative of an unsustainable investment boom.

One of our readers, who has a fair bit of expertise on China, Olin Blackman, kindly sent us a photo, which we can’t use for copyright reasons, showing a sea of brand new Chinese police cars. Apparently, the photo first appeared in the Hong Kong press back in December and Mr Blackman astutely asked “How many other police forces and government departments have had new vehicles during the year I wonder. Or, put another way, how many of the record sales are real and how much is smoke and mirrors.”
So it seems we are left with two stories.

On one hand we see evidence that the world really has de-coupled. China and not the US is fast becoming the engine of growth – it already seems to be the engine for supplying the world’s credit.

On the other hand, there is this nagging doubt it will all end in tears.

The reality is this. China is enjoying such rapid growth because she quite simply has a lot of catching up to do. Her work force is well educated, and of course her work force is huge.
Up until the European Industrial revolution India and China had been the world’s two richest countries for hundreds of years. When Marco Polo the Venetian explorer first set foot in China he looked around in wonder.

China lost its position as the world’s largest economy because she shut herself off from the rest of the world. She is now growing, because China has realized this was isolationist policy that caused her so much economic angst.

China’s modern day success is down to China ditching the entrenched Chinese attitude of isolationism, and adopting a more open approach to the world. Those who fear China should remember this. The only reason why she is becoming so successful is because she has ditched the policies the west once feared.

Now China has woken up, and she has got a lot of catching up to do.

It was like that in Europe after the Second World War. Two world wars and a Great Depression meant there was a massive gap between economic potential and reality. That is why Europe grew so rapidly during the 25 years after that last world war.
Now China is experiencing the same effect.

But the fact remains, productivity per head in China is way down on the levels seen in Europe and the West. And is likely to remain lower for decades.
On a per capita basis China remains a poor country, just a country which is getting less poor.

And as China expands, and slowly assimilates western technology, production techniques and business practice, she will become wealthier.
There will be hiccups on the way. If China is in the midst of seeing a credit bubble, then the hiccup may come sooner rather than later. Although, there are plenty of China experts who deny there is a bubble in the economy behind the Great Wall at all.

There is a theory that China is close to seeing a repeat of the Japanese experience of the late 1980s. You may recall, Japan grew at a breathless rate, and then stopped, and remained static for the best part of two decades.

Some say China is set to go that way too.

But, this prediction is surely wrong.

You need to understand, economic growth can come about for two reasons. The first reason is when there is a gap between potential and actual, for example innovations have not been incorporated into the economy. Such an economy can expand via investment; the process of taking on more capital will automatically lead to growth.

The second reason, sets in that once an economy is mature, and is just about exploiting the technological know-how to his optimum. Such an economy can only grow via new innovation.

The US and Europe are mature economies. Japan hit the buffers because it went from a developing to a mature economy, and the shock of this transformation led to economic challenges.

China may experience something similar to Japan, eventually. But this time is surely decades away.