China: No Joy In Being World’s No.3 Economy

China reworked its 2007 GDP growth numbers and that put it ahead of Germany in total GDP, making it the third largest economy in the world. The revision seems a little out of the ordinary coming over a year after 2007, but why question it? By the end of the recession China may have even dropped a few places.

According to MarketWatch, "Revised growth figures indicate nation’s economy may have surpassed Germany’s." China pegged its 2007 expansion at 13%. The US and Japan still hold a large lead over the world’s most populous country.

There are a number of factors that could push China back to the number four or number five spot by the end of a vicious and deep recession. Germany has a mature economy. It will not grow as fast in good times and it will probably not contract as much in bad ones. The German middle class has been established for decades. It may cut spending but it should not shrink by much. Germany will remain a relatively strong consumer of German goods and services.

In China, where most of the people in the middle class have been consumers for less than ten years, a sharp drop in factory output and exports could send many workers back to the rural areas where they recently labored in the fields. At least they can feed themselves if they leave the big cities.

Germany’s export base is also more stable than China’s. The largest companies in the European nation are are chemical, pharmaceutical, and advanced electronics firms such as Siemens (SI) , BASF, and  SAP (SAP). They are not likely to be as badly hurt as their Chinese counterparts.

If China’s exports are sharply undermined by a lack or world demand and the size of its middle class contrasts sharply, the economy in the Asian country could actually shrink faster that the economies in the US and EU. China’s economy is a "one trick pony" built on cheap labor and being the low cost producer. That works until the demand for what is being produced goes away.

Douglas A. McIntyre