CHINA will surpass the United States as the biggest global exporter by the end of the decade, and over the next five years will leapfrog Britain, France and Italy to become the third largest economy in the world, the OECD said yesterday.

In its first economic assessment of China, already the world’s seventh largest economy, the Organisation for Economic Co-operation and Development praised Beijing for bold economic reforms which it said had allowed the emergence of a powerful private sector.

Although China is not generally expected to surpass the United States as the world’s biggest economy until the middle of the century, the OECD said it expected China to be able to maintain the rapid 9.5 per cent growth of the past two decades for some time.

“Such an increase in output represents one of the most sustained and rapid economic transformations seen in the world economy in the past 50 years,” the report said. “It has delivered higher incomes and a substantial reduction of those living in absolute poverty.”

But the OECD said that, despite this “extraordinary economic performance”, further, wide-ranging economic reforms were now required to allow China to keep its expansion on track. “Considerable challenges face the economy, not least of which is a rapid increase in the age of the population,” it said.

“But continued evolution of economic policies . . . should ensure that this development momentum is sustained.”

Action was needed to ensure more efficient allocation of capital, boost the mobility of labour, smooth China’s urban development, and strengthen the legal and regulatory framework for the private sector.

In the field of business, the OECD said that better enforcement of laws, particularly in the area of intellectual property rights, was required.

After Beijing moved in July to ease its currency peg to the dollar in favour of an adjustable regime linked to a currency basket, the OECD said further steps to introduce even greater flexibility were still needed.

China’s 2.1 per cent revaluation on July 21 and its switch to a managed float regime represented a “step in this direction”.

But the OECD concluded that still greater flexibility would allow the Chinese authorities to operate monetary policy more effectively to ensure that inflation remained under control even as the economy grew apace.

“Monetary policy has not always been successful in maintaining low and stable inflation,” the report noted.

“Overall, a policy of allowing greater flexibility in the exchange rate would allow the authorities to guard against the risk of any further increase in inflation . . . to more easily adapt monetary policy to domestic concerns, and to allow market forces to determine bank interest rates to a greater extent.”

A theme running through the report was the need for new laws, such as long-awaited bankruptcy and company laws. “At present, it can be very difficult to obtain judgements in court and even more difficult to obtain enforcement of that judgement,” the report found.

Other recommendations included action to tackle pollution exacerbated by China’s rapid industrialisation.

The OECD said Beijing had been successful in limiting pollution but noted that China still has five of the ten most polluted cities in the world.

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