Depending on how fast its exchange rate rises, China is on course to overtake the US and vault into the No1 spot some time around 2025, according to projections by the World Bank, Goldman Sachs and others.
China came close to surpassing Japan in 2009 and the disclosure by a senior official that it had now done so comes as no surprise. Indeed, Yi Gang, Chinas chief currency regulator, mentioned the milestone in passing in remarks published Friday.
China, in fact, is now already the worlds second-largest economy, he said in an interview with China Reform magazine posted on the website (www.safe.gov.cn) of his agency, the State Administration of Foreign Exchange.
Cruising past Japan might give China bragging rights, but its per-capita income of about $3,800 a year is a fraction of Japans or Americas.
China is still a developing country, and we should be wise enough to know ourselves, Yi said, when asked whether time was ripe for the yuan to become an international currency.
Chinas economy expanded 11.1% in the first half of 2010 from a year earlier, and is likely to log growth of more than 9% for the whole year, according to Yi.
China has averaged more than 9.5% growth annually since it embarked on market reforms in 1978. But that pace was bound to slow over time as a matter of arithmetic, Yi said.
If China could chalk up growth this decade of 7-8% annually, that would still be a strong performance. The issue was whether the pace could be sustained, Yi said, not least because of the environmental constraints China faces.
In an assessment disputed by Beijing, the International Energy Agency said last week that China had surpassed the US as the worlds largest energy user.
If China can keep up a clip of 5-6% a year in the 2020s, it will have maintained rapid growth for 50 years, which Yi said would be unprecedented in human history.
The uninterrupted economic ascent, which saw China overtake Britain and France in 2005 and then Germany in 2007, is gradually translating into clout on the world stage.
China is a leading member of the Group of 20 rich and emerging nations, which since the 2008 financial crisis has become the worlds premier economic policy-setting forum.
In one important respect, however, China is still a shrinking violet: anxious to shield itself from the rough-and-tumble of global markets, it does not permit its currency to be freely exchanged except for purposes of trade and foreign direct investment. And Yi said Beijing had no timetable to make the yuan fully convertible.
China is very big and its development is unbalanced, which makes this problem much more complicated. Its difficult to reach a consensus on it, he said.
In the same vein, China was in no rush to turn the yuan into a global currency.
We must be modest and we still have to keep a low profile. If other people choose the yuan as a reserve currency, we wont stop that as it is the demand of the market. However, we will not push hard to promote it, he added.
China has been encouraging the use of the yuan beyond its borders, allowing more trade to be settled in renminbi and taking a series of measures to establish Hong Kong as an offshore centre where the currency can circulate freely.
But Yi said: Dont think that since people are talking about it, the yuan is close to becoming a reserve currency. Actually, its still far from that.
He said expectations of a stronger yuan also known as the renminbi, had diminished. There was no basis for a sharp rise in the exchange rate, partly because the price level in China had risen steadily over the past decade.
This suggests that the value of the renminbi has moved much closer to equilibrium compared with 10 years ago, he said.
Yis comments are unlikely to go down well in Washington, where lawmakers have scheduled a hearing for Sept. 16 to consider whether US government action is needed to address Chinas exchange rate policy. China scrapped the yuans 23-month-old peg to the dollar on June 19 and resumed a managed float. The yuan has since risen only 0.8% against the dollar, and economists calculate that it has fallen in value against a basket of currencies.
China would stick to the principle of holding its $2.45 trillion of official reserves in a mix of currencies and assets.
The stockpile, the worlds largest, was so big that it was impossible to adjust its currency composition in a short space of time: We wont be particularly bearish on the dollar at a given time or particularly bearish on the euro at another time, he said.