• Bloomberg


China’s anticipated move to let its currency appreciate may help the nation overtake Japan as the world’s second-largest economy, according to Australia and New Zealand Banking Group Ltd.

A 5 percent revaluation against the dollar could see quarterly gross domestic product exceed Japan’s as soon as the July-September period this year, estimated Liu Li-Gang, a Hong Kong-based economist at ANZ. The Chinese economy is likely to vault past Japan before the end of the year, even if the yuan remains stable, Liu said in an e-mailed interview.

The projected shift is another milestone in China’s increasing role in the global economy, after last year it became the largest automobile market and supplanted Germany as the top exporter.

China’ ascendance means the yuan will eventually become a reserve currency rivaling the euro and dollar, according to Goldman Sachs Group Inc.

“From the rational policymaking point of view, one-step appreciation followed by an enlarged trading band for the renminbi would be the preferred policy, but whether this policy will be implemented, that’s a big question,” said Liu, who has previously worked for the World Bank and the Hong Kong Monetary Authority. Renminbi is another name for the yuan.

Last year, China’s gross domestic product was 33.5 trillion yuan, or $4.9 trillion. Japan’s economy was valued at about $5.07 trillion, using the average yen-dollar exchange rate for the year. China’s economy grew 11.9 percent in the first quarter of 2010 from a year earlier, while Japan’s preliminary report for that period is due May 20.

Louis Kuijs, a Beijing-based economist with the World Bank, said that while China will surpass Japan this year, seasonal factors make quarter-by-quarter comparisons difficult. SJS Markets Ltd. estimates that China could have overtaken Japan as early as the first three months of this year.

China passed Germany in 2007 and the U.K. and France in 2005 and is forecast by the International Monetary Fund to become the second-biggest economy this year.

Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs in Hong Kong, said that because the Chinese statistics bureau has a history of revising up GDP numbers “it may well turn out” that China took the No. 2 slot in 2009.

China has held the yuan at about 6.83 per dollar since July 2008, aiding the nation’s exporters and fueling complaints by U.S. lawmakers that the nation has an unfair advantage in trade.

U.S. Treasury Secretary Timothy Geithner stoked speculation that China is poised to scrap the peg to the dollar by this month, delaying a report that could name the nation a currency manipulator.

Liu said a one-off appreciation of about 5 percent would show “good will” toward trading partners amid rising protectionism and, combined with a wider trading band, discourage investors from speculating on currency gains by making it more difficult to time exit strategies.

If the yuan returns to the “old regime” of gradual appreciation, speculative capital will continue to flow into the nation, making it more difficult for policymakers to counter inflationary pressures and the risks of a property bubble, the economist said.

Liu forecasts that Chinese officials may end the yuan’s peg to the U.S. currency this quarter.

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