As exports surge, China's economy said to grow 9.9%

SHANGHAI -- Led by surging exports, China's economy grew by 9.9 percent last year, the government announced yesterday, underscoring the swiftness by which this once insular communist country has remade itself into a global trading power.

The rapid expansion appears to move China's economy ahead of those of Great Britain, France, and Italy to become the world's fourth largest, although many countries have yet to report their final 2005 economic data. Over the last decade, China's output has more than doubled in size as the country's transition toward capitalism has progressed, turning farmers into factory workers and linking the fortunes of its people to the appetites of shoppers in the United States, Europe, and Japan.

Yet the news also increased concern that China could be growing too fast, despite measures aimed at cooling the hottest parts of the economy. Aggressive investment has produced too many factories, heightening trade tensions with the United States as China exports surplus wares such as steel, depressing prices globally. Chinese officials worry that unneeded plants could deliver a crippling era of deflation -- falling prices -- which hurts profits and reduces incentives for companies to invest. Such a syndrome kept Japan mired in recession and unemployment for much of the last 16 years.

''Overcapacity is dangerous," said China's leading statistician, Li DeShui, speaking at a media briefing in Beijing, according to a transcript on the website of the official New China News Agency. ''It will cause huge waste, and will especially generate huge bad loans for banks. For some businesses, it will cause losses and even closures, which will lead to rising unemployment."

Li emphasized that China is not yet facing this problem, with inflation still at a healthy 1 percent. He pronounced himself ''cautiously optimistic" about China's economic prospects this year.

State data paint a troubling picture. Steel capacity already outstrips domestic demand by 120 million tons a year, and new mills that would add another 70 million tons are now under construction, according to the National Development and Reform Commission, a unit of China's governing State Council. Chinese automakers saw profit margins plummet last year as ultra-low-priced vehicles came on the market, and as dramatic expansion brought production capacity to 2 million more than China's annual sales.

Still, some say fears of overcapacity are overblown: Even as the supply of everything from aluminum to motorcycles swells, the underlying demand for the trappings of modern life within this land of 1.3 billion people should not be underestimated. China's appetite for new housing, roads, and vehicles will eventually put the extra plants to work, some economists say.

''There's no question that there's demand," said Jonathan Anderson, chief economist for Asia at UBS Investment Research in Hong Kong.

China's economic data is notoriously unreliable, and many say the data fail to capture the true magnitude of the economy. Last year, the government restated several year's worth of economic data when a nationwide census discovered that millions of mostly private service companies had previously been left out the calculation. In one shot, the government declared that China's economy was 17 percent bigger than it had previously realized -- the statistical equivalent of finding an Austria lying around uncounted.