Japan last year lost its 42-year hold on the second spot, according to full-year data released Monday in Tokyo, cementing China's transformation from poor communist backwater to global heavyweight.

The shift became increasingly inevitable after the world's most populous country triggered explosive growth with economic reforms launched in 1978, when it "made up only 0.4 percent of international trade," said China-watcher Jean-Francois Huchet.

"It is completely normal that a country with a population like China can compete with a nation like Japan in absolute terms," said Huchet, director of the Centre for Contemporary Chinese Studies in Hong Kong.

But despite three decades of near double-digit annual growth, the per capita income of China's 1.3 billion people remains about 10 times smaller than Japan's $40,000, and backward conditions prevail in vast swathes of the country.

"Although some rich areas are approaching those of developed nations, other regions are still dealing with problems faced by developing nations," Huchet said.

When human development indicators such as education are taken into account, China still lags far behind Japan, he said.

On the international stage, China's economic rise has made it a force to be reckoned with.

Beijing oversees a vast war-chest of foreign exchange reserves valued at $2.8 trillion, and its resulting clout means its decisions bear more heavily on rich nations than ever before.

"China's place in the global economy is such that other nations must adapt to this situation," said Chen Xingdong, a Beijing-based economist for BNP Paribas.

But the idea of adapting is not always to the liking of Beijing's trading partners.

One illustration is China's approach to international trade rules, including those of the World Trade Organisation (WTO), which analysts say Beijing either doesn't implement or brazenly flouts.

"Chinese enterprises, which receive credit from state banks, for example, can all be considered directly or indirectly subsidised," Chen said of what could be seen as an unfair trade practice at the WTO.

China also faces persistent criticism over its tight control of its currency, with the United States leading accusations that Beijing manipulates the yuan to make its exports more competitive and thus gains an unfair trade advantage.

The state continues to have a dominant role in the economy not only through its grip on the currency but also by directing investment and laying out the strategies of big enterprises, most of which are state-owned.

China typically deflects criticism by insisting it remains a "developing" country and thus should be allowed more leeway in managing its economy.

Foreign ministry spokesman Ma Zhaoxu noted on Tuesday the Chinese economy's "remarkable progress over the years," but reiterated Beijing's official line, which plays down the country's economic rise.

"At the same time, we have to draw attention to where the Chinese economy lags behind," he said, adding that there were still 150 million Chinese living in poverty.

China readily acknowledges it faces serious imbalances like a widening wealth gap between rich and poor, lopsided economic growth in favour of coastal regions and cities, and well-documented environmental degradation.

The government is also grappling with high inflation that causes public anxiety and has resulted from a massive injection of liquidity into the economy as part of efforts to overcome the global financial crisis.

"The social tension is much higher than five years ago," said Shanghai economist Andy Xie.

"It is not only that some people benefit less than others. For a lot of people now, things are going backwards."

While living standards and incomes have undoubtedly risen, new challenges have emerged for China's people, including the army of up to 200 million migrant workers who work far from home doing tough work for often meagre pay.

Such workers have diligently placed their meagre savings in bank accounts that are now declining in value due to inflation, Xie said.

"Don't forget Chinese people are savers, not borrowers," he added.

earlier related report
China says January inflation remains high at 4.9%
Beijing (AFP) Feb 15, 2011 - China said Tuesday its inflation rate stayed stubbornly high at 4.9 percent in January, sparking analyst predictions that the government would take further aggressive fiscal steps to cool prices.

The consumer price index, the key gauge of inflation in the world's second economy, was "lower than market expectations" according to the National Bureau of Statistics but still above Beijing's four percent full-year target.

A Dow Jones Newswires poll of 15 economists before had forecast 5.4 percent growth.

The figure, which follows a 4.6 percent increase in December and a more than two-year high of 5.1 percent in November, comes despite three interest rate hikes in four months and several increases in the amount of money banks must keep in reserve to cut lending.

Brian Jackson, a Hong Kong-based senior strategist at Royal Bank of Canada, said the reading suggested pressure on prices would remain "uncomfortably strong" for the next few months.

"The policy focus will remain on curbing inflation, and we expect to see another 50 basis points of rate hikes and a faster pace of currency appreciation in coming months," he said.

New monthly lending data also released on Tuesday provided a ray of hope for policymakers.

The value of new loans fell to 1.04 trillion yuan ($158 billion), down about 23 percent year on year.

A torrent of lending over the past two years -- officially encouraged at first as a shield against the 2008 world financial crisis -- has helped spur inflation, and the January data suggested government curbs were having some effect.

But analysts said the overall picture indicated Beijing would need to step up its inflation fight.

Li Huiyong, chief economist at Shenyin & Wanguo Securities Co, wrote in a research note his firm expects two more rate hikes this year and further increases in the bank reserve ratio.

He said authorities also would likely allow a five percent strengthening of the yuan this year. A stronger yuan helps fend off the impact of price rises in imported commodities.

Inflation has become Beijing's top economic concern as it struggles to keep a lid on rising costs of food and other key items to head of public unrest.

The continued high prices came despite an adjustment in the index that lowered the weight of soaring food costs.

"Generally, inflationary pressure remains very high," said Yao Wei, a Hong Kong-based China economist with Societe Generale.

"(The data) cannot change the fact that the general economy is overheating and inflationary pressure is high."

A separate statement on the statistics bureau's website said the weightings are tweaked annually.

Despite the change, food costs continued to show strong growth in January, with grain prices up 15.1 percent, the bureau said.

The grain supply situation has become an increasing source of official anxiety as a drought across northern China over the past four months has raised fears that the important winter wheat crop could be severely affected.

At the same time, prices of fresh fruit grew 34.8 percent, the bureau said.

Inflation, particularly related to food, has a history of sparking unrest in China.

Tuesday's data did not include real estate prices, which also have grown sharply over the past year.

The statistics bureau said the food price weighting was lowered by more than two percentage points.

Yao said that brings food's weighting to less than 30 percent. The weighting of living costs such as utilities was raised by about four percentage points, bringing it near 20 percent, she said.

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