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Once again China has delivered the kind of surprise that U.S. politicians and economists could only dream of – a major jump in GDP statistics. While most of us were digesting Christmas dinner China revised its growth rate for 2008 upwards from 9 percent to 9.6 percent.

Not impressed? Keep in mind that this growth spurt came at a time when the global financial system was in crisis and in danger of collapse. While the world swooned China was just shy of double-digit expansion.

At the time China’s export sector was being hammered due to a severe demand pullback by shell-shocked western consumers. But China found new growth internally as it conducted a periodic economic census…a review of economic performance. The census found unexpected growth and productivity in the country’s service sector. Gross domestic product figures for 2005, 2006 and 2007 will also be revised as a result of the latest census.

Look out Japan! The new figures put China within sprinting distance of overtaking Japan as the world’s second largest economy. Gross domestic product was $4.6 trillion last year. That compares with the World Bank’s estimate of $4.9 trillion GDP for Japan. The gap is just $300 billion, almost a rounding error in China’s expanding economy.

Back in 2006, we at the China Stock Digest reported on a similar GDP surprise from China. Then the Chinese government revised its economic estimates after another economic census discovered $280 billion in hidden economic output. To put it in perspective, the census result meant that China has discovered a new internal economy equal in size to the economy of Indonesia. This newfound productivity boosted China’s gross domestic product for 2004 to almost $2 trillion.

Just $2 trillion in GDP in five years ago. Now $4.6 trillion and climbing, during a global panic.

As we say to cynics who scorn Chinese statistics, you’re right. China does often get the numbers wrong but not the way that critics charge. Beijing doesn’t habitually exaggerate its numbers. China’s mandarins are politically savvy enough to lowball their estimates to avoid the embarrassment of disappointment and enjoy the fruits of a positive surprise.

The latest surprise is good to the tune of $205 billion. That’s equal to the entire economic output of Malaysia.

The new money gives us a clue as to where investors will find their next earnings surprises. The previously undiscovered productivity is in the service sector, not state owned enterprises. That’s good news for China and for the world.

For China, it means less reliance on foreign exports as the nation’s internal economy expands dynamically (just as we first noted back in 2006). For the global economy there’s hope that China’s trade surplus will begin to approach something like a balance between exports and imports as the internal economy grows. In fact that’s already happening as China’s imports increase, while exports remain weak.

China will beat Japan once and for all in 2010. For the record, we believe this event happened years ago, not in hard currency terms, but in terms of purchasing power parity, a more realistic measure preferred by the CIA.

Disclosure: no positions

Source: China's GDP Jump