China powerhouse overtakes UK as world's fourth biggest economy

China has overtaken the UK as the world's fourth largest economy, it emerged yesterday in what will be seen as a key economic landmark for the new century.

Sources in Beijing have indicated that China's economy is much bigger than was thought. The Asian giant is understood to have raised its estimate of the size of the economy in 2004 by $300bn or 20 per cent to almost $2 trillion.

On official exchange rates used by the Bank of England this would be worth £1.13tr, putting it a whisker ahead of the UK's economy which weighed in at £1.11tr.

Jim O'Neill, the head of global economics at Goldman Sachs - which forecast two years ago that China would overtake the UK by 2007 - said the watershed had come two years early. With China expected to post nominal growth of 12.5 per cent against the UK's cash terms growth of 4.5 per cent, it would "definitely" have overtaken this year. "If these figures are confirmed then it will mean that China will become the fourth largest economy in the world," he said.

He said the revision would not come as a "huge surprise" as many analysts had cast doubt on Chinese statistics: "The other important thing is that it probably means that the investment share of GDP is lower than people had been talking about which means that speculation about a investment bubble that will have to crash are misplaced."

In an influential report on Brazil, Russia, India and China (Brics) two years ago, Goldmans forecast they would enjoy strong growth over the next 30 to 50 years, by which time only the US would still be ahead in pure size terms.

Julian Jessop, the chief international economist at Capital Economics, said: "It's another reflection of the importance of China in the world economy. This increases the case for China to join the G7, perhaps in place of one of the smaller countries like Canada.

China's bureau of statistics will next week announce some of the findings of the census and "revisions of the GDP data for 2004", reports from Beijing said. Economists believe a revision of China's service sector data - which official figures showmaking up just a quarter of the economy - will show the sector has been has underscored, especially in areas such as accountancy, banking and advertising.

This will echo warnings from Gordon Brown, the Chancellor of the Exchequer, that China presents a growing economic threat to Europe, particularly the UK. Two months ago he warned union leaders that China and India were now training more engineers, computer scientists, and university graduates - 4 million a year - than Europe and the US combined.

Dr Frithjof Schmidt, a German Greens MEP, said the news would fan Western protectionism. "China's success has made even strong industrial nations nervous," he said. "They are beginning to wonder if they will really be the winners of this [WTO] game as they expected. These higher than previously revealed GDP figures show us that China is growing much faster than they told us, so those who advocate free trade in Europe are beginning to rethink their strategy."