China Overtakes Japan to Become the Second Largest Economy in the World

According to New York Times data just released in the second quarter of this year a stagnant Japan was overtaken by a slowing but still growing China, to make the newcomer the second largest economy in the world behind the US.

Japan’s economy was valued at US$1.28 trillion in the second quarter 2010, whereas China’s came in at US$ 1.33 trillion. It was only in recent years that China overtook Germany to become the third largest economy and last year it overtook Germany to become the largest exporting economy. Just five years ago China’s GDP was $2.3 trillion, about half of Japan’s. While China’s GDP is dwarfed by the US’s $14 trillion, some are predicting China will overtake the US by 2030 but then they made the same prediction of Japan in the 1990’s. China’s rise though has been nothing short of spectacular over the last ten years. China passed the US last year to become the world’s largest automotive market and General Motors, that icon of US manufacturing companies could shortly be producing more cars in China than the US.

As the article points out though, China’s per capita income is more on a par with countries like Algeria and El Salvador than its neighbors in Asia. At US$ 3,600 it has a long way to go to reach the United States at $ 46,000. But China is already the largest producer of many metals including steel and the largest consumer of nearly every commodity. With growth forecast to be around 10% this year and some 150 million peasant workers still looking for migration to low paid jobs in urban environments over the next decade the foundations of China’s continued growth looks relatively secure.

The debate rages on both sides as to the level of impact China’s currency manipulation has had in contributing to the country’s phenomenal growth and accumulation of huge foreign exchange reserves. The US has both benefited and been hurt by the trade imbalance with China, hurt in the loss of manufacturing jobs, benefited from the provision of cheap money that has fueled growth (and debt). China has benefited with phenomenal and almost relentless growth raising the living standards of tens of millions, but arguably not lifting them as far as they would have done if the currency had been allowed to appreciate and raised spending power. Contrary to expectations that the currency would appreciate following slackening of controls on the Yuan this summer in fact it has only moved a fraction of a percent and that only in the last few days. A Bloomberg article said the currency has “suffered five straight days of weakening to 6.8033 against the dollar, the longest straight decline in a year.

China stirs considerable concern in the west. Many see it as a rising threat and although no one would begrudge the peasant in the field having a better standard of living, some fear China may one day overtake the US and become the dominant global power. But in reality China has many challenges of its own. The country is hugely vulnerable to commodity volatility and is reliant on the rest of the world for imports of petrochemicals, most base metals, iron ore, coal and precious metals. To feed its 1.3 billion people and meet their rising expectations, it has to import vast quantities of foodstuffs, of timber and is still reliant on the west for advanced technology. China’s growth is based on low labor rates, an advantage it is losing to Indonesia, Vietnam and others and its lack of environmental controls is turning not just industrial areas and mines into ecological disasters but its principal cities into smog ridden health hazards where even school children can’t play out of doors on red flag days. The authorities are trying hard to tackle some of these areas, particularly the environmental degradation and resource vulnerability but some challenges they will find harder because they run to the core of the communist control system. Problems such as labor laws, as they get slowly relaxed worker unrest increases Beijing’s greatest fear, issues of freedom of speech that so hampers creativity, intellectual property rights and endemic corruption at all levels of society. The reality is China has grown in spite of these failings but they will increasingly impact future growth and the ability of China to be taken seriously as a world power.

–Stuart Burns

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