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Booming Chinese economy passes Japan’s as world’s second largest

February 17th, 2011

Five years can change a lot as the Japanese economy has recently found out. Just half a decade ago, China’s gross domestic product was around $2.3 trillion, about half  of Japan’s.

This week China’s economy officially overtook Japan’s to be the second largest in the world behind the United States. This interchange is attributed to the stagnation of Japanese trade, especially in exports, and the emergence of China as a manufacturing powerhouse.

According to Phil Hewitt, a senior economics major at John Carroll University, the rise of the Chinese economy could also be due to the economic law of diminishing returns and the catch-up effect.

“Countries that start off poor tend to grow more rapidly than those that start off rich because an improvement of say, technology, would have a much bigger impact on a weaker economy than it would on a fully developed one,” he said.

Some analysts believe the Chinese economy will be about the same size that of the U.S. in only a decade. But to attain such a stature, the Chinese economy must maintain or better its current 10 percent annual growth rate, the feasibility of which has some analysts skeptical.

These doubts arise from their perception that the Chinese economy is built on an unsustainable foundation. The rapidity of Chinese growth has them believing that the country will be riddled in debt in the not-so-distant future. The debt might arise from the disconnect between the economic approaches assumed by the central government and the local ones.

While the central government may have sustainable plans, the local governments have seemingly greater power in planning their regional economies.

The higher the local growth rate, the more likely local officials will rise in the ranks of China’s ruling Communist Party. However, their desire for promotion sometimes results in poor economic planning.

Hewitt draws from history when assessing the Chinese economy’s ability to reach and overtake that of the U.S.

“Japan’s economy grew in the past with equal, if not greater, rapidity as China’s,” he said. “People thought it would overtake the U.S. economy but it didn’t because it matured and then leveled out. Likewise, China’s overtaking the U.S. will depend on when and if the economy reaches full maturity.”

Japan, for its part, has welcomed the growth of the Chinese economy as it has benefitted a great deal from it. The rise of China as an economic giant has led to a more balanced trade between the two nations.

After all, China is Japan’s most vital trading partner. It has invested more in local Japanese industries and imports a lot of goods from Japan, and Japan expects its economy to improve as demand rises for its exports from China and other countries within the region.

Regardless of its superiority in the overall economic size, China’s population – which is about 10 times that of Japan’s – guarantees that the average Chinese person is much poorer than the average Japanese one.

The International Monetary Fund estimates that GDP per capita of the Japanese population is almost $34,000, while in the People’s Republic of China it is barely over $7,500.