world growth

world growth

Monday, March 1, 2010

China surpasses Japan as the 2nd largest world economy

CHINA surpassed Japan as the second largest economy in the world in the fourth quarter of 2009.

Although Japan’s gross domestic product (GDP) for 2009 at US$5 trillion was higher than that of China at US$4.9 trillion, from the fourth quarter, China produced more goods and services (i.e. enjoyed higher GDP) than did Japan.

It still has some way to go before catching up with the United States, which had a GDP of US$14.5 trillion in 2009.

If China can grow 4% faster than the US annually, it is likely to surpass the US economy in 25-30 years. This could be sooner if the undervalued renminbi is revalued upwards.


On a purchasing power parity (PPP) basis, which assumes similar cost for identical products and services in different countries, China overtook Japan in 2001 (see chart) and could overtake the US by 2020.

As per the International Monetary Fund, China’s GDP per capita in 2009 at only US$3,566 was still significantly lower than that of Japan (US$39,573) and the US (US$46,443).

Growing from a low base was the easy part; the challenge is to sustain growth when China becomes a middle income nation.

China has a few advantages that will help it sustain growth. First, it has a strong pro-growth government that can implement its plans.

In the past, such plans like the Great Leap Forward and the Cultural Revolution were socio-economic disasters but under the collective leadership structure, policies are more measured.

A strong government has enabled China to quickly modernise its infrastructure (unlike India) and enhance its strong position in certain sectors like renewable energy, steel and manufactured exports.

Second, China has a very large domestic market that enables domestic producers to achieve economies of scale and attract foreign direct investments and technology into the country.

Third, China has made good strides in education and research and development. According to Unesco, China’s share of global researchers rose to 20.1% from only 14% in 2002 (see table on the previous page).


China also faces immense challenges. There is, firstly, an over-reliance on investments and exports to boost the economy while private consumption as a percentage of GDP remains low.

In the longer term, China will require a basic social net that will encourage Chinese to save less for future medical and other bills.

China’s strong one-party rule may be suitable for leading a country from a low to middle income nation but to make the leap to a high income nation requires a focus on innovation and a liberal environment that retains and attracts talent (like the US).

Taiwan and South Korea have made the transition from autocratic governments to democratic governments.

The challenge is for China to maintain stability and yet sufficiently relax its grip on its people to allow this transition.

Another challenge lies in how an emerging China interacts with the US and the Western world. Both sides will have to resolve tensions from differing world views and competition for natural resources and markets.

In the longer term, China faces a demographic time bomb due to its one child policy. China’s rapidly aging population is expected to peak at 1.45 billion in 2030 according to a UN study.

By then, China could suffer from what Japan is suffering now, a stagnant economy and a declining population that represents a strain on its healthcare and social welfare system.

China was the world’s richest nation until 1850, a position that was toppled by an inept government in the last days of the Manchu dynasty and unfair treaties imposed after the Opium War in 1842, aimed at reducing British trade deficit with China by selling opium to the Chinese in exchange for Chinese goods.

Barring major military conflicts (unlikely in the nuclear age) and major policy blunders, China is likely to resume its position as the world’s richest nation, a position it held for almost 2,000 years since the days of the Han Dynasty (206 BC–AD 220) which rivalled the Roman Empire.

The nature of the world will change as an emerging China interacts with a declining but still powerful West.

Western liberal democratic traditions focused on individual rights will square off with Eastern collectivist paradigm putting society above the individual.

Inter-Asian trade and relations will strengthen China’s influence in Asia and position the renminbi as the de facto trading currency for the Asian bloc.

Failure of China and the West in accommodating each other could lead to trade war and even a new cold war, an outcome that can be avoided if more moderate voices that value an open diverse world can prevail over xenophobic ultra-nationalistic/religious voices.

In this new global reality, Malaysia will find it increasingly difficult to compete in manufacturing. Malaysia has to fight tooth and nail to retain and attract talent and boost services (like tourism). This means crafting an attractive liberal environment for its citizens and foreign talent.