China overtakes Japan to become second largest economy in world

It is only five years since China's economy was half the size of Japan's, writes CLIFFORD COONANin Beijing

CHINA’S ECONOMY overtook Japan in the second quarter to become the second largest in the world behind the US, the latest milestone of growth in a country consistently breaking records.

Even in a simmering economy where records are broken on a relentless quarterly basis, the figure is a significant indicator that the world order is now changing.

China, long the emerging giant, has officially arrived.

The communist state became the world’s biggest exporter last year, knocking Germany of its perch. It is the world’s biggest manufacturer and consumer of cars, and the world’s biggest emitter of carbon-dioxide.

At the same time it added 37GW of renewable power capacity last year, more than any other country. It’s only five years since China’s economy was half the size of Japan’s.

China has outpaced Japan’s economy before, in the last quarter of 2009, but that was down to seasonal factors.

Analysts now believe China is on track to cement its position as the world’s second largest economy in a full year.

Data from Japan yesterday showed that its economy was worth €1 trillion, while China’s economy was valued at €1.04 trillion. Japan’s economy expanded 0.4 per cent during the quarter, while China continues to report double-digit growth – expected to be around 10 per cent this year.

While the figure largely confirms what people have sensed for a long time, and reflects Japan’s poor economic health as much as it does China’s economic muscle, with the economic heft moving from Tokyo to Beijing several years ago, it does provide a neat summation of an astonishing story of growth that began over 30 years ago with Deng Xiaoping’s process of opening and reform.

The three-decade rise from a country where Mao suits were the order of the day, subsidised food from the UN was still being delivered and the bicycle was the most popular form of transport into a booming, modern economy is the great story of transformation in the 65 years since the end of the second World War.

The first 30 years of the People’s Republic of China after 1949 were characterised by grinding poverty, of grain production targets oversubscribed on paper while the people starved during the disastrous agricultural reforms of the Great Leap Forward, and of the political instability of the Cultural Revolution (1966-1976), which kept China closed to the world and was bad for business.

Chairman Mao Zedong had pulled down the Bamboo Curtain and China was mired in splendid isolation, a tiny economy even though it was the world’s most populous nation.

Then in 1979, Deng returned from exile in the provinces during the Cultural Revolution. He headed to southern China and told them “to get rich is glorious”.

Slowly the country’s abundant entrepreneurial instincts, battered down for so long, began to re-emerge. First under Deng, then under Jiang Zemin, the leader who came in the middle and is now given more credit than ever for steering through the system of socialism with Chinese characteristics, which in the second decade of the 21st century looks an awful lot like capitalism with a strong element of state involvement.

The strong growth figures tend to mask some of the economic realities of China.

While hundreds of millions have been taken out of poverty, this is still a developing country and hundreds of millions still subside on less than a euro a day.

The government is working hard to try and ease the wealth gap, but it is proving a thorny issue. And also it’s not all that long since we were talking about Japan overtaking the US economy. Back in the 1980s Japan looked invincible before a downturn and a lengthy period of stagnation turned the dream sour.

“So before we get too excited about China’s overtaking Japan, we should remember that this has as much to do with Japan’s astonishing decline as with China’s astonishing rise, and that there is at least some small chance that the policies responsible both for Japan’s breakneck rise and equally breakneck decline may be being replicated in China,” writes economist Michael Pettis in his China Financial Markets blog.

Pettis argues that China has failed to really boost domestic consumption, which is essential to keep economic expansion on track. As a percentage of GDP, consumption was just 38 per cent in 2006 and 36 per cent last year.

However, others are less bearish, and look to the next step, which is for China to overtake the United States, which had GDP of €11 trillion last year.

The bulls reckon that will happen in about 20 years.