Q&A: China overtaking Japan in GDP

Shanghai has been the driving force behind China’s growth over the past three decades [Reuters]

China has passed Japan to become the world’s second-largest economy behind the United States, according to figures for the second quarter of this year.

Beijing has surpassed Tokyo in quarterly gross domestic product (GDP) figures before, but this time it is not expected to lose the lead.

China’s economy will almost certainly be bigger than Japan’s when the overall figures for 2010 are released at the beginning of next year.

This long anticipated milestone confirms once again that the world will have to reckon with a new economic superpower in Asia.

Why is China edging out Japan?

With average growth rates of 10 per cent in the ‘golden years’ of the 1960s, Japan was able to establish itself as the world’s second largest economy and was referred to as the Asian post-war economic miracle.

However, in the second half of the 1980s sliding stock and property prices overheated the Japanese economy, which caused a slowdown throughout the 1990s and 2000s.

Tightly run financial policies slightly revived Japan’s economy in the years 2003-2007 but the global financial crisis and a collapse in domestic demand saw the economy shrinkwith a stunning five per cent last year.

In contrast, China’s growth has been spectacular, with an average growth rate of 10 per cent for the past 30 years.

Huge state investment in infrastructure, heavy industry and private sector expansion in light industry have lifted China’s economy to second place in terms of size, behind the US economy.

What is gross domestic product?

GDP is the market value of all goods and services made within the borders of a country in a year.

Japan’s GDP fell 0.9 per cent in the second quarter of this year, which translates to nominal output of $1.286 trillion.

State investment in infrastructure and heavy industry have lifted China’s economy [Reuters]

China’s GDP was $1.335 trillion for the April-June quarter, lifting it to second place.

The GDP of the US was roughly $14 trillion in 2009.

GDP growth is often positively correlated with the standard of living, however, the wealth gap in China is so extreme that the country has dozens of billionaires while the average income for the rest of its 1.3 billion people is among the world’s lowest.

Japan’s people are still among the world’s richest, with a per capita income of $37,800 last year, compared with China’s $3,600.

Will China consolidate its edge over Japan?

China has surpassed Japan in quarterly GDP figures before, but this time it’s unlikely to relinquish the lead.

China’s economy will almost certainly be bigger than Japan’s when the overall figures of 2010 will be released at the beginning of next year because of the big difference in each country’s growth rates.

Although Beijing is currently steering monetary and fiscal policy back to normal after a record credit surge to counter the global crisis, it is still expecting double digit growth.

China is growing at about 10 per cent a year while Japan’s economy is forecast to grow 3 per cent this year.

How long before China will overtake the US?

China could match the US in total output as early as 2020, according to a World Bank forecast in June.

However, ithe bank said per capita income would be one-fourth the US level, comparable to Malaysia or Latin America.

Achieving even that will require China’s leaders to radically change their state-dominated economy.

Success is far from guaranteed, warns the bank.

It says China could easily still stall at middle-income levels if it fail to develop an educated, creative work force and legal systems to support innovation or if it allows entrenched companies to stifle competition.