China: Now, world’s #2, and soon to be no.1?

Is China going to surpass the US as the world economic leader by 2025? It’s not that easy task as the world’s largest economy controls about a fourth of the wealth in the world – more than China, India, Japan and the rest of Asia combined.

China came a long way after it initiated the reforms process in 1970s. The transformation from a closed economy to a market economy paved the way to become the world's second biggest economy. The economy is predicted to become the world's biggest, surpassing the United States, within the next decade. Leading analysts at the World Bank and Goldman Sachs predict that China may overtake the US as the number one economy by 2025.

The cheap and abundant labor attributed to phenomenal economic growth in China. On the other hand, Japan with the rising strength of its currency (which reached 15 year high against the US dollar) was hit badly as Japanese exports dwindle. Burdened with an aging population and consequent decline in consumer demand, Japan has now relinquished its position as the world's second largest economy to China after having held the title of the world’s second largest economy for long 42 years. In 2010, Japan’s nominal GDP, (before adjustments for prices) totaled 5.47 trillion US dollars blanching before China's 5.8 trillion US dollars.  Masamichi Adachi, JPMorgan's senior economist in Tokyo is of the view that “China's population is 10 times the size of Japan's, and China's growth was more than 10 percent last year. Japan's economy has been sluggish. So it was inevitable that China would overtake Japan.”

Implications

Economists worry that China's new ranking will shift attention away from the delicate work ahead. Liu Baocheng, a professor at the University of International Business and Economics in Beijing, suggests that “It is high time for China to keep its head cool and shift its focus from the pursuit of mere GDP figures to the quality of its growth pattern.” With overheating economic conditions currently, the Chinese economy may face the challenge of having to reform its economy toward greater domestic consumption over foreign demand indications in the coming years. Besides, it has to deal with the ever-present threat of environmental catastrophe that could derail its development.

Skeptic argues that China's rocketing economic growth looms as an alarming challenge to the Americas' global economic leadership. The view is also echoed by the majority of Americans who believe their country has already lost the challenge, and relatively few are confident that the situation will be reversed in 20 years. However, the US economy is yet to show strong recovery from the financial crisis which will decide its economic competitiveness going forward.  Whether it would wholly alter cynic’s perceptions that the US now trails China in global economic power battle remains to be seen.

Jany, Chief Economist.