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Japan Diary

June 28, 2009

This year China overtakes Japan as No.2 economy in the world

This year China will probably overtake Japan as the second largest economy in the world.
"So what? Did it not happen ten years ago?" you may say. One Boston cab driver (he was from Jamaica) told me more than two years ago, "Oh, gosh! You’re telling me that the US is bigger than China in economy? My roommate, he is Chinese, he always tells me the opposite."

Well, size is not that important, quality matters, I believe. Besides, China's economy in dollar terms showed an abrupt rise since last fall largely because of the dollar's steep depreciation.

China's economy is now on a par with Japan's. OK. But it merely confirms the fact that the per capita income of the Chinese is one thirteenth of the Japanese, because their population is thirteen times as big as the Japanese population.

And if you measure China's capacity to project its will overseas, you may notice that military-wise East Asia is still under firm Pax Americana and that Japan's official development assistance surpasses that of China both in quantity and quality.

On top of that, China's rapid economic growth is at a turning point. Since Deng Xiao-ping declared in 1992 a favorable treatment for foreign direct investment in China, its economy never went below 7% of annual real GDP growth. Simply amazing. The large inflow of investment from Taiwan, Hong Kong, South Korea, Japan, the US and Europe, its aggressive exports (about 50% of their exports have been realized by factories under foreign ownership) and construction of housing and infrastructure. They are building at such a pace that you may safely say that the main product of the Chinese economy is high-rise buildings and highways.

But after the world economic crisis China's exports have dwindled by more than 30%. China may well make up for its loss by inflating domestic spending. Yes, they are doing exactly that, but they tend to overdo it. Local banks are desperately giving out loans under the instructions of local party bosses, who are guided not by economic principles but by personal ambition for promotion in bureaucracy. Such a system augments the danger of inflation.

They can not limitlessly boost construction. Any new building cannot be finished without importing foreign materials and furniture. To import these China would need foreign currency. So, the tempo of Chinese economic growth will be tempered by the amount of trade surplus on hand.

True, if they make their currency, the Yuan, convertible, then they can import as much as they want. But a convertible Yuan will trigger a huge speculative purchase of Yuan in expectation of a constant rise in its value. It will push up the Yuan's rate above the heavens so that China will lose its price competitiveness.

-----In such a way the tempo in Chinese economic growth has its natural limits.

I have nothing against China's development; even the contrary. I merely want to stress that there is no overestimating China's power and underestimating Japan's.


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