China Becomes the World’s Second Largest Economy

China has now surpassed Japan as the world’s second largest economy. While this says as much about Japan’s relative decline as China’s rise, it is still is an important milestone that demonstrates China’s rapid transformation that is sure to bring more changes both inside and outside its boards.

It was not long ago that China had the image of a backwards and poverty stricken military menace in the minds of many. While it was sometimes feared for its numbers and ideology, it was not considered a serious economic force. However, since the market oriented reforms that really started kicking into gear in the early 80’s, it has marched steadily forward to become an economic superpower.

Able to keep its economy at a healthy growth rate while much of the world has struggled, it can be argued that growth in China is vital to the rest of the world economically. Now increasingly becoming a consumer as well as an exporter of goods, the Chinese market is very important to more and more nations and has outstripped the US as the number one export market for some. This has allowed China to flex its economic muscle much more than it ever could in the past.

Relatively scarce on resources, especially when one considers it has a fifth of the world’s people, China is now aggressively signing deals abroad for energy, minerals and other resources to feed its economy. While this can be expected from a nation that is acting as the factory for much of the world, some worry it is setting the stage for future conflicts over resources as its economy continues to grow.

However, it is important not to be too dazzled by China’s economic success. It has fiscal, social and other issues that may cloud its future. With its enormous population, it still ranks low in per capita income in spite of having the world’s second largest economy. Still closed politically, there are many problems with corruption, cronyism and public discontent that are not being properly addressed.

Very dependent on exports for economic growth, China needs good relations with the rest of the world if it to keep its economy humming. With its state-run banks saddled with bad loans, often made for political reasons, it needs to tread carefully if it is to avoid its own financial crisis.

Having taken steps to greatly reduce its birth rate well before becoming wealthy on a per capita basis, China may also soon be facing demographic problems with fewer younger people to support an aging population.

Furthermore, while China is still a relatively poor country and wages are low by the standards of richer nations, they are rising fast. This has made manufacturing in China less competitive than it once was and some lower wage manufacturing has begun to shift elsewhere.

Still, China has an industrious and disciplined work force. Moreover, for all the problems with its closed political system, it at least has stability and is free of the kind of strife that hurts so many nations economically. These factors, combined with the massive infrastructure investments being made, are likely to keep China competitive and growing as an economic powerhouse.

With its much larger population, it remains on course to eventually surpass the United States too and become the world’s largest economy. If that day comes, the effects on China, and the rest of the world, will certainly be huge.

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