By: Dr. Mike Campbell
The writing has been on the wall for a long time, but economic output figures finally show that China has eclipsed Japan as the world’s second largest economy behind the USA. Japan had held onto the number two spot for more than four decades. Japanese economic output came in at $5.47 trillion last year whereas the Chinese figure was $5.8 trillion.
Japan ended Q4 2010 with an annualised contraction of 1.1% as the recalcitrant recovery refused to kick-in and the effects of a high Yen hit the competitivity of Japanese exports. Therefore, part of the reason for Japan’s losing its mantle is weakness in its economy in addition to the strengthening of the Chinese economy.
A Closer Look at China's Economy
China ranks only 93 in a ranking of GDP per capita since the country is the most populated in the world. The average Chinese citizen is much poorer than their compatriots in other leading economies. The Chinese authorities will have been casting an anxious eye on developments in Egypt. Although the official level of inflation in China is 4.9%, food inflation has seen a double digit increase. Whilst the Chinese economic revolution has made some incredibly wealthy, the tangible benefits have yet to filter down to the citizens who, of course, live in a communist state.
Part of China’s economic strength has been due to the abundance of cheap labour, but if the workforce can’t afford to buy goods and food, that will become an unsustainable situation quickly in both economic and political terms. Many western nations have also been critical of the Chinese for (in their opinion) keeping the Yuan artificially low and therefore making Chinese products cheaper in their export markets. The rise of China to the number 2 spot is likely to put further pressure on the government to let the Yuan appreciate against other major currencies.