Beijing: China will overtake Japan to become the second largest economy in the next two years, giving Beijing greater clout on the world stage and boosting the ruling Communists’ stature at home, analysts say.
Figures to be released this week in Beijing are expected to show the economy expanded 9.5% in the third quarter, further narrowing the gap with Japan which may only post one percent growth for the period, economists forecast.
China is expected to unseat its Asian rival from the position it has held for more than 40 years in 2010 or 2011, though analysts say the shift in the global economic hierarchy will be largely symbolic with little impact on trade.
“China is already close to Japan in overall size so becoming the world’s number two doesn’t really have any substantive implications,” Todd Lee, an analyst at IHS Global Insight said.
“Rapid economic growth will give China more weight in the global arena... and bragging rights and additional ammunition for the Chinese Communist Party to encourage national pride.”
Before the global crisis struck, China had posted double-digit annual growth from 2003 to 2007 and again in the first two quarters of 2008, pushing its gross domestic product to $4.3 trillion, according to World Bank data.
Last year, US GDP was at $14.2 trillion and Japan’s economy was worth $4.9 trillion, the data showed.
Eric Fishwick, head of economic research at CLSA Asia-Pacific Markets in Hong Kong, said the timing of China’s ascendancy to number two was a “matter of arithmetic.”
“Clearly it’s going to happen - a combination of rapid Chinese growth and pretty stagnant Japanese growth,” Fishwick said.
“If you are looking for the footprint that each has on the rest of the world, then looking at the incremental growth is much more important. When you do that then China has been more significant than Japan for quite a long time.”
After slumping to 6.1% growth in the first quarter of 2009 - the slowest pace in 20 years - China rebounded in the second quarter, with 7.9% growth and it is expected to exceed eight percent for 2009 as a whole.
The turnaround in China - underpinned by a four-trillion-yuan ($586 billion) stimulus package and 7.4 trillion yuan in bank lending in the first half - has been in stark contrast to the situation in Japan.
Japan emerged from a year-long recession in the second quarter of 2009, but the economy is expected to contract by 6% for the year before growing by an anaemic 0.9% in 2010, according to the Organisation for Economic Cooperation and Development (OECD).
“The only thing standing between China and Japan in terms of who is number two is the Japanese yen,” said Dong Tao, a Hong-Kong based economist for Credit Suisse. “Without the yen factor, China is already the world number two.”
The yen, seen as a safe-haven currency, remains stubbornly high against the dollar due to the global crisis, while the Chinese yuan has been pegged to the greenback since July 2008.
Toyoo Gyohten, a special advisor to Japan’s finance ministry, however said China trailed a long way behind its Asian neighbours in terms of per capita GDP, which he put at slightly less than $4,000.
“A simple calculation would show that China will need some 30 years to reach the per capita GDP level of Singapore or Japan, which is around $40,000,” Gyohten said.
Jing Ulrich, managing director and chairman of China equities and commodities at JP Morgan in Hong Kong, said while China’s move to the number two spot would be “largely symbolic,” it would bolster its claim for a bigger say in how the world economy is run.
China, still excluded from the Group of Seven richest nations even though it has become a key driver of global economic growth, has been lobbying for a bigger role in groups such as the International Monetary Fund.
At home, where the legitimacy of the ruling Communist Party is tied to the strength of the economy, becoming number two in the world is far more significant.
“Confidence in the government’s economic management has never been as high as at present,” said Fishwick.
“The policy reaction to the global crisis was outstandingly successful, at least to the requirements of generating robust growth. Overtaking Japan will be seen as vindication of that.”