CHINA OVERTOOK Japan this week to become the world's second largest economy. It surpassed Japan in the second quarter after three decades in which China has achieved annual growth rates of 10 per cent. The fact that China's gross domestic product (GDP) was half that of Japan's just five years ago underlines the scale of the shift in global economic power. The 21st century seems set to become the Chinese century in much the same way as the 20th belonged to the United States. But can China maintain its record rate of expansion and how soon might it overtake the US?
Some economists predict that this could happen by 2030 but, although such an outcome is likely, it is by no means assured. For doubts remain about the flexibility of China's economic model which is now facing its toughest test.
Thirty years ago, Japan was widely touted to succeed the US as the next global economic superpower. But Japan's economy peaked in 1990 and quickly collapsed. It has failed to recover. Economic output in Japan in 2010 is little higher than it was in the early 1990s. A key challenge facing China is to avoid repeating the mistakes made by Japan in its over-reliance on export-led growth and its failure to boost domestic consumption. Much now depends on how the Chinese leadership - which is due to change over the next two years - manages a domestic economy which is in transition in a world economy beset by recession and deflation. China is the world's biggest exporter but in this weakened global economy, demand for its goods has been greatly reduced.
China's leaders have no option but to reduce the over -reliance on the export sector and to boost domestic consumption which, at 35 per cent of GDP, is the lowest of any major economy. They must do so both to redress an obvious economic imbalance and to maintain the 8-10 per cent growth rate required to sustain high levels of employment. In a country of 1.3 billion people, a boost to domestic consumption would also raise...