Friday, October 2, 2009

China closing in on Japan -- what does it mean?

Story in today's NYT reports that China will soon overtake Japan as the world's 2nd largest economy. This is happening for two reasons: (1) economic growth has resumed its rapid pace in China and (2) Japan's economy will flatline as rising standards of living are offset by depopulation (low birth rate and virtually zero immigration).

What does this really mean, however? Some caution is warranted -- after all, what did being the world's biggest auto company do for General Motors? It does mean that China will play an increasingly important role in global trade and finance. The US continues to be a significant borrower, so it would be wise to maintain good relationships so that the Chinese continue to buy dollar-denominated assets. A sharp rise in interest rates or a quick drop in the dollar would not help at this time.

On the other hand, everyone would do well to keep in mind that Chinese standards of living lag significantly behind those in Japan or even Taiwan. Click on the graph that accompanies the Times article to see how far China has to go in this dimension. American visitors see the modern marvels of the cities, which makes it easy to forget that China remains primarily agricultural.

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