Business, Economics and Jobs

Hyperventilation alert: China tops Japan


A Chinese bank worker counts a stack of 100-yuan notes at a bank in Hefei, east China's Anhui province on February 27, 2011.



The headlines are popping today as China has "officially" usurped Japan as the world's second-largest economy.

The reason, of course, is part of a longer-term trend: Japan is hurting; China is growing.

Here's how the New York Times artfully spelled it out today:

Japan’s gross domestic product fell 0.3 percent in the October-December quarter as the end of generous government incentives on environmentally friendly cars resulted in a temporary decline in spending. At an annualized rate, Japan’s economy shrank 1.1 percent from the previous quarter.

The contraction, the first in five quarters, brought Japan’s economy for 2010 to $5.47 trillion, the Japanese Cabinet Office said. That compared with a $5.88 trillion economy for fast-growing China. The latest numbers were further evidence of China’s rapid ascent as an economic superpower, as China surpassed Japan last summer after the half-year gross domestic product numbers were released. Just five years ago, China’s gross domestic product was around $2.3 trillion, about half Japan’s.

For those of you who have been paying attention to this ongoing story there's very little news in this news. As I wrote in a column last August when similar headlines made the rounds, the real story might not be China's strength, but rather, its many weaknesses.

Money quote:

There is no guarantee that China's current economic model is sustainable. China grew so quickly over the past three decades by throwing masses of relatively cheap labor into thousands of coastal factories, driving GDP higher and boosting the living standards of millions of formerly rural and migrant workers.

But the model is showing some strain. For one, factory workers across China have grown increasingly uneasy. Demands for higher wages and better working conditions sparked significant labor unrest earlier this year, with disputes hitting a number of high profile factories, including Honda and Apple supplier Foxconn.

And let's not forget that, for all the excitement, China remains a very poor country. Its GDP per capita is about $6,500. That's less than Namibia, Tonga, Jamaica and 95 other countries. (In the U.S., GDP per capita is about $46,000).

When you consider worsening loan defaults in China's banking system, its ongoing property bubble worries, and increasing concern about the immediate health of the U.S. economy (where most of China's low-cost, low-margin exports end up), China doesn't look scary for its strength. It looks scary for its potential weakness.

So let's keep our heads. And a little perspective, please.