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China overtakes Japan as the second largest economy in the world

Overview

China climbed one place higher from the No.3 position to overtake Japan as the second largest economy in the world after the United States. In the second quarter of FY10, the Gross Domestic Product (GDP) of China was $1.337 trillion as compared to Japan’s $1.288 trillion. The economic growth of China in Q2 FY10 was 11.9% with Japan’s GDP growth being just 1%. The achievements of Chinese economy in the last few years have had a significant impact on economic superpowers of the world. It surpassed Germany as the biggest exporter for year 2009 with exports of $1.2 trillion against Germany’s $1.17 trillion exports. The country is the second largest importer of crude oil following United States and the largest importer of iron ore and copper. With such spectacular numbers, the Chinese economy is expected to show a consistent growth in the coming decades.

 

Synopsis

GDP Statistics: It has not been an easy path for China to reach this level where it is being considered as an economic superpower. The roots of the exponential economic growth of the country can be found in year 1978 when the country began to make major reforms in its economic policy. In the last three decades, the focus of the Chinese government has been on increasing manufacturing and foreign trade, controlling the rising inflation, deployment of advanced technology for improvement in productivity, attracting foreign investments and increasing the per capita income. The GDP of China has been growing at an average pace of 10% every year since 1978. The chart below shows the historical GDP of China for the period 2000-2009 with the corresponding growth percentage:

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The chart (Refer fig 1.1.) shows that the GDP growth rate has been consistent in between 8-11% in the last 10 years. In the year 2007, the growth rate was 14.191% as it was the most booming year for the Chinese economy. The GDP showed a negative growth in the years 2008 and 2009 due to the global economic recession. In spite of the recession, China maintained the 9% growth mark for both these years and faired comparatively better than other countries in terms of GDP.

The sector-wise contribution to China’s GDP for year 2009 is represented in the following pie diagram:

(Refer fig 1.2) Industry was the top contributor towards China’s GDP in 2009 with 46.8%, followed by Services which contributed 42.60% and Agriculture with 10.60%.

Factors behind the economic growth:

Foreign Trade: There are a number of parameters behind China’s emergence as the second largest economy in the world. Foreign trade, precisely, imports and exports, has a significant share in the revolution of the country’s economy. Since 1978, the trade policies of China experienced a transformation and as a result there was an obvious increase in imports as well as exports. Naturally, the increase in foreign trade provided a boost for the economy to continue its growth in an exponential fashion. China is now the largest exporter globally followed by Germany. Textiles, electronic equipment, arms and ammunitions are the major contributors to China’s exports. Besides these, the country is also a leading exporter of metals such as antimony, tin, tungsten, mercury and steel and alloys which include aluminum. The below mentioned pie diagram provides data for China’s exports for the year 2009 classified on the basis of product categories which are the major contributors to exports:

(Refer fig 1.3) Electrical and electronic equipment were the highest exported goods in 2009, followed by textiles and apparel. Rest of product categories shown in the diagram contributed between 2-3% to the total exports. These are the products which have increased the country’s revenue and eventually have helped China to grow in terms of gross domestic product. The total exports of China in year 2009 were $ 1.202 trillion posting a growth number of 21.9% on a year-to-year basis.

Coming to imports, China is the largest importer of iron ore which also makes it the biggest steel producing country in the world. In 2009, the country produced 567.8 million tones of steel which accounts to 46.55% of total global steel production. Crude oil is another commodity in which China ranks as the second largest importer after US. In the first eight months of year 2010, China has imported 157.87 million barrels of crude or 4.76 million barrels per day. There has been an increase of 22.6% in crude imports as compared to last year. Recently, China seems to have adopted the policy of stock piling in case of crude oil. The total imports of China in 2009 were $986.34 billion with an increase of 27.6% as compared to 2008. Also, copper is one of the major contributors to China’s imports. The following pie diagram represents the contribution of major products which were imported by the nation in year 2009:

(Refer fig 1.4 )As can be seen, electrical equipment ranks at the top with a contribution of 24.24% to the imports. China has also imported fuels like crude oil and natural gas on a large scale and the number continues to grow every year. Fuels are followed by machinery and metal ores with contributions of 12.33 and 9.69 percent respectively. The top four imports of China account for almost 60 percent of the total imports for the year 2009. This indicates that the country is undergoing an extensive development phase in terms of economy as well as society. The huge imports of fuels clearly point out the fact that the energy consumption of China, both domestic as well as commercial, is at record highs. Also, the country is importing electrical equipment and machinery on a large scale. These three imports are helping China to increase its productivity and manufacturing of goods which it sells in foreign markets. The whole mechanism of imports is working as a raw material to fuel the revenue growth of the country through domestic as well as overseas consumer markets. Besides, since a long time China has been a major producer of iron ore. The imports of metal ores are 12.3% of the total imports in 2009. Metal ores are the raw materials which undergo industrial and chemical processes to produce usable metals such as steel, iron, copper etc. Metal Ores imports are contributing largely to the growth of metal industry in China and also increasing the Chinese GDP.

Other Factors: Apart from foreign trade, factors such as emergence of the stock market, capital markets and bond markets have also fueled the economic growth. These markets have constantly attracted foreign institutions to invest in them because of the fast growing infrastructure of the country. FIIs have huge confidence that the Chinese economy is a profitable market to employ their money and as a result the cash inflow from these institutions is assisting the economy to grow substantially. Also, the sector wise growth of industries and service-oriented organizations is an important aspect behind China’s journey to the second largest economy. Another vital factor which is working as an energizer for the economy is the bailout package of $586 billion announced by the government in 2008 in order to tackle the global economic slowdown. The bailout was to be delivered over a period of 2 years and China is still reaping the benefits of it. The package helped in maintaining investor confidence in the economy and promised positive returns in the future.

Impact of China’s GDP Growth

China is growing every year and is also reaping the benefits. But, it is not only China who is at an advantage. There are many countries which are being benefited from this spectacular growth of China with Japan on the top. Even though, China left Japan behind in the race for highest GDP and climbed the No.2 spot, Japan seems to be focused on the advantages that it has received as a result of this. Out of the total exports of Japan, 19% exports are directed towards China which is more than what United States imports from Japan. The Japanese Ministry of Economy, Trade and Industry has predicted that the imports of China may rise to $5.57 trillion by year 2020 which places Japan at an excellent position to exploit the Chinese market. With the growth in China’s GDP, the per capita income of the country is also increasing steadily. Japan being a neighboring country, many Chinese tourists are attracted towards it. Moreover, the Japanese government has eased visa norms with an objective to attract 1.8 million Chinese visitors in 2010 as compared to 1 million of the last year. Besides this, Chinese enterprises have invested in more than 600 Japanese companies which is providing a boost to the country’s industrial growth. Japan was a country which used to be over reliant on US and European countries. But, many Japanese businesses learnt that it is dangerous to rely on these countries during the economic slowdown. China overtaking Japan has proved to be a boon to Japan.

Not only Japan, but many countries in South East Asia are relishing on the growth of Chinese economy. In order to increase the productivity of the country’s industries and services sector, China imports more from its neighboring Asian countries as compared to what it exports in these markets. In the period between January 2010 and June 2010, China imported goods worth $72 billion from the South East Asian countries and exported $64.4 billion. Basically what China takes from these countries is these countries is commodities and resources products and supplies them with finished goods manufactured by Chinese industries.

Apart from South East Asian countries, China depends on Middle East countries for the supply of crude oil. Also, it imports a variety of goods from the United States. The average imports of China from US are around $1 trillion approximately. China’s GDP growth is having a positive impact on countries all over the globe and is assisting further increase in economic growth in those countries.

Inferences

China is expected to follow the exponential pattern in future for its economic progress. According to the current situation, there is a high probability that it will continue the growth curve in terms of GDP and will remain consistent in the coming years. Some analysts and investment institutions are of the opinion that the country will overtake the United States to claim the position of largest economy by posting greater GDP numbers in the next 2 decades. The only challenges that the country faces now are the population in poverty zone, the per capita income and the environmental harms of industrial growth. It is already taking necessary measures to take care of the environment around and make proper use of energy. Also, the poverty situation in the country has reduced significantly in the last 3 decades and continues to improve. The boom in Chinese economy and the event of it surpassing Japan as the second largest economy is extremely beneficial for world economy.

The Writer Ishan Tipre is Reporters at Application Nexus India and can be reached at ishan.t(at_the_rate)applicationnexus.com as well on his Facebook Page.

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