Soaring surpluses, international integration – and a quiet shift to second place

China's economy overtakes Japan as the world's second largest
In recent years, the talk has turned from whether China's economy will overtake Japan's, to a question of when. This 2010.08.15 New York Times article by David Barboza strongly suggests that this milestone has occurred:

"The recognition came early Monday, when Tokyo said that Japan’s economy was valued at about $1.28 trillion in the second quarter, slightly below China’s $1.33 trillion."

The article notes that at Japan's economic peak in the 1980s, talk turned to whether it would unseat America as the world's largest economy. Today, its industries are mature, its standard of living on par with other developed nations, and its population is ageing. By contrast, China is still urbanizing, with a standard of living closer to most developing nations, with "a lot more room to grow". (Demographically, there may be an age crisis to come as the Chinese one-child policy results in retirees outnumbering the workforce in future decades: a scenario commentators have referred to as "growing old before growing rich".) The article emphasizes the familiar set of challenges ahead: 

• an economy too reliant on exports, 
• insufficient support from domestic consumption and the economic infrastructure to encourage the same, 
• questionable financial policy by state-run banks lending irresponsibly and evading accountability,
• environmental impact of industrialization, having overtaken the U.S. as the world's primary greenhouse gas emitter

More positively, it also covers the familiar territory of China's disproportionate influence in commodities markets (most notably iron, coal, and oil), and the attraction of foreign investment. However, Barboza's article ventures briefly into unorthodox American journalistic territory by giving some credit to the authoritarian government in China, acknowledging its ability to implement quick responses and take decisive action, emerging more quickly from the global recession than many developed nations and pulling the region out along with it.


International integration – and roadbumps
Despite this numerical metric, viewing the two nations as rivals sheds little light on the trade relationship. Japanese businesses have seen considerable benefits to doing trade with their primary Asian neighbor. An early beneficiary of China's cheap labor workforce, Japanese corporations have adapted to rising wages and found a ready market for their own products and goods. A growing Chinese middle class has spurred keystone joint ventures such as a massive 2,100-unit residential project in Dalian and a 160-store outlet mall in Ningbo (2010.08.11 Financial Times article: China lures once-shy Japanese developers). FT's Michiyo Nakamoto writes that this growth industry owes its success to several factors: a) saturation in the native Japanese markets, b) significantly greater demand than supply – 200 million urban households alone, with only 80 million added from 1999 to 2009, c) generous profit margins compared to the domestic Japanese market, and d) an expertise gap among Chinese corporations, few of whom have the experience of overseeing an entire mall project from start to finish, and with a notable existing advantage over the lower quality of Chinese workmanship.

Germany, too, is another economy helping its region out of the global recession, and racking up a large trade surplus while doing so. Like Japan, Germany has a strong reliance on Chinese demand for its exports, so much to the point that some experts say without Chinese demand, the recovery in Germany's textile machinery sector would be invisible, and German auto makers would be heavily hit. (2010.08.16 Financial Times article: Analysis – Germany: On a roll). The prevailing mood is "summery" according to FT's Daniel Schäfer, but an underlying fear remains of what might happen if the Chinese boost stutters. Conversely, whether Chinese entrepreneurs can reverse the flow and crack into Germany's iconic engineering machinery industry remains to be seen – but Chinese corporation Sany is leading the charge with fellow rival Zoomlion close behind. (2010.08.11 Financial Times article "Chinese push into Germany's heart and soul".)


...and an embarrassing surplus
Given the continuing manufacturing slump in America, and the moribund revaluation process of the Chinese renminbi yuan, it's likely that the recent news that China's surplus hit an 18-month high has done little to lift the American sense of grievance. (2010.08.11 Financial Times article "China trade surplus at 18-month high".) However, currency manipulation (though a sensitive political subject) is seen by Financial Times' Lex columnist as a non-factor in China's surplus. The main factors are:

• Government emphasis on export industries, which are privileged,
• Domestic demand so far tends towards products already made locally, because of tradition and demographics,
• High industrial productivity.

Also noteworthy, the World Bank projects that China's current account balance percentage of GDP – currently at 6% – will shrink considerably over the next few years.
Either way, with a GDP at $14 trillion, America's economy is more than ten times the size of China's. 2010 may be the year China overtook Japan, but for America, that prospect is still some ways off – 2030 at the earliest.