China overtakes Japan as world's No. 2 economy

BEIJING -- China has eclipsed Japan as the world's second-biggest economy.

Japan is still far richer per person after confirming Monday that economic output fell behind its giant neighbor for the three months ending June 30. However, the news is more proof of China's arrival as a force that is altering the global balance of commercial, political and military power.

Analysts are already looking ahead to when China might match the United States in total output -- which the World Bank and others say could be no more than a decade away.

"This means the world will pay more attention to China, especially when most Western countries are mired in the bog of debt problems," said economist Lu Zhengwei at Industrial Bank in Shanghai.

Unseating Japan -- after earlier passing Germany, France and Britain -- caps three decades of breakneck growth that has cemented a dramatic change in China's place in the world over just the past five years.

State-owned Chinese companies have emerged as major resource investors, pouring billions of dollars into mines and oil fields from Latin America to Iraq. Chinese pressure helped to win a bigger voice for developing economies in the World Bank and other global institutions.

On a human level, China's rise has allowed hundreds of millions of people to work their way out of poverty and sent a flood of students and tourists to the West. Its consumers are so avidly courted that companies from Detroit automakers to French handbag producers now design goods to suit them.

Still, China's rise has produced glaring contradictions. The wealth gap between an elite who profited most from three decades of reform and its poor majority is so extreme that China has dozens of billionaires, while average income for the rest of its 1.3 billion people is among the world's lowest.

By contrast, Japan's people still are among the world's richest, with a per-capita income of $37,800 last year, compared with China's $3,600. So are Americans at $42,240, their economy still by far the world's biggest.

According to Monday's report, Japan's nominal GDP was worth $1.286 trillion in the April-to-June quarter compared with $1.335 trillion for China. The figures are converted into dollars based on an average exchange rate for the quarter.

World stock markets mostly fell on the news that Japan's economy grew just 0.1 percent in the second quarter, far short of expectations and well below the 1.2 percent growth in the first quarter. The report follows signs last week that both the U.S. and Chinese economies are not growing as fast as earlier in the year.

In the midst of the global crisis, stimulus-driven Chinese growth that hit 11.9 percent in the first quarter this year before easing in the latest quarter helped to propel the world out of recession. Chinese demand for raw materials and other imports buoyed economies from Australia to South Korea to Africa.

China uses more than half the world's iron ore and more than 40 percent of its steel, aluminum and coal. It passed the United States last year as the biggest auto market and Germany as the biggest exporter.

"We are at the point now where China is overtaking the U.S. to be the engine of growth in consumption," said Amar Gill, a researcher for brokerage CLSA Asia-Pacific Markets.

China could match the U.S. in total output as early as 2020, said a World Bank forecast in June. America's gross domestic product was $14.26 trillion last year, nearly three times China's.

A more serious concern for communist leaders is China's income per person, which the World Bank said ranked 124th in the world last year -- more on a par with impoverished nations like Angola, Tunisia and El Salvador than Japan, which ranked 32nd, or the U.S., ranked 17th.

As a result, becoming the second-largest economy "isn't something to add to national pride," said Zhang Bin, a researcher at the Chinese Academy of Social Sciences, a government think tank.

"I care more about GDP per capita," Zhang said. "People in small countries like Switzerland lead a much wealthier life."

Despite slipping in the rankings, Japan still enjoys Swiss-style health, wealth and comfort. Tokyo has more Michelin-starred restaurants than Paris.

By contrast, China faces a huge and politically explosive gap between an elite who have profited from reform and a poor majority. The country has launched two manned space missions, but families in remote areas live in cave houses in hillsides.

"China's first-tier big cities might look similar to big world cities. But social welfare still has a long way to match Japan, the U.S or European countries," said Industrial Bank's Lu.

China's growth has made it a major importer and consumer of oil and gas and the biggest source of greenhouse gases blamed for changing the climate.

Complaints that surging Chinese demand pushed up global crude prices have made energy a sensitive issue for Beijing. It angrily denied an International Energy Agency report last month that said it passed the United States in 2009 as the top energy consumer.

China's 21st century rise marks a return to a status it held until the 18th century as Asia's military, technological and cultural leader. That era ended as European colonial powers expanded and Chinese imperial leaders crushed reformers who wanted to imitate Japan's embrace of Western technology.

China spent much of the 20th century wracked by war and political upheaval before reforms pioneered by leader Deng Xiaoping in 1979 opened the door to renewed growth.

China, with 10 times Japan's population, has long been expected to catch up with its neighbor. But the global crisis and Japan's sluggish growth brought that point forward by many years.

The International Monetary Fund is forecasting growth of up to 10.5 percent this year for China. By contrast, Monday's data showed Japan grew at an annualized rate of just 0.4 percent in the latest quarter, well off the first quarter's annualized 4.4 percent expansion.

The symbolism of dropping to third place might be the "wake-up call" Japanese leaders need to focus on reviving growth, said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo.

"Japan is always strangely inward-looking," he said. "And nobody is doing anything about it."