China has overtaken Japan to become the 2nd biggest economy in the world

China is poised to become officially the 2nd biggest economy in the world in 2009. On Christmas Day, the Beijing Statistical Office raised its 2008 GDP from 9 to 9.6% valuing the economy at US$4.6tn (US$4,600 billion) compared to Japan's US$4.9tn. In 2009, the forecast is for 8% GDP growth. To date, growth year-on-year for the 1st, 2nd and 3rd quarters were 6.1%, 7.5% and 8.9%. Averaging the first nine months at 7.7%, it will almost certainly overtake a stagnating Japan economy which the World Bank forecasts to shrink by 6% in 2009 and has held this 2nd spot for decades. India now ranks 4th.

“The big underlying factor propelling China’s growth is the continued migration of people from the agricultural sector to the more modern economy — industry and services,” said David Cohen , an economist at Action Economic in Singapore. “There’s no stopping China.”

China has had a natural advantage over Japan for years in terms of abundant natural resources, particularly energy and metals and a competitive labour pool. Japan has been captive to the price increases of world oil and natural gas prices.

China will still take decades to catch the United States' US$14tn economy although it can close that gap quickly if the US grows at 2-3% a year and it maintains current breakneck 8%+ rates.

The Chinese may not need to build a strong military to pass the US as the world's leading power. While maintaining powerful armies was important in the 20th century, national influence in the 21st century is liked to be fomented on currency value, export strength and access to natural resources. It is searching in all continents and developing alliances to secure natural resources, particularly oil and uranium.

Headwinds are never far away. Interventionist government investment, low interest rates and asset bubbles, according to some economists, can still crash the economy in the same manner as happened to Japan in the late 1980s from which they never recovered. Robust reserves can be eroded by bad debts from state owned banks. The country's demography points to a one-child policy leading to an inevitable aging population and pressure on the public finances that will constrain its growth prospects.

In 2010 China will play a pivotal role to shore up the waning US and European economies as it engages with its continuing , albeit diminishing purchases of their Government debt (Treasury bills, gilts etc). It is now locked in a relentless battle to prevent a meltdown in the value of its international reserves, denominated over 70% in US$; a battle that can be won only by diversifying stealthily to other asset classes. If it does not maintain the buying of US Treasuries, this signal to the financial markets will trigger a domino effect leading to the collapse of the US$ and plunge the country and the world at large into yet another economic crisis. Obama and Hu are playing a high stakes game of who blinks first.

In the future, China is considered likely to overtake the US in GDP... but three decades ago, so was Japan.