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China Gaining on U.S., Now World's Second Largest Economy

China surpassed Japan as the world's second largest economy and some project that it's on track to beat the U.S. in as few as 10 years. China's official ascendancy to number 2 came this week when Japan reported a weaker than expected quarter. But the bigger story is that the Chinese economy is growing about 10 percent a year, while the U.S. economy barely eked out a 2.4 percent annualized gain in its second quarter. China still has a long way to go to catch the U.S., though: In the second quarter, U.S. gross domestic product was $3.52 trillion; China's was $1.3 trillion and Japan's, $1.29 trillion.

That has many implications, from China's influence in the United Nations and world currency markets to demand for oil and drywall. Here are some thoughts:

  • China is still a mostly poor country. As The Economist points out, it has four times the U.S. population, but less than half the output. In U.S. dollars, the Chinese economy produces $3,687 for each of its citizens every year; the U.S. produces $46,381. So China still has a way to go if it is to take care of its rural and impoverished citizens.
  • China could get old before it gets rich. Remember that one-child policy? It is going to cause a lot of problems, and not just for young and lonely Chinese men. By 2020, almost one quarter of the Chinese population will be over 65, according to some projections. It won't have enough young workers to fill its bustling factories (or support its elderly) and it will have to spend a lot of money taking care of the old folks at home. (Note to investors: Instead of buying Chinese widgets, maybe invest in its health care industry?)
  • China's demand for energy and resources will push up prices around the world. Think oil is expensive now? If China is growing by 10 percent a year, its demand for resources is probably growing by that much as well. And with China bidding against the U.S. (and Europe, and Japan) for everything from ginger to gypsum, sellers are going to send their material to the highest bidder.
  • Chinese growth will help worldwide recovery. Multinationals doing business in China should boom, as China needs to build and buy everything in a hurry. Eastern nations already are finding their growth fueled by Chinese demand; companies seeking new profits should be learning Chinese. Investors seeking profits should be looking for companies aggressively investing in doing business there.
  • The U.S. had better get going on upgrading its infrastructure. The Chinese government (which essentially continues to run its economy) has been putting the bulk of its new earnings into roads, trains, wireless communications, top of the line factories, and more. They will leapfrog the technologies used by countries that have long been developed.
  • China needs to take on leadership responsibilities. As China becomes a bigger player in world economics and politics, it should be pressed to do its part as a leader in environmental and human rights issues, too. China's government suppresses dissent and limits speech, and some of its companies work people until they get sick or kill themselves. And pollution is the one place where China already "bests" U.S. performance: It is now the world's top producer of carbon emissions. China's defenders say that those problems are typical of a rapidly industrializing society, and point out that working and environmental conditions were pretty horrible in the U.S. in the late 1800s. The U.S. has improved; let's hope China continues to chase us in those contests, too.
Photo by Peruisay on Flickr.
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