It is official. Measured in terms of nominal GDP converted to dollars at official exchange rates, China has, in 2010, overtaken Japan as the world’s second largest economy. Figures from Japan released this week showed that Japan’s nominal gross domestic product was worth $5,474 billion in 2010 compared with China’s $5,879 billion. This is indeed a significant milestone. For many years before that China had been ahead of Japan only when GDP was measured in purchasing power parity terms. PPP is an indicator that takes into account relative prices and therefore the command over goods that a dollar of income provides. Since with lower wages and prices, a dollar in China when converted to RMB delivers more purchasing power, Chinese GDP measured in PPP dollars is significantly higher than at official exchange rates. Hence, becoming the world’s second largest economy at official exchange rates does mark an important transition. There are only two features that seem to discount this achievement. The first is that while having overtaken Japan, China is far behind the U.S., with less than two-fifths of its GDP in nominal terms. The second is that with a population of more than 1.3 billion, compared with Japan’s 128 million and the United States’ 307 million, China’s per capita nominal GDP in 2009 was less than a tenth that in both Japan and the U.S.
Yet China’s rise does seem to evoke fear. One reason is its export success, with exports of goods and services estimated at close to two-fifths of GDP before the 2008 crisis broke. But that figure has come down since and is likely to remain low as China seeks to redirect growth and rely more on home demand. Yet the fear of the socialist giant is unlikely to subside. This is because its low per capita income and large population makes its rise more ominous in the eyes of its global rivals. Being low on the per capita league table allows China to aspire to high growth rates for decades to come. When growth occurs at that level of per capita income, the demands it generates tend to be more intensive in manufactures, energy, and mineral resources. Add to this the fact that the size of the population that will benefit from that potential growth is immense and the pressure this puts on the world’s resources, besides its environment, is likely to be huge. The threat this poses to countries that rose to dominance in a context of cheap and ample resources and raw materials should be obvious. Rising India has nothing to fear from its big neighbour assuming that bilateral relations will continue to be handled soundly on both sides. For one thing, China is one of India’s top trading partners and bilateral trade, which amounted to $61.7 billion in 2010, is well on course to meet the target of $100 billion by 2015.