China’s economy tops Japan: Are you worried?

BOSTON—“Chinese Economy Eclipses Japan,” said the headline in the Financial Times. “China surpasses Japan,” the Korea Times stated. “China rising on world stage,” warned the San Francisco Chronicle.

A quick Google search reveals 1,542 similar entries about China’s economy topping Japan’s second quarter gross domestic product, making it one of the week’s biggest stories.

The news is certainly noteworthy.

Chinese visitors are the fastest growing market in Hawaii, up 23 percent during the first quarter of 2010. Chinese visitors are also the highest spending visitors, averaging $312 per day.

Fueled by three decades of economic reform, years of double-digit growth and its undisputed position as the world’s factory, China’s remarkable rise is one of the greatest accomplishments in economic history.

Moreover, Japan has been the world’s second-largest economy for the past 43 years, behind the United States. So China’s move into the second slot, while largely insignificant in day-to-day economic terms, does signal a shift on the global stage.

As political influence flows from economic strength, China is already a regional force and, in many ways, an important global power. Toss in a population of 1.3 billion people, its immense size and vast economic potential — not to mention a large and nuclear-armed military — and you’d be excused for worrying about China’s capacity to threaten the rest of the world.

You’d also be wrong.

China overtaking Japan isn’t exactly a news flash to anyone who’s been paying attention to global economics or to recent events in Asia.

In purchasing power, China eclipsed Japan almost a decade ago. And as Gavin Blair points out, go-go China is more than 10 times the size of Japan, a rapidly aging country with a population of just 127 million.

In fact, China’s economic heft is mostly a good thing for struggling Japanese exporters. Rather than worrying about their increasingly powerful neighbor, many pragmatic Japanese firms are now busily targeting new Chinese consumers.

“This is a huge opportunity for Japanese companies,” Takashi Shiono, an economist at Credit Suisse told Blair.

That said, the deeper story here may be not Chinese economic strength, but rather, its weakness. And that’s where our tale potentially turns dark.

That’s because there is no guarantee that China’s current economic model is sustainable. China grew so quickly over the past three decades by throwing masses of relatively cheap labor into thousands of coastal factories, driving GDP higher and boosting the living standards of millions of formerly rural and migrant workers.

But the model is showing some strain. For one, factory workers across China have grown increasingly uneasy. Demands for higher wages and better working conditions sparked significant labor unrest earlier this year, with disputes hitting a number of high profile factories, including Honda and Apple supplier Foxconn.

And let’s not forget that, for all the excitement, China remains a very poor country. Its GDP per capita is about $6,500. That’s less than Namibia, Tonga, Jamaica and 95 other countries. (In the U.S., GDP per capita is about $46,000).

When you consider worsening loan defaults in China’s banking system, its ongoing property bubble worries, and increasing concern about the immediate health of the U.S. economy (where most of China’s low-cost, low-margin exports end up), China doesn’t look scary for its strength.

It looks scary for its potential weakness.

All of this comes as the Chinese government is carefully attempting to redistribute wealth from its coastal regions to its poorer interior.

In a high stakes strategy with implications beyond its borders, Beijing is trying to gradually reduce its reliance on exports while transitioning to a more sustainable growth model based on Chinese consumers buying more stuff. Oh, and it must do this while creating new jobs, expanding social safety nets, and without provoking political or social unrest.

Developing a stable, consumption-led economic model is the whole game in China right now. That’s how it is likely to become a true economic superpower in coming years.

But the country is still a long way from that, and passing Japan in GDP this week isn’t going to change that fact.

So, yes, let’s mark the occasion. Let’s not lose our heads.