by Zhang Ming

BEIJING, Aug. 23 (Xinhuanet) -- According to newly released data by the Japanese government, Japan's nominal gross domestic Product (GDP) was worth $1.286 trillion in the second quarter, compared with $1.335 trillion for China, indicating that China will certainly overtake Japan as the world's second-largest economy this year.

This news sparked worldwide attention, with overseas media, especially, clamoring for China to take a more central role on the world stage as its economy expands.

Well, how should we rationally treat the phenomenon?

Analysts who are against using GDP as the primary indicator of a country's overall strength prefer the concept of per capita GDP. According to the International Monetary Fund, China's GDP per capita in 2009 was only $3,566, significantly lower than that of Japan ($39,573). China only ranked 99th worldwide in terms of per capita GDP.

GDP per capita is one of the most important indicators in identifying whether a country is a developed or a developing one. As per this criterion, China cannot be regarded as a middle-income country, let alone be placed on a par with Japan, whose economy has been the world's second largest for over four decades.

However, China's population is six to seven times that of Japan, indicating that the Chinese market has far more potential than Japan. With its vast territory and fruitful resources, China also has more space for industrial transfer and higher capability for economic self-support.

China's advantage over Japan is also presented in growth rate, demographic age structure and policy leeway. China's growth rate is expected to average 7 percent in the next decade, compared with Japan's 2 percent. China can still enjoy the demographic dividend until 2015, while Japan faces more severe aging problems.

In addition, Japan's debt-to-GDP ratio is approaching 200 percent, leaving Tokyo very limited space to adopt expansionary monetary or fiscal policies. With the current debt-to-GDP ratio at about 20 percent, Beijing still has policy leeway.

Actually, from the perspective of economic development history, many countries could lift their per capita GDP to the level of $5,000. But only the Republic of Korea and Singapore have successfully raised the figure to $20,000 from $5,000 over the past 20 years. And if China wants to achieve the same great leap, it must try to avoid two kinds of trap.

The first is the so-called Latin American pattern. Economies in South American countries, like Brazil and Argentina, bogged down when per capita GDP reached $5,000 because the alliance formed by the government and interest groups strangled economic vitality and growth power.

The second is the Japanese-type bubble economy. The government's long-term obsession with loose monetary policy will finally lead to an asset price bubble that an economy cannot withstand.

Unlike Russia, China embarked on the road of gradually advanced reform at the beginning of the reforms and opening up. The biggest problem of progressive reform is the easy shaping of various interest groups, which hinder further reform. Trammeled by the formidable interest groups, there are still some uncertainties about whether China can engage in smooth reform in terms of economy, society and politics. So, now is not the time for us to get uppish.

Japan has entered an aging society, but before that they got rich. Though Japan experienced the bursting of the real estate bubble, it was at a time when the nation's per capita GDP had reached $20,000.

So, if China cannot rein in its monetary policy in the future, the nation's looming assets bubble might collapse when per capita GDP is at about $4,000 to $5,000. If the bubble bursts and leads to recession, we have to face the challenge of "aging before getting rich".

Finally, it should be pointed out that although both China and Japan have continuing current account surpluses, in the latter's current account surplus the proportion of investment returns has already surpassed the trade surplus contribution.

China's oversea investment return, on the other hand, has just turned into positive from loss. Moreover, despite both countries' huge oversea net assets, Japan's foreign exchange assets are mainly possessed by domestic residents and enterprises, while the majority of China's are under the control of the government. Compared with Japan, China still has a long way to go in saving a fortune for the people and storing foreign exchange assets in the people.

The author is an economist with Institute of World Economics and Politics under the Chinese Academy of Social Sciences

(Source: China Daily)