Wed, Jul 07, 2010 - Page 9 News List

China and Japan duel for control of Asia’s economic duopoly

The world is nervously watching as leaders in Tokyo and Beijing attempt to steer their countries, through a very different set of circumstances, to continued sucess

By Heizo Takenaka

In today’s Asia, there are two economic powers of global standing: Japan and China. The balance of economic power between the two is changing, and fast. Sometime this year, China’s GDP will exceed that of Japan (if it has not already done so). China’s economic footprint, moreover, is spreading rapidly across Asia and the rest of the world.

Most Asian countries are recovering strongly from the global recession that set in following the collapse of Lehman Brothers in 2008. China’s growth rate last year was 8.7 percent, and more than 10 percent in the past two quarters. Neighboring countries, like South Korea and Singapore, also are recording very high rates of growth. The only exception is Japan, where a lack of political leadership and a limited knowledge of basic economics among government ministers undermines mid-term growth prospects.

While China’s ability to maintain high growth through the “Lehman Shock” was a remarkable feat of economic management, three important changes in China hold geopolitical implications for the region and the world.

The first change concerns China’s pattern of economic growth, which so far has been achieved mostly by rapidly increasing factor inputs — labor, capital, and energy. According to recent research, however, about one-third of growth in China now comes from technological progress, or an increase in total factor productivity. In other words, China’s growth pattern is coming to resemble that of industrialized economies.

Second, the renminbi is expected to appreciate substantially in the coming years, owing not only to pressure over China’s huge trade surplus, but also to the Chinese government’s understanding that a stronger renminbi, despite its negative impact on exporters, is needed to fight inflation.

The question is how rapidly will China’s authorities allow the renminbi to appreciate. In 1989, before the Tiananmen Square incident, the renminbi’s exchange rate was 45 percent higher than now — a level that could be reattained relatively soon. Between 2003 and 2005, the renminbi appreciated by 20 percent. Given rapid economic growth and continuous renminbi appreciation, Chinese GDP could exceed that of the US as soon as 2015.

However, around 2015, China will face a third dramatic change — a demographic shift reflecting the effects of its long-standing one-child policy. China’s total fertility rate is estimated at around 1.5, implying that the working-age population will begin to decline by the mid-2010s. As a result, economic growth will slow, and China’s domestic problems — such as income inequality — will worsen, even as political institutions that can channel popular grievances remain underdeveloped.

Under such circumstances, the role of political leadership will become much more important. Chinese President Hu Jintao (胡錦濤) will step down in 2013, but will continue to hold his post on the all-important Central Military Commission until a complete succession is completed, also around 2015. So, all things considered, China’s looming leadership transition is shaping up to be a very challenging period for China and the world.

While China’s economy is growing very rapidly, Japan is still struggling. Indeed, the country desperately requires strong political leadership to prevent a Greek scenario — political leadership that it is unlikely to find. On the contrary, the recent resignation of former Japanese prime minister Yukio Hatoyama created more uncertainty than his own government did.

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