Barring a financial crisis in China, that country is et to surpass Japan next year as the world's second largest economy, five years ahead of earlier estimates. And, as the world economic landscape adjusts to life after the worst recession since the 1930s, the economic gap between the world's most populous nation and the United States (US) is likely to narrow rapidly.

Some forecasters are predicting that by the year 2039 China could surpass the US, while others are projecting that this could happen as early as 2026, less than 20 years' time, if the Chinese economy can be re-oriented to be more domestically-driven.

Most people know that China is one of the world's oldest civilisations, but very few may be aware that it has been the most advanced economy for much of recorded history. In fact, China has been the world's largest economy for 18 of the past 20 centuries (according to The Financial Times), and up to 1820 it accounted for 33 per cent of the world's gross domestic product. But, by the start of the 20th century, its share had slipped to less than 10 per cent, as political instability undermined its economy and the Industrial Revolution propelled Western Europe and the US to the forefront of the global economy.

India suffered a similar demise, economically, due in part to how British imperial rule disrupted its production structure (documented by West Indian historian, Walter Rodney).

Chinese pride in its restoration to the forefront of the global economy was vividly displayed in the recent celebration of the 60th anniversary of the founding of its modern state. China now boasts the largest foreign reserves of over US$2.3 trillion, and the biggest trade surplus which continue to rise despite the global economic crisis, as it pushes past Japan and Germany to become the leading exporter. Befitting its growing industrial might, it has also galloped to the front of world producers of coal, steel and aluminium, among others. Nowhere is the changing face of the global economic landscape wrought by the financial meltdown in the US and Europe more evident than China's surge to displace the US in 2009 as the world's top auto market. Its total vehicle sales jumped by 34 per cent in the first nine months of 2009 to reach 9.66 million units while sales in the US are not anticipated to reach more than 10 million units for the full year, down from 17 million before the recession.

Economic relationship

The rise of China as a world economic superpower and the 21st century successor to Britain's 19th century position as 'workshop of the world' has been underpinned by what has, up to now, been a symbiotic economic relationship with the US ('Chimerica'). The US market absorbs the enormous expansion in Chinese production of manufactured consumer goods, with the financial surplus being reinvested in US government securities and other instruments. In other words, China sells consumer goods cheaply to US households, which has helped to keep inflation low globally, while also serving as a source of low-cost capital to the US.

Massive displacement

The enormous downsides have been the massive displacement of US industrial capacity by cheaper Chinese production costs, and the damage to the US financial system partly caused by the excess liquidity generated by capital inflows from China. With the US financial system now badly weakened and American consumers deeply saddled by debt, the Chinese economic machine will have to adjust its export-led momentum towards its domestic market. There are some early signs that such recalibration may already be underway.

Indeed, China's economic growth rate which had slowed to an annualised rate of five per cent at the height of the global recession is now accelerating to nine per cent despite a 14.2 per cent decline in exports to the US. This rebound is being fuelled by a combination of an over US$550 billion stimulus package and liberal bank lending. The stimulus package is boosting spending on infrastructure that appears to be slanted towards opening up rural areas in order to speed up the shift in economic activity from the now saturated coastal areas. Meanwhile, lending to Chinese consumers and businesses rose by US$1.2 trillion in the first seven months of this year and is reflected in double-digit growth in spending on car sales as indicated earlier, housing and consumer durables.

China has a highly successful export-led growth model which has fuelled its accumulation of large foreign reserves has been based on high savings and low internal demand. The Asian giant now has the wherewithal to respond to the pressures to increase domestic consumption and, in the process, serve as a growth pole to help boost world economic recovery, a role that has, in the past, been played by the US economy. With US consumer spending being weak, recovery of that economy will have to be driven by increased net exports. In this rebalancing of world demand, China is being looked to as a market for increased US exports.

Critical differentiating factor

As we have seen in the case of Japan with its aging population and mature domestic markets/ the transition from a high savings, low internal demand export model is problematic. China's humongous population and low per capita consumption are, however, critical differentiating factors. This new global economic matrix represents a shift which involves profound challenges for many economies and industries. Jamaicans should be examining the consequences for our leading sectors and the axis of investment flows to the island.

Dennis E. Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.