The poor Chinaman

Even though China has overtaken Japan as the world’s second largest economy in 2010, its GDP per capita ranked #86 out of 164 countries in 2009. Japan was ranked 19. China’s GDP per capita in 2010 was $4,300. In comparison, that for the US and Japan are $47,100 and $42,500 respectively. Both are nearly 10 times bigger than China.

The US GDP was $14.62 trillion in 2010. Those for China and Japan are $5.74 and $5.39 trillion respectively. So, when will the Chinese economy surpass the US? Some say 2020 while others predict 2025. But one thing is for sure, this is an inevitable event.

China’s inflation rate for January 2011 was 4.9%. But, this is not necessary a bad thing. As wages outpace productivity, workers’ share of the economy will rise – thus boosting consumption. Wage- driven inflation would help to narrow China’s trade surplus through a higher price for its exports. This could be a better way of rebalancing the economy than an outright appreciation of the Yuan. The latter modus operandi would cause big job losses in export firms. A gradual appreciation of the Yuan would also be unpalatable as it attracts large speculative capital inflows.

Inflation would help accelerate China’s GDP in US$ terms. Any appreciation of the Yuan would be helpful too. Whatever it is, a GDP per capita of $4,300 has ample room to grow. China has the technology and the entrepreneurial drive needed for growth. So, there should be no surprise that China would eventually be the number 1 economy someday.