The new status will lead to increasing demands on China to share greater responsibilities globally

On Monday, news that China had overtaken Japan to become the world's second-largest economy in the second quarter of this year made headlines around the world.

The economic milestone was seen as a telling confirmation of the shifting balance of economic power in Asia, and as a culmination of China's stunning three-decade economic resurgence.

In the country's commercial capital, however, the development has been greeted more with measured caution than any sense of achievement. In fact, economists here warn that the Chinese economy is facing a growing list of challenges, from rising inequalities to continued dependence on the government's heavy hand to sustain growth.

Low per capita

“It would be premature to read into too much significance into this news,” Chen Zhao, an economist at the influential China Centre for Economic Studies, which is part of Shanghai's leading Fudan University, told The Hindu in an interview on Tuesday. “With quite a long time of high-speed economic growth, and a large population, it is only natural that China's GDP will overtake that of Japan. The problem is when you look at GDP per capita, China is still lagging far, far behind.”

The Japanese government said on Monday that its economy recorded only 0.4 per cent growth in the second quarter of the year, with its GDP at $ 1.28 trillion. In sharp contrast, China's economy surged ahead by 10.3 per cent, valued at $ 1.33 trillion. A comparison of per capita income, however, tells another story. In 2009, China's per capita GDP was $ 3,687, far below Japan's $ 37,800.

“A huge amount of GDP for China does not mean everything,” Professor Chen said. “And I hope this does not lead to a sense of pride. We are facing many problems, such as a growing income gap between urban and rural areas, and widening regional disparities. This increasing income inequality shows that the high speed of economic growth rate is not benefitting all people equally.”

Yao Jian, a spokesperson at the Ministry of Commerce, said beyond GDP data, China needed to improve “the quality of economic growth”, whether “in terms of people's quality of life or in terms of science, technology and environmental protection.” “We still have an enormous gap to make up,” he said at a press briefing.

Stimulus helps

China's economy, which is expected to grow at between 9 and 10 per cent in 2010, has been buoyed in the past year by the government's $586 billion stimulus plan. Unprecedented investment in infrastructure projects, coupled with a loosening of monetary policy and record lending, has helped sustain growth, even as other economies, like Japan, reeled under the impact of the recession.

“Keeping a high economic growth rate is not a problem in China,” Professor Chen noted. “The real question is, how do we achieve a high economic growth rate more effectively and efficiently, using more market-oriented ways instead of government intervention? With deeper government intervention, we can keep a high growth rate, but it might not be good for the future of sustainable economic growth.”

In China, there is also concern that the country's new status as the world's number two economy will lead to increasing demands on China to share greater responsibilities internationally. Specifically, officials and economists expect renewed pressure on China to strengthen its yuan currency, which, the U.S. and other countries say, has been devalued to support China's exports. This is also part of the reason for the cautious response on Tuesday. “China's economic strength is still at the level of a developing nation,” the ruling Communist Party's official newspaper, the People's Daily, wrote. “So being the world's second-largest economy is not the same as being the second-largest economic power.”

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