- Associated Press - Saturday, July 31, 2010

BEIJING (AP) — China is set to overtake Japan as the world’s second-largest economy in a resurgence that is changing everything from the global balance of military and financial power to how cars are designed.

By some measures it has already moved to second place after the U.S. in total economic output — a milestone that would underline a pre-eminence not seen since the 18th century, when the Middle Kingdom last served as Asia’s military, technological and cultural power.

China is already the biggest exporter, auto buyer and steel producer, and its worldwide influence is growing. The fortunes of companies from Detroit automakers to Brazilian iron miners depend on spending by China’s consumers and corporations. And rising wealth brings political presence: Chinese pressure helped to win developing countries a bigger voice in the World Bank and International Monetary Fund.

Japan was the powerhouse driving the rest of Asia,” said Rob Subbaraman, chief Asia economist for Nomura Securities. “Now the tide is turning and China is becoming a powerful influence on the rest of Asia, including Japan.”

China’s rise has produced glaring contradictions. The wealth gap between an elite who profited most from three decades of reform and its poor majority is so extreme that China has dozens of billionaires while average income for the rest of its 1.3 billion people is among the world’s lowest. Beijing has launched two manned space missions and is talking about exporting high-speed trains to California and Europe while families in remote areas live in cave houses cut into hillsides.

Japan’s people still are among the world’s richest, with a per capita income of $37,800 last year, compared with China’s $3,600. So are Americans at $42,240, their economy still by far the biggest. But Japan is trapped in a two-decade-old economic slump, the U.S. is wrestling with a financial crisis, and China’s sheer economic size and the lure of its vast consumer market adds to its clout abroad.

Its explosive growth has driven conflicting shifts in Asia and beyond, triggering a scramble for commercial opportunity but fueling unease that the wealth is helping to finance a military buildup to press the communist government’s claims in the region.

“I think everyone in the region is trying to benefit from Chinese economic dynamism but at the same time is trying to make sure China does not become a regional hegemon,” said Greg Sheridan, foreign editor of The Australian newspaper.

Exactly when China passes Japan formally will be unclear until after this year ends. It depends on shifting exchange rates and data reported in different forms by the two governments.

Chinese GDP in 2009 was $4.98 trillion and Japan’s was $5.07 trillion. In 2010, Chinese GDP was $1.335 trillion for the April-June quarter — a period for which Tokyo has yet to report. China is growing at 10 percent a year, while Japan’s expansion this year is forecast at no more than 3 percent.

“On that basis, the crossover probably happened last quarter,” said Julian Jessop, chief international economist for Capital Economics in London, in an e-mail.

Beijing appears to take it for granted that it already has overtaken Japan.

China already is the world’s second-biggest economic body,” said a deputy central bank governor, Yi Gang, in a policy discussion posted July 30 on the foreign exchange agency’s website.

Australia has been one of the biggest beneficiaries as China’s voracious appetite for iron ore, coal and other commodities drove a mining boom that kept its economy growing through the global crisis.

That booming trade prompted Australia to reconsider its stance toward China, previously seen as a communist aggressor. In 2008, then-Prime Minister Kevin Rudd, a Mandarin-speaker who was a diplomat in Beijing, called for closer political, economic and academic engagement with the Chinese government.

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