S&P: China Still Lags Behind Japan In Many Economic Areas

China is the world’s second biggest economy, a title it took from Japan. This was inevitable, from the moment China joined the World Trade Organisation in 2001, as any reasonable level of average income per capita would make it a huge economy in total.

This theme is picked up by Standard & Poor’s (S&P) in a note released by its Asia Pacific chief economist Paul Gruenwald, titled “Is China’s Economy Really Besting Japan’s? A Look Beyond GDP”.

Gruenwald says:

The presumed mantle of economic leadership in Asia has passed from Japan to China, with the latter now firmly ensconced as the No. 2 economy in the world.

However, when we examine metrics other than the level of GDP, China still lags Japan in many areas, sometimes by a sizable margin — although it is catching up.

China also has more ground to gain with softer indicators, such as the strength of its institutions and the business environment, where the gap with Japan is larger.

That is great news from an Australian point of view. As China catches up, its growth will continue and the market for Australian goods (other than iron ore) will open up.

Picture: Standard and Poors

It’s GDP per capita — which is where S&P says China lags — but where the great opportunities for Australia lies.

S&P highlights the disparity, noting: “China still shows a meteoric rise over the past three decades, but still lags far behind Japan. As of 2013, China’s per capita GDP was US$9,828, one-fourth of Japan’s US$37,135”.

S&P highlights the growing sophistication of Chinese manufacturers, and the outbound investment funds that have been going into the Tiger economies of Asia in greater quantities than Japan over recent years.

From a market and Australian perspective, the key point to all this is the reform agenda that Premier Li and President Xi are undertaking across the economy.

There is a risk that these reforms disappoint market expectations of growth in the short run. But in the long run S&P believes they are crucial to help China close the gap on Japan.

still trails Japan on many of the “soft” metrics, including business environment and efficiency, which we believe will become increasingly important as the country moves away from relying on investments and manufacturing toward a more service-based economy with consumption-led growth. Improving competitiveness and maintaining high productivity in this phase of China’s development will be critical for securing the buffers needed to help face the inevitable challenges associated with changing its growth model. This requires a continual push in reforms along the lines spelled out in the recent Third Plenum.

That spells a great opportunity for Australia.

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