This week, I received an e-mail from a friend in Tokyo tagged: “Greetings from Number Three, Japan.” He was mourning the passing of an era.

The quarterly numbers he was alluding to suggest that, even in dollar terms, China is now the world’s second-biggest economy. There it will remain until, catastrophe or stagnation aside, it overtakes the US to become Number One.

Dollar comparisons are pretty arbitrary, as much influenced by currency fluctuations as by economic activity. They do not take into account that it is much cheaper to buy a house, a meal or a foot massage in Beijing than in Tokyo. In purchasing power terms, China’s economy surpassed Japan’s nearly a decade ago. But symbolism counts. And by that measure, China’s usurpation indeed ushers in a new order. For the first time since 1968, when Japan overhauled the then West Germany to become the second-largest capitalist economy, there is a new pretender to the US throne.

There are important similarities between Japan in 1968 and China in 2010. Then, Japan’s achievement demolished any lingering racist notions that non-whites were somehow incapable of modernisation. As recently as 1958, liberal economist John Kenneth Galbraith had begun The Affluent Society by defining wealthy nations as those “in the comparatively small corner of the world populated by Europeans”. For many Asians, China’s rise symbolises their region’s rightful return to the forefront of human endeavour. China, with an ancient writing system and the world’s biggest economy for 18 of the past 20 centuries, is simply restoring affairs to their “natural” state.

Like China today, 1968 Japan – which had expanded by 12 per cent the previous year – pursued growth at almost any cost. That was the year Japan’s government owned up to the tragedy in Minamata where for decades the Chisso Corporation had been causing devastating human deformities by flushing mercury into the bay. It was not until the 1970 “Pollution Diet”, when parliament enforced a radical clean-up, that Tokyo began to address its legacy of environmental destruction. China’s leadership has begun to give such problems at least rhetorical attention. But for now, hundreds of thousands of Chinese people die prematurely of respiratory disease, while rivers continue to be poisoned and food to be adulterated.

Another similarity is currency. The yen then, like the renminbi now, was widely regarded as undervalued. It had been pegged at Y360 to the dollar since the war. In 1985, after finance ministers from five countries agreed a dollar depreciation in the Plaza Accord – more like the Plaza Mugging – it leapt from an average Y240 to Y128. If the renminbi rose by a similar amount, China’s economy – today about one-third the size of America’s in dollar terms – would dramatically close the gap overnight.

The differences between China and Japan are more intriguing still. By 1968, Japan had more world-class companies in the making than China does now. It was already on the way to becoming a rich country. Today, China has a nominal per capita income of $3,867, almost identical with that of El Salvador. For the first time in the modern era, a relatively poor country has enormous global clout, exerting influence through investments in Africa and votes at climate change conferences.

China sometimes finds it convenient to hide behind the “poor country” label. But it is already far more assertive than Japan. One of the extraordinary aspects of Japan’s spectacular rise was the lack of resulting diplomatic influence. China is far less inhibited. Its rapidly modernising military, its web of trade and investment links and its sense of national interest – whether in the South China Sea or in Sudan – set it apart from a Japan still hiding behind US skirts.

The two countries have differing abilities to exert influence through “soft power”. China’s Communist system has little obvious attraction for advanced nations, though for those poor countries wishing to prioritise modernisation over democratic niceties it arguably offers a template. By contrast, there were people who once took seriously the notion that Japan offered a superior model of capitalism with compliant unions, just-in-time production and state-sponsored corporate champions. Yet over time, China has a better chance of exerting global influence. Martin Jacques probably overstates the case in his book When China Rules the World in which he emphasises the Middle Kingdom’s sense of cultural superiority. But there is at least a grain of truth in his assertion that China’s rise could, eventually, remake the world partially in its own image. (A record 3,000 British students sat this year’s Mandarin A-level.)

The most important difference is the most obvious. China’s population of 1.34bn – one person for every five on the planet – is 10 times that of Japan. That makes it 10 times harder for China to feed its industrial habit, to recreate an American standard of living or to pour out exports without clanking against big resource and political constraints. On the other hand, scale confers on China the potential to mould the world it inhabits, whether by challenging the supremacy of the US dollar or by imposing its national interest on others, by force if necessary. Japan at Number Two showed Asia’s potential. China at Number Two is the real deal.

– David Pilling

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Updated and expanded new Chinese edition just released.

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Turkish edition just published!

When China Rules the World is the first book to fully conceive of and explain the upheaval that China’s ascendance will cause and the realigned global power structure it will create.

New edition available now from:

Amazon UK
and all good booksellers.

US second edition is available now via: 

Amazon US