The Chinese economy is now larger than Japan's -- a symbolic development that also signals a strategic shift in Asia's power balance. China's gross domestic product is now $1.335 trillion, surpassing Japan's GDP of $1.286 trillion, which isn't adjusted for price and seasonal variations, according to the Associated Press.

What's the significance of this news, and what might it mean for China? To get some insight on the economic and strategic implications, DailyFinance spoke to Evan A. Feigenbaum, director of geopolitical consultancy Eurasia Group's Asia practice -- and a former deputy assistant secretary of state for South Asia at the U.S. State Department from 2007 to 2009. Feigenbaum notes that on one level nothing much has changed now that China is officially the world's second-largest economy. But on another level, this development cements critical changes that have been building both within China and regarding China's foreign relations, particularly with the U.S.

DailyFinance: How big of a deal is the fact that China's economy is now larger than Japan's?
Evan Feigenbaum: It's of huge significance and of no significance at all. It's hugely significant because it shows how very important China has become in the region. For a long time, the country has been on track to surpass Japan, and now it's finally happened. Not only is China lifting economic growth, but also per capita income, and the country has a lot of room to grow even further.

So, how is it "of no significance at all"?
It's of no significance because the fundamental challenges facing China today are the same as they were last week or two weeks ago. The financial crisis had a double-edged meaning for China. It gave them the confidence that they had come out of it earlier and stronger. But for China's economic managers, the crisis highlighted the fact that the Chinese economy has relied on sources of revenue, like exports, that won't be there as before.

Moving forward, China's economy will depend more on local demand and less on the export economy. Some in the Chinese strategic class have said this is terrific because the country will have more influence, but some economic managers are asking where the growth is going to come from.

So it's not all good news for China, then?
China's biggest economic challenge is to rebalance the economy from exports to domestic consumption. And they still have to deal with resources issues, labor issues and manufacturing policy. Becoming the second-largest economy in the world is hugely significant because it confirms China's rise, but doesn't erase the underlying social and structural challenges underlying the economy. Chinese policymakers do not take for granted that they can rely on global export growth to sustain their economy in the long term.

Speaking of which, what are China's long-term prospects?
First of all, China's economy is slowing. First-quarter growth was a blistering 11.9%, but second-quarter growth was 10.4%. This is a managed slowdown, of course -- they were worrying about overheating.

But the long-term question is: Can they sustain 7% to 8% growth? Second, what kind of growth is China going to experience because they can no longer just rely on global growth to drive their economy anymore? How do they shift toward less reliance on global demand and more reliance on domestic consumption, whether through infrastructure investment or green energy or industrial policies that are designed to support domestic consumption?

How has China's relationship with its Asian neighbors and the U.S. changed?
China has become the most important Asian economic center in a way that was not the case even five years ago. It's the major trading partner of almost everyone in the region. It's also at the center of efforts to set technical standards. The U.S. is no longer the agenda-setter in the region. As the U.S. has become less active and relevant in global trade agreements, China is at the center of regional trade, financial activity and trade and technical standards integration. A possible trilateral trade agreement between China, Japan and South Korea could be very important.

Finally, U.S. and Chinese trade and economic tension is heating up on several fronts. The first is the currency issue, the second is industrial policy, and Democrats in Congress are focused on U.S. domestic manufacturing polices that could result in a bill that would affect trade with China. I expect that U.S. and Chinese economic tensions will increase in the next year.

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51 Comments

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tennockerslv

If people took the time to buy USA made items this would not be happening. I know it is hard (I sometimes forget to look) but I am at about a 40% buying rate of USA items, it takes time but they are there and I am even finding that they are not always as expensive. If all of us only took a little time to look we could knock them back in no time.

August 18 2010 at 12:26 AM Report abuse rate up rate down Reply
John Potterf

It would really be nice to be able to find an item made in the United States when you go into a store. Thanks to the high rollers in Washington D.C. this is no longer possible.

August 17 2010 at 5:17 PM Report abuse +1 rate up rate down Reply
fovday@163.com

may be good news!

August 17 2010 at 8:31 AM Report abuse +1 rate up rate down Reply
hemlock1382

Thanks to the USA

August 17 2010 at 6:31 AM Report abuse +1 rate up rate down Reply
richikid

CHINA WIL PAST THE U.S.A. SOON.......WE GAVE IT ALL AWAY !

August 17 2010 at 2:39 AM Report abuse +3 rate up rate down Reply
1 reply to richikid's comment
janeroch2112

Can someone explain why US manufacturing policy change may strain relations with China. Is Mr. Gustin suggesting protectionist tariffs? If so does anyone know of other sources that indicate this?

August 16 2010 at 11:59 PM Report abuse +4 rate up rate down Reply
cpminline

Chinese are going to get hip to the fact they are slave wage stooges like happened in Japan 40 years ago. Japs woke up one day and said we want what americans have and that was the end of cheap Jap stuff. Only one problem China is a Cummunist country (something everyone seems to forget) when the people rise up the government will squash them back into the 17TH century, then I can laugh at all the companys that bet on them and lost everything.

August 16 2010 at 11:12 PM Report abuse rate up rate down Reply
1 reply to cpminline's comment
edormoy

I thought Japan's GDP was more in the neighborhood of $5 trillions+. It is also amazing that GDP per capita is never mentioned as it is the real measurenment of individual well-being in a country. Japan's GDP per capita is probably 10-12 times that of China's.

August 16 2010 at 11:11 PM Report abuse +1 rate up rate down Reply
Sieben

Keep on buying their JUNK, It has to be amazing that we import more than we export to China

August 16 2010 at 11:04 PM Report abuse +3 rate up rate down Reply
carddfann

It means we've had decades and decades of sorry azz leadership in this country. That's what it means. Both parties let us down.

August 16 2010 at 9:26 PM Report abuse +10 rate up rate down Reply