The Chinese economy has presented a remarkable economic growth in recent years and has even surpassed Japan's in Gross Domestic Product (GDP) during the second quarter of 2010 as the world's second largest economy (Guardian, 2010). The essay intends to examine the reasons why China has overtaken Japan in economy and investigate two major challenges, pollution and wealth gap, which China has encountered, and its economic forecast.
China' economy has already surpassed Japan's and will almost certainly be larger than Japan at the end of 2010. According to the latest news reported in The Economists of 16 August 2010, Japanese output during the second quarter merely rose by 0.4%, far less than economists had expected of 2.3% rate, while China has a significant growth in GDP, at appropriately 10%. In addition, consumer expenditure in Japan remained constant, whilst the Chinese consumption increased consistently in recent years. A major reason is that the Chinese economy was influenced less than Japan by financial crisis in 2008 and another factor is that the Japan currently suffers from inflation, which affects its product exports. Although the Chinese currency of RMB has encountered the same problem, booming population in China helps to boost domestic consumer's expenditure, which contributes to the sharp growth of GDP. The huge differences in terms of output and consumption between China and Japan have narrowed the gap of the two economies year by year. Therefore, it seems to be apparent that China has overtaken Japan as the second largest economy in the world. However, there is suggestion by economists that GDP growth is just nominal and cannot be a standard to represent real living conditions. In fact, Japan continues to be placed the second richest country in the world, just behind the US, if the nominal GDP is divided by the number of people in each country. The data of last year had described that Japanese individuals were wealthy, with a per capita income of $37800, compared with China's $3600(Guardian, 2010). Nonetheless, China's economy has achieved a remarkable improvement. If China maintains the present GDP growth rate of 10%, it will have undoubtedly overtaken Japan in economy at the end of 2010.
There are two primary root causes to explain the significant changes of the Chinese economy which led the country to surpass Japan. First of all, since the introduction of economic reforms, the Chinese economy has grown substantially faster than during the pre-reform period. In December 1978, Deng Xiaoping, the chairman of China, announced the implementation of economic reform, transformation from planned economy into market economy. Planned economy is an economic system that all plans and decisions for each industry have to follow the steps of the central government, while market economy means that the free price system is established automatically by supply and demand of the whole market. In the free market environment without government restrictions, the majority of Chinese people started to establish their own business and some of them purchased stocks and shares by themselves. In addition, China's WTO accession in 1999 also marked the beginning of a new stage in its reform. According to Morrison (2006), during pre-reform, the average annual GDP growth was appropriately 5.3% from 1960 to 1978, while after the implementation of reform, the GDP rate grew at a staggering rate, achieving 9.7% and stabling itself at or even more than this level in later years. If the economic reform had not been carried out by the government in 1978, the Chinese economy would have not achieved such significant improvement.
The other major cause of China's rapid economic growth is large-scale capital investment, incl