China yesterday overtook Japan as being the second largest economy in the world, behind the United States.

It is also being projected that within the next decade, China will overtake the US and clinch top spot. But what exactly does that mean? It is not as gloomy for other economies as one would make out; in fact Japan has already sought to allay confidence fears by saying that China’s growth is beneficial to the Japanese economy. This becomes more and more evident when one looks at the issue in more detail and sees that China has now become Japan’s major trading partner.

As China’s economy grows, so does its production and consumption. This leads to cheaper import prices for other nations, as well as an opportunity to export to the Chinese market. As the economy grows, so does the spending power of the Chinese people. Just like anywhere else, the more money people have to spend, then the more opportunity for export.

But China has to be careful. It has seen gross domestic product growth rates of 10% and this has largely been fuelled by cheap labour and high productivity. But is 10% a sustainable level of growth?

We have already pointed out that China has increased the salary of workers to cope with inflation. Inflation was created as the renminbi was manipulated on the stock exchange to offset energy costs, increased wages and other cost induced factors.

The fact that the currency is manipulated (or at least has been), is an open secret and there have been many calls from the United States and the European Union to put a stop to it, mainly to prevent unfair trading, and also to not lead to a meltdown as was experienced in Europe and the US over the past couple of years.

China cannot afford to go down the same road as the US and Europe in terms of fiscal policy. The two Western economies have almost ruined themselves, and both are not yet out of the woods by any stretch of the imagination.

Aiming for 10% GDP growth, increasing production costs (through increased wages) and offsetting the negative factors through manipulation of currency values to trade on the markets will only bring about a more spectacular collapse than we witnessed in 2008-09.

China has supported the West by pledging to buy up European bonds and it is also helping our economies recover by offering the purchase of cheap commodities, while at the same time purchasing Western ‘luxury’ products for consumption on its own internal market. It has been proved time and time again, every economic system collapses at some point. We saw it with feudalism, Bolshevism, ‘modern’ communism and now, even capitalism. One wonders what the current Chinese system will eventually morph into and how it will stand the test of time. We live in a new reality. China is now the pace setter. The pace maker that is the US will shortly have to allow the runner on its shoulder past. Just exactly what a flagging Europe will do is anyone’s guess. Procrastinate and draft another useless treaty and change it again within a couple of years, probably….