POINT OF VIEW/ Kwan Chi Hung: China's growth can be a threat or an opportunity

China is about to overtake Japan as the world's second largest economy. China's per capita gross domestic product, however, will be only about 10 percent of Japan's because its population is 10 times larger. Judging from factors like life expectancy and per capita electricity consumption, the Chinese economy is currently at the same stage of development as the Japanese economy was four decades ago. China's economy is large but it is still in the process of industrialization.

When social systems and other factors are taken into consideration in addition to the standard of living, the overall disparity between the two countries is even bigger than the economic gap. It will take China a long time to catch up with Japan. Japan should have more confidence in itself.

It is often said that the economies of Japan and China are locked in fierce competition. But my view is that the two economies complement each other. China has the advantage over Japan in low-tech areas, but Japan leads China in high-tech fields. Japan and China can build a win-win relationship that will allow their economies to develop together if they use their ingenuity.

Comparing the manufacturing process to a river, you could say that Japan is strong in both "upstream" areas like research and development and "downstream" areas like after-sale services. Japanese companies make products with high value added and large profit margins. In contrast, Chinese manufacturers are competitive in the "midstream" segment of assembling. They are labor intensive and don't generate much added value.

But China is rapidly closing the gap with Japan in some sectors such as the auto and steel industries, where Japan has traditionally been competitive. China has become the world's largest producer of automobiles, and its crude steel production is now 6.5 times that of Japan.

In Guangdong province, which has turned from a labor-surplus to a labor-scarce economy, manufacturers have started shifting production to Southeast Asia. Some Japanese media reports said that the phenomenon is a sign of "hollowing-out" of the manufacturing sector in the region. But that is not the case. Chinese manufacturers are trying to shift to high-value-added areas. The industrial gap between Japan and China is narrowing.

That makes it all the more important for Japan to accelerate its efforts to upgrade its industrial structure. Whether China will really surpass Japan in economic development some day depends on how far Japan moves forward as well as how hard China works.

The Japanese economy has barely grown in the past 20 years, a period often described as the "lost decades."

The government has been pouring huge amounts of taxpayer money into sunset industries as part of its efforts to stoke economic growth. The new government led by the Democratic Party of Japan has adopted more or less the same approach.

Instead, the government should focus its spending on new growth industries where Japan can capitalize on its strengths. It should focus on protecting people by helping unemployed workers find new jobs, for instance, rather than on trying to save declining industries.

The Japanese economy has been dead in the water for as long as 20 years because the nation has been putting higher priority on equality than on efficiency. As a result, Japan has been becoming more and more like a socialist country. China, in contrast, is pursuing efficiency at the expense of equality.

There is much debate in Japan on whether the fast-growing China represents a threat or an opportunity for the Japanese economy. The answer is that it depends on how Japan responds to China's rise. When I recently discussed the issue with some Europeans, they said Japan was in an enviable position, with such a rapidly growing country in its neighborhood.

Japan should not keep trying to maintain a full set of industries at home. It should start shifting more human and economic resources from low value-added industries to high value-added ones.

As with the human body, a nation's industry needs constant replenishment.

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The author is a senior fellow at Nomura Institute of Capital Markets Research. Born in Hong Kong and earning a doctorate in economics from the University of Tokyo, he worked for the Hongkong and Shanghai Banking Corp., Nomura Research Institute Ltd. and the Research Institute of Economy, Trade and Industry.