The closing decade of the 20th century offered a crystal ball for anyone peering into the future of Asian Pacific countries. The Japanese economy which had once led the region underwent a so-called “lost decade” after its economic bubble burst. And the Chinese economy overcame the stagnation that accompanied its Tiananmen Square crisis to achieve its present growth path.

The issue of whether China’s rapid growth would be a danger or an opportunity to the whole region was much discussed 10 years ago, but nowadays most observers agree that it would be impossible to continue with wider regional development without it. Meanwhile, the United States remains the world’s only super-power even if its relative influence has been declining.

Now that the 21st century is entering its second decade, these economic trends have accelerated further. China, despite the shockwaves of the financial meltdown that followed Lehman Brothers’ collapse in 2008, has maintained growth that has pulled the world’s economy along with it. Last year saw Chinese GDP exceed that of Japan, and in terms of PPP (Purchasing Power Parity) China’s GDP will reach that of the U.S. very soon, perhaps by 2015.

It is already clear that this geopolitical transformation of Asia means the potential for hostility between the U.S. and China will grow, even while they try to make use of each other’s vitality. So when establishing a new economic order in the world, it will be essential for one country in Asia to play the role of third party to ensure the region avoids any tensions between the U.S. and China. For Asian Pacific issues, that third party would clearly have to be Japan, while for global issues it should be the European Union.

“It is already clear that this geopolitical transformation of Asia means the potential for hostility between the U.S. and China will grow, even while they try to make use of each other’s vitality”

China’s part in the process of global economic recovery has been growing dramatically. Its approach to economic management is greatly appreciated elsewhere as its high growth rate has continued despite the shockwaves created by Lehman Brothers’ collapse. For all that, we should recognise three important transformations that have taken place in China that also have geo-political implications not just for the Asia Pacific region but for the world.

The first concerns the Chinese pattern of economic growth. So far, growth there was mostly achieved by rapid increases in a number of input factors, notably increases in labor input, capital input and energy input. But some recent research suggests that about a third of China’s economic growth comes from the technological progress, or from the increase in total factor productivity. In other words, China’s growth pattern is becoming similar to industrialised economies, which in turn suggests that its economy will soon start grow more evenly from now on, taking on much the same characteristics as more mature economic mechanisms.

The second transformation is the substantial appreciation of the Chinese Yuan that seems inevitable in the years ahead. Today, there is strong pressure from foreign governments for the Yuan’s value to appreciate in line with China’s huge trade surplus. But because of importance of exports to the country’s economy, the Chinese government is widely seen as having been reluctant to permit a major revaluation of the Yuan. Yet even from a Chinese point of view, the Yuan’s appreciation is needed in order to dampen inflationary pressures. Beijing therefore appears ready to allow the Yuan to appreciate gradually, so for them the problem is how rapidly or slowly this should be.

We should not forget that before the Tianamen Square events in 1989, the Yuan was about 45% higher than its current rate. Many financial market experts now believe that the Yuan could sooner or later return to that level.

Between 2003 and 2005, long before the Lehman Brothers collapse, the Yuan appreciated by as much as 20% in the course of three years. So in light of China’s rapid economic growth and the continuing appreciation of the Yuan, it can reasonably be predicted that Chinese GDP (based on the market dollar rate) will exceed that of the U.S. much earlier than was expected, possibly in 10 to 15 years. And as far as a Purchasing Power Parity-based GDP is concerned, China’s GDP will reach that of the U.S. in around 2015, thus changing the balance of economic power.

There is yet another transformation that will affect China at about the same time. Demographic change reflecting China’s one-child policy means that its working-age population will start declining in the mid-2010s. Chinese domestic problems ranging from income inequalities to democratisation issues will emerge more seriously once the economic growth trend begins to decline.

In these circumstances, the role of the country’s political leadership will become much more important. Although the current president, Hu Jintao, is due to step down in 2012 he will for a while continue to hold a degree of power through the military, so the succession to power of the next generation won’t be completed until around 2015.

“China’s growth pattern is becoming similar to industrialised economies, which in turn suggests that its economy will soon start grow more evenly from now on, taking on much the same characteristics as more mature economic mechanisms”

All things considered, the new geopolitical landscape will not appear until the mid-2011s, because along with China, significant changes are also due to happen elsewhere in Asia. Although Chinese GDP overall is large and growing, per capita income is still low, its economic policy differs very much in style from those of the OECD countries. Yet other Asian counties are very much influenced by the Chinese policy style, so government support for business is increasing and China’s so-called “state capitalism” is gaining wider influence elsewhere in the region. Of course, this isn’t unique to China; Japan, Korea and Singapore had similar policy styles in the past, even though they later adapted their styles in line with their GDP growth. Now, however, they are once again espousing forms of state capitalism and their earlier industrial policies are being restored. One reason is that China’s influence is growing. Another is that the 2008 meltdown in Wall Street and elsewhere gave a new rationale for a return to government intervention. In Japan, postal services that had been privatised are going to be re-nationalised. The role of government finance is being strengthened once again. Japan Air Lines, which was almost bankrupted, has been rescued by the government in a bail-out that seems to be increasingly common. Many Asian countries already have Sovereign Wealth Funds, but now the Korean government is establishing a new type of fund to support the export activities of the construction sector. In short, closer business-government relationships are being re-established throughout the Asia Pacific region. Asian countries are seeking to strengthen their infrastructure exports by combining government and private sectors. And that means it will be necessary to create international regulations which can limit a government’s intervention, or at least define the situations in which it will be acceptable. But to achieve this, the U.S. and China will have to reconcile their very different views on the market economy to as to reach a common agreement.

The Chinese presence in the forthcoming international discussion on global financial regulations will not be as large, as its financial sector is not yet highly competitive. But the sharp rise in China’s industrial development makes it easy to forecast that conflict in this field between the U.S. and China looks like to intensify. In which case, Europe’s responsibility will be comparatively large. Right now, there are several areas of conflict between Europe and the U.S. over the creation of new financial regulations, that is likely to be overtaken by the wider tensions between the U.S. and China over trade and industrial issues. When that happens, European countries’ different systems and histories in terms both of government and markets means that both Washington and Beijing will want to turn to the EU for support and mediation.

As the world begins to grapple with the creation of a new economic order, the moderating role of a third party in the direct conflict between the United States and China will be highly important. It is a role that will fall to Japan for Asia Pacific issues, but to European countries on global issues. If Europe can successfully manage this role, the tensions between the U.S. and China can be overcome, offering a great opportunity for the whole world to harness and benefit from the strength of its two most powerful countries.