China has overtaken Japan to become the world's second largest economy and is threatening the U.S. for the top spot. Japan insisted it was still ahead when international research agencies said China had already overtaken it late last year but admitted defeat in second-quarter GDP figures on Monday.

Japan's GDP for the April to June period stood at US$1.288 trillion, and China last month announced GDP of $1.337 trillion for the period. The margin was a mere $49 billion, but economists say the actual gap is much wider given the current strength of the yen and weakness of the yuan.

Over the last five years, China gradually overtook the major European economies, starting with the U.K., France and Italy in 2006 and Germany in 2007. The main reason was its breakneck growth rate of between 10 to 13 percent backed on the effects of its admission into the World Trade Organization and a booming global economy during the early and mid 2000s. China managed to expand more than 9 percent last year even in the midst of the global financial crisis.

Many economists felt that it was only a matter of time before China outdid Japan. China's GDP, based on Purchasing Power Parity (PPP), had already outdistanced Japan in mid 2000, and according to the World Bank, its GDP based on PPP was scaled at $7.97 trillion in 2008, almost double Japan's ($4.49 trillion).

At this rate, experts predict it will eventually overtake the U.S. China's GDP was estimated at $4.9 trillion in 2009, just one-third the U.S.', which was worth $14 trillion. But global investment banks predict China will replace the U.S. at the top around 2030 assuming that the U.S. economy grows 1-2 percent annually over the next 20 years and China's 7-8 percent. "This is just the beginning," Wang Tao, chief China economist at UBS, told the New York Times. "China is still a developing country. So it has a lot of room to grow."

But some economists say China must overcome significant hurdles if it is to stand shoulder to shoulder with the U.S. by achieving high growth each year for the next two decades. China's per-capita GDP stood at $3,600 last year, which is equivalent to Albania, Thailand, Tunisia and other developing countries. It is lightyears behind the U.S., whose per-capita GDP is $46,000. A low per-capita GDP and a high savings rate are obstacles to growth in China's domestic demand.

Another key factor is whether China will be able to maintain political stability and social cohesion. Over the last two years, China experienced major upheavals by minority ethnic groups in its western provinces, and a widening income gap and corruption among government officials are also stoking political instability. On top of that, China is shouldered with an aging population, as well as energy and environmental burdens as increasing wages prompt more of its citizens to buy cars.