The political rift between Beijing and Tokyo is making a dramatic entrance on the trade and investment stage as Japanese companies shift their focus from China to Southeast Asia.
Figures released by China’s Commerce Ministry a few days ago show Japanese investment in China tumbling 47.2% in the first quarter of this year over the same period in 2013.
Meanwhile in Tokyo, numbers published by the Japan External Trade Organization (JETRO) show investment in China by Japanese companies shrinking by 18% last year to the equivalent of $9.6 billion. At the same time, Japanese investment in the 10 countries of Southeast Asia doubled last year over 2012 to $25 billion.
“Viewed from the Japanese companies’ headquarters, China’s economy and China’s political situation presents a considerable amount of risk,” JETRO chairman Hiroyuki Ishige said as he released the report.
The Chinese figures show it is not just Japanese investment that is shunning China. There is a broader disengagement with trade volumes between the two countries shrinking by 5.1% last year from 2012, which followed a 3.9% fall over 2011.
Most prominent among the risks referred to by JETRO’s Ishige are the anti-Japanese riots in late 2012 and continuing friction between Tokyo and Beijing over the ownership of five uninhabited islands in the East China Sea, known as the Senkaku Islands in Japan and the Diaoyu in China.
Late in 2012, the Tokyo government bought three of the islands from their private owner in an effort to calm the situation by preventing Japanese ultra-nationalists from buying and occupying the outcrops. But Beijing chose to interpret Tokyo’s actions as an inflammatory “nationalization,” and has stepped up its military incursions into Japanese waters and airspace.
The rift has widened with the return of Shinzo Abe to power as prime minister of Japan in December 2012. Beijing portrays Abe as a nationalist who is attempting to play down the historical record of atrocities committed by Japanese forces in the 1930s and 1940s.
That Japanese investors, especially those in the retail, machinery and automotive sectors, do not feel welcome in China has serious implications for Beijing, which is wrestling with an economy in decline. China’s industrial great leap forward of the last three decades has relied to a substantial degree on the transfer of technology from Japan, and the adoption of Japanese management and production models.
The JETRO survey found that among Japanese corporate investors, China has fallen from first to fourth place in their lists of attractive destinations. Indonesia has taken top spot for the first time.
It is not only the political risks that are steering Japanese companies away from China. The earthquake and tsunami that struck Japan in March 2011 had a serious dampening effect on the country’s foreign investment in general. Efforts by the Abe administration to boost consumer spending and exports by depressing the value of the yen, and promoting a moderate degree of inflation, have also compelled Japanese companies to be more shrewd about their foreign investments.
There are some cases of Japanese companies withdrawing entirely from China, said the JETRO survey, but in most cases, companies reducing their exposure in China are simply shifting production, mainly in labour-intensive industries such as textiles, to Southeast Asia.
Rising wages in China put salaries on par with those of Thailand, a favourite Japanese manufacturing centre in Southeast Asia, though still below labour costs in Malaysia. However, according to the JETRO survey, labour costs in Indonesia and the Philippines are only 66% of those in China, while those in Vietnam are less than half. •
Trade goes down with the ship
Japanese business enterprises got further incentive to keep clear of China last week when a Shanghai court backed the seizure of a Japanese cargo vessel to pay for a claim by a Chinese ship owner dating back 80 years.
The court order for the detention of the ore carrier Baosteel Emotion, owned by Japan’s Mitsui OSK Lines, a branch of the Mitsui Group, is the first time the assets of a Japanese company have been seized in China in a lawsuit stemming from Japan’s occupation of much of China during the 1930s and 1940s. It comes amid heightened tension between the two countries, ostensibly over disputed claims to five uninhabited islands in the East China Sea, but in reality a reawakening of hundreds of years of rivalry for influence in Asia.
The Mitsui case appears to be only an opening salvo in China, where a court in Beijing has agreed for the first time to hear a lawsuit by Chinese citizens claiming compensation from Japanese companies over forced labour. Japanese government officials warned last week that the lawsuits are only likely to further depress Japanese investment in China, which fell by nearly half in the first quarter of this year compared with the same period in 2013.
Chinese ship owner Chen Shuntong brought the claim for $28.3 million in compensation against Mitsui, which rented two cargo vessels, the Shun Feng and the Xin Taiping, from his grandfather in the 1930s. But when Japan declared war on China in 1937, Mitsui stopped paying rent on the ships, which were sunk during the war after being commandeered by the Imperial Japanese Navy.
Mitsui denies responsibility because the ships were commandeered by the navy, and because in the 1972 joint communique that normalized relations between China and Japan, Beijing renounced any further demands for wartime reparations.
