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Home > Debates Last Updated: 14:33 03/09/2007
Commentary (August 18, 2004)

China Emerges as New Japan Investor

J. Sean Curtin (Fellow, GLOCOM and Asia Times)

While China has enjoyed stupendous economic growth rates, Japan has suffered a decade-long downturn, though now it's on the upswing. These two opposing, yet complementary, forces finally are beginning to interact, altering the fundamental dynamics of the Sino-Japanese equation. Even though Japanese companies are still heavily investing in China, the traffic is no longer one-way. An increasing number of cash-rich Chinese enterprises are starting to buy up Japanese firms weakened by the prolonged business slump.

Japan is now China's largest trading partner, while China is Japan's second-largest trading partner after the United States. Most economists predict that in the space of a few years China will easily snatch the number one slot. China already has overtaken the US as the largest exporter to Japan.

Although the trend of Chinese companies buying Japanese enterprises is only in its nascent stage, it appears to be the genesis of a highly significant shift, which will probably transform the underlying nature of the two countries' increasingly interdependent economic links.

The exact number of these Chinese acquisitions and their total worth or estimated worth is not known. The Japanese government is not known to have published figures or estimates for Chinese firms investing in Japan because the numbers are still low. There is apparently no public country-by-country breakdown for foreign direct investment (FDI). Overall, Japan's ratio of FDI inflow to gross domestic product (GDP) is low.

Buoyed by phenomenal growth and a determination to enhance their global presence with brands and the latest cutting-edge technologies, a growing number of Chinese enterprises are homing in on Japan as fertile investment soil. While some sectors of the Japanese economy have recently shown signs of recovery, huge swathes remain in poor shape, weakened by the lengthy recession. These conditions make many Japanese companies ripe for foreign acquisition.

Dr Linda Yueh, a well-known expert on the Chinese economy at the London School of Economics (LSE), told Asia Times Online, "China will likely become an investor in Japan on account of the strong push of Chinese firms to establish their brands overseas, and [they are] learning from companies which have been able to do so successfully. Moreover, Chinese consumers prefer Japanese products, particularly in cosmetics, and such industries become natural acquisitions and partners."

In the past three years, a number of Chinese enterprises have acquired majority stakes in a wide variety of Japanese companies, ranging from a microwave-oven manufacturer to a high-tech printing firm. In most cases, the Chinese purchaser was able to turn around an ailing Japanese business by restructuring and relocating some production to China, where labor costs are cheaper. All indicators point to a greater volume of Chinese investment in Japan during 2004.

Tokyo wants to attract Chinese investment
Tokyo is keen to attract FDI as part of its strategy to revitalize the nation's battered economy, and China's voracious appetite for imports has significantly fueled Japan's economic recovery. The Japanese External Trade Organization (JETRO) is one of the key government agencies tasked with implementing this policy. Its efforts are part of a global five-year plan that Tokyo hopes will double FDI from 2001 levels, raising it to a target 13.2 trillion yen (US$119.3 billion) by 2006.

Presently, one of JETRO's many FDI initiatives is spearheading a drive to assist Chinese firms seeking to go to Japan. Hiroshi Tsukamoto, the president of JETRO, is positive about Chinese investment and eager to encourage it. He told Asia Times Online, "JETRO already has five offices in China and through these offices we are willing to work with Chinese companies, to help them to come to Japan to invest. At the moment, the numbers are rather small, but I think the figure will gradually increase and we will be prepared for this and ready to work with them."

In China, some regional and municipal authorities have sponsored conferences to assist Chinese companies thinking of investing in Japan. Some enterprises such as the Shanghai Electric Group have already successfully acquired a Japanese printing enterprise and more are considering following suit. A few Chinese consulting firms specializing in advising on Japanese acquisitions and mergers have also sprung up, including Tiantong Star Investment, set up by one of China's largest brokerage houses, Tiantong Securities, to advise government-owned companies on how to buy Japanese firms.

JETRO president Tsukamoto comments, "There is already a very substantial presence of foreign companies in Japan and they are known for their very good performance. So, in the case of China, I think a very similar pattern will emerge." He adds, "We hope that there will be an increase in Chinese investment into Japan. In fact, I think it is rather a natural trend and we are really looking forward to cooperating with Chinese firms on this."

Chinese firms already successful in Japan
In October 2001, low profitability forced Sanyo Electric Co, a major Osaka-based home appliance maker, to sell its entire microwave-oven division to China's Guangdong Midea Holding Co. Tsukamoto sees the takeover as a positive development. "Sanyo has a good experience with its Chinese partner [Guangdong Midea Holding Co]. We hope that other such foreign alliances will develop," he says.

In 2002, the Shanghai Electric Group Corp (SEC), a heavy electronics and industrial equipment manufacturer also entered the Japanese market by purchasing the troubled Akiyama Printing Machinery Manufacturing Corp, a globally renowned manufacturer of high-tech printers.

The new Chinese-owned entity was renamed Akiyama International Co, Ltd (AIC). It immediately hired back many of the Japanese company's former employees. SEC decided to keep its factories in Japan as it was able to trim production costs through renegotiating contracts with suppliers. This rapidly made the new venture profitable.

SEC then overhauled the entire management system, cutting benefits for senior staff, instituting a merit-based pay system, and encouraging all employees to take initiative. The Japanese staff adjusted relatively well to the changes, although many found it difficult to come to terms with being taken over by a Chinese company.

By 2003, SEC had transformed AIC, registering approximately 6 billion yen (about $54 million) in sales revenues from its Japanese acquisition, a 52% increase from the previous financial year.

SEC's executives have publicly acknowledged that Japanese government agencies were positive about their takeover proposals and assisted them in successfully concluding the deal. Chinese companies like Guangdong Midea Holding Co and SEC have now become trailblazers for other Chinese companies that are certain to follow in their footsteps.

Sino-Japanese economic bonds deepening
As the first few Chinese companies establish themselves in Japan, economic bonds between the two neighbors continue to grow at an astronomical rate. In the first half of 2004, figures show Japan's exports to and imports from China broke all previous records. The newly released Japanese Ministry of Finance data reveal that exports to China, excluding Hong Kong, climbed an impressive 24.2% to 3.8 trillion yen (about $26.9 billion), while Chinese imports, excluding Hong Kong, were up 14.9% to 4.74 trillion yen.

Economics specialist Dr Yueh says, "The long-term economic relationship between China and Japan looks positive. Japan has been growing via its external sector, including significant exports to China as well as the US. Japanese investment in China has also been robust, indicating a shift away from the US and towards China with its rapid growth of imports exceeding 40% year-on-year and significant opportunities for investment with WTO [World Trade Organization] liberalization measures coming into place."

She adds, "With indicators of interest from Chinese firms in foreign investment and establishing their brands, there is also a strong likelihood that China could see Japan as a potential partner for investment and for acquisition given the strong brands in Japan."

JETRO's Tsukamoto concurs, "I basically think the Chinese economy is in a rapid phase of development. It is growing at a very high speed, faster than Japan. So that gives China a greater global presence, meaning they will also come to Japan and we will welcome them."

From an economic perspective, increasing Chinese investment in Japan seems highly probable. Indeed, it is a natural development arising from the virtual frenzy of economic activity between the two.

China's efforts to cool key sectors of its overheated economy - steel, cement and real estate, among others - is not expected to deter Chinese enterprises from seizing good bargains in Japan.

Closer Sino-Japanese ties inevitable
While many Chinese are not overenthusiastic about the increasing strength of economic ties with Japan, given Tokyo's brutal wartime occupation of China, the majority of Chinese seem resigned to them. Tang Liejun, an educator at Qingdao University in Shandong province, sums up this feeling well: "Like it or not, the geographic locations and proximity of the two countries cannot be chosen or changed. In some way China and Japan will have to deal with each other."

Kunio Sasaki, a Japanese politician for the main opposition Democratic Party of Japan (DPJ), recently visited China on an official trip. He told Asia Times Online, "I think it is safe to say that in certain areas the Chinese economy is racing ahead, and in 10 years' time they will probably overtake Japan in some aspects of commerce. Japanese people will easily adapt to the change as we already have lots of business dealings with China. People from both countries are becoming more familiar with each other and that is a good thing."

He adds optimistically, "Bilateral ties will improve tremendously once a DPJ government has been elected as we stand for a strong Japan-China relationship and our leaders have already developed a good rapport with Beijing. People know the DPJ will take a mature approach in dealing with China. Under [Prime Minister Junichiro] Koizumi and the Liberal Democratic Party [LDP], relations with Beijing have been a catastrophe." He was referring to Koizumi's annual visits to the Yasukuni shrine, memorializing Japan's war dead, including some executed Class-A war criminals.

Post-Koizumi China relations likely to improve
For decades, a lengthy list of disputes has periodically soured relations between the two neighbors. However, since Koizumi took the premiership in April 2001, Sino-Japanese political ties have taken a nosedive. Koizumi repeatedly has offended Chinese public opinion by his regular visits to the controversial war shrine.

Fortunately, the fallout has not yet slowed the pace of economic cooperation. The great irony of the situation is that Koizumi is the driving force behind Japan's efforts to double its FDI, including Chinese investment.

Since a lot of the current friction can be directly traced to what Beijing considers Koizumi's insensitive behavior, once he leaves office tensions should substantially ease, and Chinese companies are likely to be even more eager to invest in a post-Koizumi Japan. In the meantime, Beijing has put high-level political exchanges on hold, refusing to allow the premier to pay customary official visits to China.

Currently, Beijing is biding its time, knowing that a Japanese prime minister's shelf-life is short. Although Koizumi has been around longer than many of his predecessors, assuming he survives until the end of his term as president of the LDP, he is scheduled to leave office in September 2006. Party rules dictate that once Koizumi's current term as LDP leader expires, it cannot be extended.

It is highly unlikely that any future prime minister would wish to antagonize China as Koizumi has done, so his premiership will probably turn out to be a temporary downward blip in bilateral political relations that will improve in the future.

China's momentum unstoppable
Dr Yueh believes economics will eventually overcome politics. She says, "The political ties may begin to strengthen despite the numerous unresolved territorial and historical issues between the Chinese and Japanese. However, as China increases its economic and political ascendancy in the global economy, its relationship will likely become better with Japan as one of the world's largest economies and its key position in East Asia. The recent talks regarding ASEAN+3 [the Association of Southeast Asian Nations plus China, Japan and Korea] and the possible development of a Northeast Asia Free Trade Area are testament to the increasing economic integration in the region and therefore should foretell better relations among the region's governments."

Geoffrey Howe, the distinguished former British foreign minister and deputy prime minister in the administration of Margaret Thatcher, is currently the president of the Great Britain-China Center. Lord Howe believes Chinese business dynamism is building up an almost unstoppable momentum, and the Middle Kingdom is destined overtake Japanese and European economies.

He sums up his enthusiasm for China: "President [George W] Bush said he did not think the French had a word for entrepreneur, but the Chinese don't need a word for entrepreneur, because they are all entrepreneurs."

Dr Yueh sees good long-term economic prospects for both countries. "In 10 to 20 years time, China and Japan will likely find themselves as the powerhouse economies of East Asia with closer ties than at present," she says. "The political issues will continue, but mitigated by growing closeness in economic linkages."

(Copyright 2004 Asia Times Online Ltd. This article first appeared in Asia Times Online on 16 August 2004,, and is republished with permission.)

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