China vs. Japan: Part 1 – Changing Perception and Reality

Toyoo GYOHTEN (President, Institute for International Monetary Affairs)

China's Emergence in the World

There is no doubt that China's influence has been increasing significantly in Asia as well as in the world in recent years. This is primarily due to the rapid development of China's economy, and there are two underlying factors for such development. The first factor is sheer size of population, and the second factor is speed of economic growth.

Furthermore, domestic and international events seem to be contributing to the increase in China's influence. Economically, the most important step that China has taken in recent years is its WTO accession. Politically, the most significant is the succession of leadership from Jiang Zemin to Hu Jintao. One might add the Olympics in Beijing in 2008 and the World Exposition in Shanghai in 2010. These events are certainly making China quite visible on the international scene.

Regarding economic policy, China has made it clear that it will maintain the "policy of opening and reforming" adopted since Deng Xiaoping's era, and there seems to be no change in this policy under the regime of Hu Jintao. Also domestically, the Chinese government seems to be making an effort to solve the major problems that have been pointed out from within and from outside, including reforms of the state-owned enterprise system, the pension system and the legal system, as well as the development of the western region. This is quite prudent on the part of China and, as a result, its influence has increased noticeably.

China's Political Cleverness

Politically, China has become more cooperative with other countries under the current regime than under the Jiang Zemin regime. Although China still seems to be overly sensitive to such issues as Japan's textbooks and Yasukuni Shrine, the relationship between the two countries has improved of late. China has also been improving its relations with the U.S., and cleverly (or skillfully) emphasizing its common interest with the U.S. and other Western countries regarding anti-terrorism. Even with Russia, China seems to be managing its relations in spite of potential conflicts between the two superpowers. Those strategies, coupled with its actual economic performance, have made China more visible and influential than ever on the international political scene.

That can also be seen in China's stance toward other Asian countries. Prior to the Asian financial crisis, China seemed to have detached itself from other countries and to have focused on its economic development all by itself. After the Asian crisis, however, China has become more cooperative and has tried to be a responsible member of the Asian community by participating in regional efforts for economic cooperation such as "ASEAN Plus Three." Its recent push toward other Asian countries regarding the FTA and foreign investment is quite noteworthy.

While China has been increasing its presence and influence in Asia and the world, the Japanese economy has been stagnant and, as a result, the relative position between the two countries has changed dramatically for the last few years. Although such a change may be partly due to exaggeratedly favorable perceptions of the rapidly growing economy, China seems to have replaced Japan as the most influential country in Asia in the eyes of most observers.

Asia's Concern About China

However, a question remains as to how stable China's performance will be in the future. Is China likely to be achieving solid performance in substance, not just in perception? In answering this question, we need to take note of the fact that there is some concern, anxiety, and uncertainty regarding the future of that country. Other Asian countries still seem to be afraid of China, which could be flooding their markets with cheap and yet high-quality products. China also could be taking Western investment away from their markets, as China has become number one in attracting foreign investment--even surpassing the U.S. market.

As a result, Asian countries have ambivalent feelings about China in the sense that they are trying to form a coalition such as ASEAN to compete with China, while seeking cooperative relations with that country for mutual benefit. This is particularly true of Asian countries with large numbers of overseas Chinese, such as Singapore and Thailand, who have no choice but to cooperate with China from their domestic viewpoint.

Japan's Hollowing-out Phenomenon

In Japan there is much anxiety over the so-called "hollowing-out phenomenon," due to the rapid exodus of its manufacturers to China. In fact, many of the businesses that have lost comparative advantage in Japan have been moving to China, especially since 1985, and such movements have been accelerating more recently. It seems that this rapid movement has caused strong concern in Japan, although it might be considered a historical necessity, as China has been emerging as a leading economy in the developing world.

Actually, while the speed of the business exodus may be too fast and therefore may be perceived as "hollowing-out," Japan's overseas production ratio is still around 15 percent, lower than that of Germany (about 20%) and far below that of the U.S. (close to 25%). What is actually happening is a deepening interrelationship between Japan and China in such a way that Japan exports its intermediate and capital goods to China, while importing final products from China in those sectors where costs are less competitive in Japan. This is indeed a natural relationship between two economies in different stages of development.

Therefore, Japan's anxiety over China stems largely from Japan's own inability to adjust itself to the changing reality of its relations with China. In other words, the speed of economic reform in Japan is much slower than necessary to catch up with the speed of China's development as an industrial powerhouse in the world. Especially, low productivity industries in Japan, including processed foods, textiles, electric appliances, and sundries sectors, are too slow to adjust themselves, leading to the sense of anxiety and crisis among many Japanese.

Lessons to be Learned

In contrast, the U.S. has been managing economic relations with China in a much more productive way than has Japan. Although many industries have moved out of the U.S. as a result of competition with China, it has not lead to "hollowing-out," because new industries have somehow emerged to fill the void. This is due to the flexibility of the U.S. economy as compared to the Japanese economy. Japan can learn from the U.S. experience in dealing with China.

Furthermore, we can learn from China itself. It is clear that the vitality of the Chinese economy does not come from its government sector but rather from private companies and individuals, which form the basic sectors in China's society. The reason for their vitality is that competition prevails in such sectors and the degree of competition in China seems more intense than in Japan. It might also be pointed out that market competition is often suppressed intentionally in Japan, as we have witnessed in the case of failed attempts to create "Special Deregulation Zones" in many low productivity sectors.

Japan needs to reform itself and encourage more competition in its own markets by learning from the U.S. and China in order to overcome fear and anxiety over China's emergence as the leading power in Asia. The problem lies not on their side, but on our side, and therefore we can solve it by our own effort.

(To be continued)