Recent Economic Development in China from Japan's Viewpoint

Shoichi IKUTA (Corporate Advisor, Marubeni Corporation)

China's accession to WTO in 2001 was one of the most significant developments in the recent history of the Chinese economy, from the viewpoint of Japan and the rest of the world. It has not only helped establish formal trade relations between China and advanced countries such as Japan and the US by the rules of WTO, but also led to structural reforms in Chinese society on a much greater scale than previously expected. In particular, we can point out the following changes:

(1) Conclusion of ideological debates on whether the competitive principle should be introduced into the communist economy.; (2) adoption of market opening measures based on WTO protocols and schedules; (3) use of external pressure to remove domestic resistance to reforms and opening measures; (4) transformation of government functions into national policy and rule making; and (5) acceptance of foreign companies as important economic players.

As a result, the Chinese economy has been developing at an unprecedentedly rapid pace, especially since its WTO accession. In fact, China has achieved high economic growth around 10% with relatively stable inflation, and sharply rising exports and foreign reserves, now surpassing Japan. At the same time, with active introduction of foreign investment, the level of income has rapidly been rising, especially in coastal regions, where the standard of living in big cities is now comparable to that in advanced countries. On the other hand, it is well known that along the way the Chinese economy has been developing such negative factors as the massive consumption and waster of energy, worsening environmental pollution, widening economic disparities, increasing urban unemployment, simultaneous development of overcapacity and inflation as well as national banks' bad debts.

While all these complex phenomena are being observed in China, we should be carefully watching the following developments in particular from Japan's standpoint. First of all, Japan and China have developed an interdependent economic relationship, where various kinds of exchange coexist between the two economies in successively developing phases of their relationship. Clearly, this is different from the well-known development model following the pattern of flying geese. In fact, Japanese companies are now investing in China not only in manufacturing but also in services in anticipation for expanding domestic markets in China, partly depending on China's technology in such areas as computer software. More recently, with its massive foreign reserves, China has started to invest in Japan as well as in other countries, sometimes in cooperation with Japanese companies.

It is important, therefore, to think of how to have China's development built into Japanese business growth for the purpose of creating values in the market through collaboration rather than competition with each other. In this regard, Japanese companies might follow a new business model developed by general trading companies with various functions well coordinated and world-wide networks of information and know-how well integrated into corporate strategies.

The second key point for Japan is the size factor of China as a global power. No Japanese company can ignore China's market, whatever industry it is in. For example, back in 2000, steel production was almost the same in volume as that in Japan, but since then it has now quadrupled, surpassing the total production in Japan, the U.S. and Europe combined, and China has become the largest steel exporter in the world, possibly impacting steel business in the global market. So, it may be necessary to demand, from Japan's standpoint and the global viewpoint as well, that China behave itself properly as a global superpower in such areas as environmental policy, currency policy, energy demand-supply adjustment, ODA policy, food safety, etc.

The third important point is about the current stage of China's economic development, which has not yet reached any equilibrium. In fact, the business environment for direct investment in China seems to be changing rather radically. For instance, there are a number of regions, where labor costs have increased by 20-30% since 2001, and generally managerial human resources with high levels of administrative and technical skills are in short supply. It might also be noticed that a number of policies favoring foreign investment have been abolished with policy priorities shifting from energy-consuming and polluting industries to high-tech and environment-friendly industries with possible technology transfers. Japanese companies should take note of this fundamental change in China's policy directions.

The fourth point is the fact there are numerous problems associated with the execution and practice of China's WTO accession conditions, especially in terms of transparency, consistency and uniformity in the execution of various rules and regulations. For example, China is now a leading nation in terms of the number of anti-dumping measures adopted against foreign companies, but often fails to provide clear explanations for the details of such measures. The same can be said about domestic laws regarding properties, corporations, labor, taxation, etc., which have been legislated since the WTO accession, where there are many details yet to be spelled out in execution and application, and Japanese companies are now subject to "legal risks," meaning a kind of litigation that has never been expected against them. Needless to say, the problem of intellectual property rights is still serious in practice, even though a set of necessary laws have been formulated in accordance with the WTO protocol.

Finally, we should keep an eye on China's monetary and exchange rate policies, which may or may not be able to slow down the appreciation of the Chinese currency in the future, and also on China's FTA policies for regional economic integration, which will　affect Japan's national presence and economic position in the Asian region as a whole in a profound way.