Column  International Exchange  2009.06.08

The recovery of the Chinese economy and the positive posture of Japanese enterprise toward business development

While the future of the world economic downturn continues to be unforeseeable, only the Chinese economy appears to be an exception. The Chinese economy began to recover from the bottom of the business cycle in February or March, and will continue to achieve rapid growth this year as well. One high-level government official said, "Although we still have some sources of anxiety, as external demand remains dull and corporate profit and the government revenues have declined, domestic demand is heating up again."

Central government officials responsible for macroeconomic policy expected at the end of last year that the Chinese economy would start to get on track for recovery beginning in the second quarter. Not only Chinese policy planners, but also Japanese businesspeople familiar with the local scene in various parts of China believed that the Chinese economy had received only a relatively light shock from the world financial crisis. Yet when they went back to Tokyo and reported this to their bosses, they were met with disbelief.
After the beginning of this year, however, Tokyo head offices began to ask them again what they thought about the Chinese economy, and recently began to accurately recognize the recovery of the Chinese economy. It is also worth noting that the headquarters of some Japanese companies manufacturing construction machines and agricultural equipment ordered their executives in China to submit plans to increase production in preparation for the expansion of Chinese domestic demand.

While enterprises from many countries are extending their business to China, I was told that Japanese companies have fared better than others against the unfavorable winds of the recent world economic downturn. For example, in the Shanghai Mart, the exhibition center for the goods of foreign enterprises aiming at the Chinese domestic market, the phenomenon of the retreats of American and European enterprises has been obvious since last autumn. On the other hand, no Japanese companies have pulled out of there yet. In Zhejiang Province, among foreign small- and mid-sized enterprises there have been retreats by Taiwanese and Korean enterprises but only rarely by Japanese companies. This is because of the more advanced technology of the Japanese enterprises and the value of the Japanese yen.

It is not just that only a few Japanese enterprises have pulled out of the Chinese market; some Japanese companies aiming at expansion of their presence in China's domestic market have seized this opportunity to actively develop their business. Japanese convenience stores have expanded their store networks in Shanghai, a business machine enterprise (Dalian) and a chemical enterprise (Shanghai) are preparing increase investment in production facilities, and one of the Japanese megabanks opened the first branch of Japanese bank in the interior of the country (Wuhan). A variety of Japanese enterprises are actively developing their business in many regions of China.

In the meantime, for six years a small Japanese real estate company had been facing rapidly rising wages that kept profits down-until last year. But no employees left the company even though their wages were recently cut. In addition, it has become possible to hire some talented individuals whom the company couldn't attract before. This company sees the present situation as a golden chance, never to come again, for securing valuable human resources.

We should also note the other side of the abovementioned success stories. Behind such an early recovery of the business cycle is the effect of both daring policies of huge fiscal expenditure and an extraordinary credit relaxation policy. This sort of forcible expansion of investment through stimulus policies inevitably causes side effects. For example, it will encourage infrastructure construction that is neither really necessary nor efficient, and will expand investment that is not strictly monitored from the viewpoint of environmental protection, energy conservation, and so on.
On the other hand, because most of the massive fiscal expenditures and enormous credit is flowing into the SOE sectors while the relatively efficient private business sectors are continuously plagued by lack of funds, this will invite an increase in the SOE's weight in the Chinese economy and a deterioration of overall efficiency.
The officials responsible for macroeconomic policy understand these problems. So their chief anxiety has already seemed to shift from the issue of how to recover from the stagnation or how to achieve an 8% growth rate in GDP to that of how to suppress the harmful effect of the macroeconomic stimulus policies.

If you are interested in the more detailed information, please see the attached report, "China's Current Economic Situation (May 2009): A Report from Beijing and Shanghai."

China's Current Economic Situation_May 2009