Media International Exchange 2013.12.25
On a visit to Xian in late October, I was leaving the hotel at 9 o'clock for a meeting. I'd been trying to catch a taxi for 15 minutes, but there were none available and all the hotel's cars were already booked.
■ Adults don't care about the Senkaku Islands issue
So I hurriedly arranged a car through a local travel agency. Soon a brand new Honda Accord appeared. According to the travel agent who was driving the car, it had been bought 2 months previously.
So, I asked him, "After the issue of the Senkaku islands last September, so many Japanese cars were destroyed by Chinese nationalistic citizens. Do you not need to worry about that any more?" He answered, "Only university students who have a lot of time to spend on the internet every day worry about that now; no adult cares."
I felt upset because I couldn't catch a taxi in the morning, but on the other hand I got the chance to hear a good story.
In the coastal cities, south of Shanghai, the separation of politics and the economy is ingrained into the people. Negative influences on the economy from the deterioration of the relationship between China and Japan are small. On the other hand, local cities in the inland areas tend to be influenced by Beijing where the effects of politics are more closely felt.
Xian was one of the cities that had trouble controlling the anti-Japanese riots and suffered damage as a result, although this was not as bad as Tsingtao and Changsha. However, the talk with the driver made me realize how much Xian had recovered.
■ Economic ties have become deeper
Although, focusing on the relationship between China and Japan, there is still an impasse in terms of politics and diplomacy. On the other hand, economically, the performance of Japanese companies in various industries has risen back to the level it held before the Senkaku issue flared up last December.
Thereafter, only a few industries continued to suffer serious damage from the Senkaku issue. These were the construction, heavy electric, and large sized medical equipment companies holding contracts with national or local governments. Other industries were the automotive and tourism industries.
Since The Xi Jinping Administration was inaugurated in March, the situation has become better. After April, sales of automobiles rose back to average levels of last year. Since the end of June, Japanese companies started to be able to enter open bids for Chinese governmental procurement projects. In July, package tours to Japan were reintroduced in Chinese tourist agencies, and Chinese group tourists who had stopped coming to Japan since last autumn were back in Kyoto, Mt.Fuji, Tokyo and other places.
At the same time, many Chinese local governments started to attract Japanese companies. Especially after October, they are more active than they were in the summer, and groups who were assigned to promote investment into China by Chinese local governments have been visiting the main Japanese cities one after another.
In late September, top representatives of major state-owned enterprises in China like China International Trust and Investment (CITIC), China Investment Corp (CIC) and SANY Group Company visited Japan, and met Yoshihide Suga, the Chief Cabinet Secretary. Chinese provincial governors and government officials are planning to visit Japan. Furthermore reciprocal contact between China and Japan has been between higher level officials.
From November 18th, some members of the Japan-China Economic Association are planning to visit Beijing and other places, and Japan is hoping Premier Li Keqiang will attend the meeting, which will be an indicator of a normalization in politics and diplomacy.
■ Japanese foreign direct investments into China will increase again
During those events, we found worrying data about Japanese foreign direct investment into China (statistics compiled by China.)
In spite of the deterioration of the relationship between China and Japan, the amount of Japanese foreign direct investment in China in the first half of this year increased by 15% compared to last year. However, the cumulative total from January to September increased only 6% compared to last year, and there was possibility of the total amount being lower than last year.
When I visited Shanghai after Xian, I met some trusted executives of Japanese major financial institutions and asked them how they anticipated the amount of investment would change.
They then put forth the idea that the amount of investment has decelerated recently because the temporary interruption at the beginning of this year has had a lag effect. After summer, the numbers of customer enquiries to financial institutions about investment increased due to the recovery of the economic relationship between China and Japan. As a result they anticipated that the amount of investment would increase as well.
There is another opportunity to promote an increase of investment: the Shanghai Pilot Free Trade Zone. This special zone which offers tax exemptions, tax breaks and deregulation was set up in Shanghai to try liberalization in financing, advancement of deregulation in trade, and simplification in administration.
This project is an experiment for China as a whole, on which the Premier puts special emphasis. There is an expectation that Shanghai, which has been sluggish since the Expo would be rejuvenated as well.
Additionally, there is another important objective for Shanghai, which is to have the opportunity to attract foreign direct investment (FDI). I don't think that Shanghai will sit by while other Chinese local governments compete to attract Japanese companies. Its aim is to attract Japanese and other foreign businesses by utilising the pilot zone.
Chinese GDP is very likely to be double that of Japan in the latter part of next year and is predicted to grow 2.5 to 3 times in 2020. This huge market has tremendous potential for Japanese companies. Chinese people whose GDP per capita surpasses 10,000 dollars are potential customers for Japanese companies. Japanese companies target Chinese cities with a GDP of over 10,000 dollars per capita and the combined population of those cities is expected to be 100 million in 2010, 300 million in 2013, and 7~800 million in 2020, which means that the speed of increase in numbers of potential customers will rise faster than GDP.
There have been several booms of Japanese FDI into China in the last three decades, the longest one of which lasted for 5 years. However, considering the rapid expansion of the Chinese domestic market, there is a high possibility that this boom will last even longer.
However, this would probably be the last big FDI boom in China. The Chinese economy seems likely to shift to a more stable growth cycle around the end of the decade. Although the amount of Japanese FDI into China will continue to increase thereafter, it is unlikely to be a long term increase like previous booms, but a more gentle increase.
■ Promotion of the restructuring produces more investments into China by Japanese companies
On 12th of November, the communique of the Third Plenary Session of the CPC Central Committee was released. The content was vaguer than that had been expected. Some people were expecting the communique would emphatically state the necessity of restructuring, but were disappointed as it said that public ownership would continue as the primary system.
Although, if you take a good look at the contents of the communique, you'll see it mentions public ownership but also that China is going to keep urging the development of non-public ownership, and seriously consider the importance of resource allocation through market mechanisms. I think this means the reform of state-owned enterprises and expansion of private enterprises which include foreign ones entering to the market.
The wording is vague, paying careful attention to opposition elements, but one still can see their determination to reform state-owned enterprises.
At present we can't see how this restructuring will proceed. I anticipate that it'll become clearer through the Central Economic Work Conference held in December; the National People's Congress held next March, and the drafting of the 13th Five-Year Plan which will start from April. At the same time, they will start to gradually implement their restructuring policy starting with comparatively simple things such as financial liberalization.
The forces of resistance against restructuring are strong. It was also difficult to restructure in Japan. To implement restructuring measures is not easy, but I'm looking forward to seeing President Xi Jinping's leadership and how the Leading Group for comprehensively deepening reform, a new group to be set up, can carry out the restructuring.
To promote economic structural reforms for the expansion and reinforcement of market mechanisms will make Chinese markets more attractive, and will have the effect of urging Japanese enterprises to expand their investment into China. It will enhance the economic relationship between China and Japan which in turn will strengthen China's international competitiveness and reinforce the fundamentals keeping the Chinese economy healthy.