Media  International Exchange  2016.06.23

Risks Facing the Chinese Economy in the 2020s and the Prospects for Japan-China Relations-From cultural exchange through Japanese missions to Tang China to the new era of win-win economic relations between Japan and China-

An article published in JBpress on April 28, 2016

Visiting Xi'an, Site of the Ancient Capital Chang'an

From April 7 to 12, I visited the city of Xi'an in Shaanxi Province.

When I go overseas to conduct economic research, I usually just have meetings with Chinese central and local government representatives and Japanese companies, and visit economic development zones and the like, so I do not generally visit tourist attractions. However, on this trip, I was accompanying a group of Japanese corporate executives and departmental directors on a training course, so I had the chance to visit several historic sites in the ancient capital Chang'an for the first time in many years.

When Their Majesties the Emperor and Empress of Japan visited Xi'an in October 1992 (during their visit to Beijing, Xi'an and Shanghai), I accompanied them in my capacity as a staff member at the Japanese Embassy in Beijing, so I walked around the city many times, including when I was checking the places they would visit in advance.

I have made a number of business trips to Xi'an since then, but this was the first time in 24 years that I had visited Qinglong Temple, where the famous scholar-monk Kukai underwent his academic training, and Xingqing Palace Park, which is home to a monument to the Japanese scholar Abe no Nakamaro.

24 years ago, I certainly did not expect China to achieve such rapid economic development. Still less did I imagine that Xi'an, which was something of a provincial backwater, would become a major city leading China's economic development.

Revisiting historic sites of cultural exchange in Xi'an after many years, I thought about the great contribution made by Kukai and Abe no Nakamaro through their participation in the Japanese missions to Tang China. While I cannot be compared to those two great figures, I renewed my own resolve to continue striving to achieve my goal of improving Japan-China relations and promoting efforts to build a win-win relationship between them.

The government officials with whom I spoke during this visit to Xi'an told me, "Japan-China relations have been rather difficult for the last 20 years. However, they had a good relationship for the whole of the previous 2,000 years except for an unhappy era.

Things should return to their original state in the not-too-distant future." Feeling hopeful, I concurred with that view.

The New Era of Japan-China Relations as Shown in Data

I would like to provide an overview of Japan-China relations as seen from economic data.

According to the IMF's World Economic Outlook database, China's GDP (gross domestic product) caught up with Japan's in 2009. This was the first time that it had regained the lead in about half a century, since Japan's GDP overtook China's in 1960.

China's economy has continued to experience high growth since then and was 2.7 times the size of Japan's in 2015. It is projected to be 3.4 times bigger than Japan's economy in 2020. Looked at in the context of Japan-China relations over the past 2,000 years, this is a normal situation.

Assuming that China experiences a gradual slowdown in the 2020s and that Japan maintains stable growth, China's GDP is projected to be around five times the size of Japan's in 2025 or thereabouts.

It is believed that China's per capita GDP will reach $15,000 by this stage, bringing it into the ranks of developed countries. If this happens, economic relations between Japan, China, and South Korea will be similar to those between the major countries of the EU today and there will be even closer interdependence in the areas of trade and investment than there is currently.

The number of travelers visiting Japan from China each year will grow to 20-30 million or even more.

The integration of the East Asian Economic Bloc - consisting of Japan, China, and South Korea - will progress further and the economies of these countries will become even more synchronized, to the extent that there will no longer be a situation in which one country's economic climate can improve or deteriorate without affecting the other two economies.

Furthermore, these three economies will lead Asian economic development, with Asia driving the global economy as a whole.

Risks Facing the Chinese Economy in the 2020s

Thus, the three East Asian nations are a growing presence in the global economy. China is the core, with Japan and South Korea helping to support it.

However, there is no guarantee that the stability of the Chinese economy can be maintained indefinitely. On the contrary, as in the case of other countries, when the high growth era comes to an end, economic resilience usually declines and various hitherto unseen problems begin to emerge.

The forecast with a comparatively high probability is that the reform of state-owned enterprises will not progress as hoped, causing inefficiency and a decline in competitiveness to start to become noticeable in the management of major companies, reducing the industrial competitiveness of China as a whole.

If this were to occur, there are concerns that China would risk falling into the middle-income trap, in which exports demonstrate sluggish growth, the current account balance deteriorates, the RMB depreciates, imported inflation pressure grows, China is forced into domestic demand constraints by a restrictive monetary policy, and the unemployment rate rises.

If the Chinese economy were to find itself in such a serious situation, the economies of both Japan and South Korea would stall as a matter of course and the whole of the Asian economy would stagnate.

If the multipolarization of the global economy progresses as emerging economies come to the fore, there is a strong possibility that the relative status of the U.S. economy will decline and it is unlikely that the U.S. will maintain sufficient influence as a single nation to be able to bring about the recovery of the global economy.

Consequently, there is a strong possibility that the stalling of China's economy would bring about a deterioration in the global economy via Asian economic stagnation, which could in turn cause currency crises or financial crises in countries with a fragile economic base.

If this had an adverse impact on an extensive array of countries, the global economy would go into secular stagnation. This is one perspective on the global economy in the latter half of the 2020s and beyond.

Japan's Role

Taking an overview of the aforementioned future risks, one can see that Japan has an important global role to play.

Rather than thinking about its economic stability as a single country, Japan's role should be to help to maintain the stability of the East Asian Economic Bloc, which also encompasses China and South Korea, and to contribute to the sustainable development of the global economy through Asian economic stability.

Fortunately, an open regime has been a cornerstone of China's economy for some time, and it is proactive in seeking to attract foreign capital. In particular, Japan is the only major country whose companies' total direct investment in China is in excess of $100 billion.

The U.S.A. is in second place, South Korea is in third, at around $70 billion, Taiwan comes fourth with around $60 billion, and Germany is fifth, at less than $30 billion.

In addition, Japanese companies have for some time had a strong tendency to develop in tandem with Chinese companies and have made a particularly substantial and extensive contribution, such as improving technical capabilities throughout China, increasing employment, and expanding tax revenue.

Just recently, a Japan automaker announced plans to expand exports of components to overseas bases from its production base in China. The contribution that the technical assistance provided by Japanese companies has made to improving the technological standard of China's local businesses is said to be one factor behind the recent growth in Chinese infrastructure-related exports.

If Japanese companies continue to expand marketing channels within China, increase local production, and engage in the appropriate amount of technology transfer, it will be possible to achieve ongoing improvements in industrial competitiveness - primarily among the private sector companies that make up 80% of the Chinese economy - and to reduce the risk of China's falling into the middle-income trap.

This will not only reduce risks for the Japanese economy, but also make a substantial contribution to the global economy.

The Prospects for the New Era of Japan-China Relations

During my recent visit to Xi'an, a leader in the upper echelons of the government of Shaanxi Province described his wish to "develop Xi'an as a 'new Chang'an' that would follow in the footsteps of the ancient capital of Chang'an, which flourished as China's biggest cosmopolitan city and was the seat of successive dynasties."

As members of the Japanese missions to Tang China and therefore part of an elite group of representatives of Japan, Kukai and Abe no Nakamaro studied overseas in Chang'an during its Tang dynasty heyday. They learned a great deal from China, conveying this knowledge to Japan.

Today, exchange between Japan and China is typified by the surge in both Japanese companies expanding into China and Chinese travelers visiting Japan. The nature of the exchanges between them has changed from one-way interaction by elites to two-way exchange between the middle classes.

Most of the executives from 29 leading Japanese companies who visited Xi'an with me recently marveled not only at the exchanges between Japan and China in the days when Chang'an was the capital, but also at the state of economic development today in Xi'an, which aspires to be a "new Chang'an." They told me that they had spotted some huge investment opportunities.

The fact that the Japanese business executives who will be involved in Japan-China relations in the future noticed the latent growth potential of markets in China's inland areas is tremendously significant.

I gave senior officials of Shaanxi Province and Xi'an City the advice that the key to promoting efforts to attract Japanese companies is to attract a JETRO office, branches of the three megabanks, and a Japanese Consulate-General of Japan, as this would open up a gateway for Japanese businesses.

I hope that in the new era of Japan-China relations symbolized by the "new Chang'an," the middle classes such as Japanese companies and Chinese travelers will play a leading role in accelerating efforts to build a win-win relationship between Japan and China.

This will help to stabilize Japan-China relations, encourage the stable development of the East Asian economy in the long term, and contribute to the sustainable development of the global economy.

Japan is not strong enough to support the global economy on its own, but cooperative development bringing Japan, China, and South Korea together would make it possible to support the global economy. Japan has a substantial global role to play in the new era of Japan-China relations.

(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on April 28, 2016.)