Media  International Exchange  2019.06.21

While the US and China are fighting, Japan reaps the benefits; Chinese cities are passionately calling for Japanese investment

The article was originally posted on JBpress on May 17, 2019

China's local government attitude toward attracting Japanese businesses changing totally from negative to positive as evidenced by the examples of Dalian and Shanghai

The US-China trade war changes the investment environment surrounding Japanese firms for the better

US-China trade talks appear to be stalling due to an abrupt increase in the tariffs on Chinese goods by unpredictable US President Donald Trump as usual.

It is generally thought that during the Osaka G20 Summit to be held on June 28 and 29, the US President will meet his Chinese counterpart to reach a certain trade agreement.

But we should say that we never know what is going to become of it.

The purpose of the US's waging a trade war on China is not just to reduce its trade deficit with the country.

The US feels threatened by China. As a measure to reduce the threat, it is imposing economic sanctions on China on the grounds of a trade imbalance problem.

Even if the two countries reach any agreement through immediate trade negotiations, China will remain a threat to the US.

This is because the real reason why the US feels threatened by China is that China's economic and military power is approaching that of the US and the US fears it may challenge American hegemony and unipolarity.

In other words, unless the Chinese economy stops growing and shrinks to nearly half or less of the US economy, the threat that China poses to the US will not be eliminated.

However, it is highly likely that China's economy, which still remains in the final phase of a rapid growth period, will maintain a growth rate of around 5-6% over the next several years.

In that case, it seems to be difficult to disagree with the forecast made by IMF (International Monetary Fund) World Economic Outlook (April 2019) that China's GDP (gross domestic product) will grow to as much as 83% of US GDP by 2024.

If so, the threat that the US feels against China will continue to grow significantly going forward, regardless of the size of US trade deficits with China.

It may be natural to think that there is a high possibility of the US resorting to various measures other than trade-related measures to mitigate the threat. This is a fundamental long-term outlook for US-China relations.

Under these circumstances that look set to continue, China must want in some way or other to prevent Japan, an ally of the US, from breaking away from China and further strengthening ties with the US.

Under Prime Minister Shinzo Abe and Chinese President Xi Jinping, Japan-China relations have recently improved to a level similar to that seen in the early 1990s.

I think it is safe to say that China, even more than Japan, wants to stably maintain these good relations between the two countries.

This is also a great opportunity for Japan to enhance its national interests in terms of both economy and diplomacy if it succeeds in further stabilizing its relationship with China, while giving full consideration to that with the US.

An important base for stabilization of the Japan-China economic relationship is the investment environment for Japanese firms in various regions in China.

Local governments across China willing to attract Japanese companies are now seriously listening to those companies' requests to improve the local investment environment.

I have often heard from businesspersons from Japanese companies and financial institutions stationed in China that local government attitudes about interactions with Japanese firms have improved totally to the extent that we could have never imagined a few years ago.

Let me give you concrete examples of this below.

Dalian creates an extremely good investment environment for Japanese corporations

I visited Dalian in mid-April.

Dalian had been in the economic doldrums due partly to the downfall in March 2012 of Bo Xilai, who had served as Mayor and Party Secretary of the city from 1993 to 2000, as a result of his involvement in a bribery scandal.

However, Tan Zuojun, who was said to be a close aide to President Xi Jinping, took up the post of Dalian Party Secretary in January 2018, and Tan Chengxu assumed the office of Dalian Mayor in November 2018, and these personnel changes have been reviving the Dalian economy.

When Japanese companies had an opportunity for interaction with the Dalian city government in December 2018, both the Dalian Party Secretary and Mayor participated in it, an indication that the city attached exceptional importance to the interaction.

At that time, the Dalian city government proposed holding a regular exchange meeting with Japanese businesses three times a year, and the first meeting was held on April 1 this year.

Since around the end of 2018, the city government has put more effort into reinforcing the cooperation with Japan under the slogan, "Deepen a Relationship with Japan."

People in Dalian have long felt an affinity toward Japan as a lot of Japanese have lived there and taken care to nurture a good relationship with local people since prewar periods.

On top of that, because Bo Xilai, while in office, actively encouraged Japanese firms to invest in the city, a total of 1,550 Japanese companies have made inroads into Dalian (as of 2017). At present, the city ranks third in terms of the number of Japanese companies doing business locally only after Shanghai and Bangkok, the capital of Thailand.

Out of around 2 million people living in Dalian urban areas, approximately 190,000 people work for Japanese companies, indicating that about 10% of people are related to Japanese businesses, which thus have an overwhelming presence in the city.

Each university in Dalian has a Japanese language department with abundant human resources specialized in Japanese. Furthermore, passenger services of the city subway include Japanese-language announcements. As these facts attest, Dalian is a particularly Japanese-friendly city compared to other regions in the Three Northeastern Provinces (Liaoning, Jilin and Heilongjiang) which have relatively close ties to Japan.

Thus, it goes without saying that as Dalian's efforts to revive the economy have been getting into full swing since last year, they are increasingly expecting more investment by Japanese firms.

The recent improvement of Japan-China relations has had a significant impact on the Dalian city government taking such a positive attitude.

Since the Three Northeastern Provinces are in a severe economic situation, the amount of investment made by Japanese companies in Dalian is not as large as that in either Guangzhou or Suzhou. Nevertheless, an increasing number of investment projects in car batteries, medical equipment, luxury clothing, convenience stores, etc. have been made by Japanese corporations since last year.

The Dalian city government is said to have started to consider constructing an economic development model district exclusively for Japanese companies with a view to further accelerating its efforts to encourage Japanese firms' investment.

The market environment surrounding Dalian is inferior to either the Yangtze River Delta region incorporating Shanghai District, or the Greater Bay Area (including Hong Kong, Macau, Shenzhen and Guangzhou) in Guangdong Province. However, there are no other cities more willing to cooperate with Japanese corporations than Dalian.

Lots of excellent students graduating from local universities every year leave Dalian for a better job because they cannot find a suitable one in and around the city.

If Japanese companies increase job opportunities, they will also be able to make good use of local talent.

Considering that once the political problem caused by ex-Mayor of Dalian Bo Xilai is solved, Dalian is expected to drive economic growth in the currently stagnant northeastern region, and I believe that it will be easy for the city to garner support from the central and Liaoning provincial governments and others.

Japan-China relations anticipated to remain stable over the medium- to long-term will provide another boost.

Japanese companies that succeed in taking advantage of these positive factors, gaining a deeper understanding of complex and rapidly-changing Chinese markets, finding good and appropriate partner companies in China, and getting strong support from local governments, have great potential for development.

Some time ago in Shanghai, semi-private consulting companies helped hundreds of Japanese firms striving to expand into Chinese markets by providing them with venues for showcasing their products as well as opportunities for business matching between them and Chinese corporations, thereby enabling considerable achievements to be made.

If business support services for Japanese companies similar to this are developed in Dalian as well, I think that the challenges faced by Japanese corporations as mentioned above are more likely to be addressed.

Dramatic change in the Shanghai city government attitude toward dialogue with Japanese businesses

The City Government of Shanghai has begun to put more effort into improving the business environment. Starting from this year, it will hold ten or more discussion meetings a year with foreign corporations which have invested in Shanghai to hear their requests to improve the investment environment.

European and American companies were invited to the first and second meetings, respectively, with Japanese businesses, to the third that was held in late March.

The meeting was chaired by the Deputy Mayor of Shanghai from the beginning to the end. It was the first time for Japanese firms to talk directly with such a high-ranking official as the Deputy Mayor.

It is thought that the Deputy Mayor attended the meeting to hear opinions directly from Japanese companies prior to enactment of the Foreign Investment Law in January 2020, as it is stipulated by the law that in cases where any law concerning foreign corporations is amended, their opinions must be heard beforehand.

A similar meeting was held between Japanese companies and slightly lower-ranking officials from the Shanghai city government before, but many responses those officials gave to Japanese companies at the meeting were brusque and empty.

However, at the meeting held this year, when an official from the City Government of Shanghai gave an insincere response to Japanese firms, the Deputy Mayor immediately pointed out that it was so nonsensical that even he did not understand it and had the official give a more specific response.

Participants in the meeting said that the Deputy Mayor's behavior conveyed the serious attitude of top officials from the city government toward them.

Judging from these facts, it is clear that the Shanghai city government's attitude toward improving the business environment has changed dramatically to a positive one; it is now very eager to improve the investment environment by responding with sincerity to foreign corporations' requests.

Such changes have also begun in Tianjin and Guangzhou.

Japanese companies have not yet managed to cope with this change in the attitude of city governments. Even when they get an opportunity to meet with Chinese city government officials, it is often the case that they ask neutral and abstract questions.

In the past, Japanese companies that showed their true colors got bullied. As they have gotten used to such a situation over the long-term, many of them have yet to shake off the conventional wisdom.

It is important that Japanese corporations realize quickly that China's city governments are seriously expecting them to make concrete and frank requests.

Improvement in the investment environment under the Foreign Investment Law is also thanks to the US

I have pointed out at the beginning of this article that the recent escalation in the US-China trade war is contributing to better Japan-China relations and bringing about an improvement in the investment environment for Japanese businesses. However, the trade dispute between the two countries will afford more than improved Japan-China relations.

The Foreign Investment Law, slated to come into effect in January 2020, is also thanks to pressure from the US.

The law is a set of important rules aimed at improving the investment environment, such as those on prohibition of forced technology transfer, reinforcement of the protection of intellectual property rights, reduction in inequality between domestic and foreign companies and freedom of foreign remittance secured for foreign corporations.

If they fully comply with these rules, Japanese businesses will be able to enjoy significant benefits.

As described above, the US-China trade feud will provide Japanese firms with not only diplomatic benefits, i.e. better China-Japan relations, but also economic ones, i.e. an improvement in the investment environment.

In the first place, Japan's accumulated foreign direct investment toward China is the largest among those made by other countries. Accordingly, Japanese firms are expected to benefit the most from the improved investment environment in China.

I hope that a number of Japanese corporations will take full advantage of this opportunity and steadily develop their business in China.

(This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on March 17, 2019.)