Media  International Exchange  2019.09.17

U.S.-China trade disputes and the improvement of Japan-China relations: the frontline of the Chinese market is undergoing rapid changes - After the G20 Summit, Japanese businesses are riding a tailwind as it becomes increasingly strong -

The article was originally posted on JBpress on July 18, 2019
1. Substantial meeting between the Japanese and Chinese leaders and the arrival of golden business opportunities

On June 27, President Xi Jinping, who visited Japan to attend the G20 Summit held in Osaka from June 28 to 29, had a meeting with Prime Minister Shinzo Abe, and they reached an agreement on many important policies.

Attention should be paid to the following points (excerpts from the Ministry of Foreign Affairs' website):

First, the two leaders confirmed that Japan-China relations were getting back on track and seeing new developments, and shared the determination to open up a new age for the two countries.

Secondly, in principle, President Xi accepted the Japanese government's offer to invite him to Japan as a guest of the nation in the spring of next year.

Thirdly, the two countries will strive to achieve the goal of making the East China Sea a sea of peace, cooperation, and friendship. They also agreed to further step up dialogues in the diplomatic and national security fields.

Fourthly, the two countries agreed to establish closer reciprocal cooperation at the working level in potential growth areas such as third-country markets, innovation, protection of intellectual property, trade and investments (including foodstuffs and agricultural products), finance and securities, medical service and nursing care, energy conservation and the environment, and tourism and interchange, and at the same time develop a free, fair trade system.

Fifthly, the two countries agreed to work actively to attract school excursions to each other throughout the Japan-China Youth Exchange Promotion Year this year.

As mentioned above, the two leaders reached an agreement in many areas such as diplomacy, national security, economy, and personal exchange, indicating that the two countries would make all-out efforts to improve the relations between Japan and China.

In particular, it is significant that it was basically agreed nine to ten months earlier that President Xi would visit Japan in the spring of 2020.

It is said that there has been no precedent in which a Japanese leader's official visit to China or vice versa was decided between the two countries so early as this time.

If there is such a long lead time, the governments of the two countries can secure time to develop various policy cooperation projects and statements between them, and there are growing expectations for substantial projects and statements being developed.

In addition, since it is expected that senior officials of the central and provincial governments of China will make efforts to bring substantial results by the time President Xi visits Japan, it is more likely that during this interval, specific cooperation projects between the two countries will be accelerated even further.

In particular, the Foreign Investment Law, which was established by the Chinese government under pressure from the United States, will come into force in January of next year, and this law is anticipated to improve China's investment environment significantly.

If so, cooperation projects planned during the preparatory period up to President Xi's visit to Japan will start to take concrete shape at an accelerating pace in January and thereafter. This means the arrival of greater business opportunities Japanese businesses could not ask for.

The governments of both countries strongly expect Japanese companies to develop business actively and Chinese companies to produce results with the strong support of the Chinese government.

2. Intentions of President Xi's speech at the G20 Osaka Summit

In his speech at the G20 Summit in Osaka, President Xi presented five basic economic policies to step up efforts to open the Chinese market to foreign firms with the aim of achieving high-quality economic growth as follows:

This was intended to take the opportunity of the G20 Summit to communicate to the rest of the world details of economic reforms centered on the Foreign Investment Law mentioned above, emphasizing again the Chinese government's stance to work on economic reforms without fail. The important points in his speech are as listed below.

  • (1) Make further efforts for open markets in agriculture, mining, manufacturing, and service industries
  • (2) Expand imports by taking measures such as lowering customs duty and removing non-tariff barriers voluntarily
  • (3) Improve the business environment on a continuous basis mainly by enforcing the new Foreign Investment Law on January 1, 2020, strengthening the system to compensate for violated rights, and raising the level of protection for intellectual property rights
  • (4) Ensure fully equal treatment of Chinese and foreign companies chiefly by revoking all regulations for foreign-affiliated companies other than those based on the negative lists
  • (5) Push economic and trade negotiations for an EU-China investment agreement, Japan-China-Korea free trade agreement, and so forth
  • These policies primarily meet the strong demands of the U.S. government to its Chinese counterpart: stepping up efforts to protect intellectual property rights, treating Chinese and foreign companies equally, and reducing trade surpluses with the U.S. by expanding imports.

    In view of the fact that it was delivered the day before the U.S.-China summit meeting, this speech can be taken as intending to show the Chinese government's firm determination to push reforms with President Donald Trump in mind.

    Most of these reforms are led by Vice Premier Liu He, and therefore, this can be interpreted as President Xi expressing his strong support for policy administration by the Vice Premier.

    In China, there are groups of people with vested interests who are strongly dissatisfied with and resist the reforms pushed by the Vice Premier. President Xi's speech is also considered to be intended to hold these resistant forces in check.

    3. Growing tailwinds for Japanese businesses in China

    As described above, better Japan-China relations and the pressure from the U.S. are combining to continuallycontinuously improve the investment environment for Japanese businesses, and specific moves have already started to be seen.

    In the automobile industry--the core targetpart of investments by Japanese businesses in China--the new category of super energy-saving cars has been established in a bill for regulations on new new-energy vehicles, which will come into force in 2021, and it is more likely that hybrid cars will be included in the list of vehicles covered by the preferential treatment applicable to new-energy ones.

    According to persons concerned with Japanese-affiliated automobile businesses, three major Japanese manufacturers of finished cars are leading the world in the technical aspects of hybrid cars.

    For this reason, partly because the inclusion of hybrid cars in the category of new-energy vehicles would clearly put Japanese businesses in an advantageous position, hybrid cars were previously included in the same category as for regular gasoline-fueled cars and were not given preferential treatment.

    It is pointed out, however, that taking measures to promote the spread of electric vehicles alone may make it difficult for the Chinese government to achieve the national goals related to fuel efficiency and new-energy vehicle regulations in 2025.

    Since environmental improvements are one of the three major reforms on which the Chinese government places the greatest emphasis, it seems that the government decided to change its policy as mentioned above with the aim of obtaining environmental improvement effects by increasing the share of highly energy-efficient hybrid cars.

    Of course, there is no doubt that the improvement of Japan-China relations encouraged the Chinese government to make such a decision.

    If a new law that adds hybrid cars to the category of new-energy vehicles is enforced and hybrid cars are eventually given preferential treatment, it is absolutely certain that sales of Japanese cars will grow substantially.

    The share of Japanese cars in the entire Chinese passenger car market, where 24.72 million units sold, was 17% in 2017, but during the January-May 2019 period, it reached 21.3%.

    It was regarded as a matter of time before this market share would grow to 25%, but it is certain that the growth will be achieved even earlier than projected.

    In addition to this, government approval is providing greater business opportunities to Japanese companies, as exemplified by the fact that MUFJG Bank has been authorized as a yuan clearing bank in Japan and that Nomura Securities is expected to be permitted to establish a new securities firm with a 51% stake.

    Under these circumstances, and encouraged by the momentum of Toyota Motor, which completely changed its attitude toward investments in China in the middle of last year and has since become active in investing in the country, all affiliated manufacturers of automotive components are also becoming active in doing so.

    Furthermore, in April 2019, Panasonic established the new company, China & Northeast Asia Company, to accelerate its attitude toward Chinese business, and as typified by these moves, the positive attitude of Japanese businesses has become conspicuous.

    4. Expectations for President Xi's visit to Japan next spring

    The driving force behind the improvement of Japan-China relations is President Xi's planned visit to Japan, and in the future, as his visit to Japan approaches, various proposals for policy cooperation between the two countries will be considered.

    The author once made the proposals specified below to officials of the governments in Japan and China.

    First, Japan should join the Asia Infrastructure Investment Bank. Secondly, as part of their third-country market cooperation, the Japanese government and Japanese businesses should serve as advisors when their Chinese counterpart works on new cooperation projects and important investment projects in Western countries.

    The Chinese government and Chinese businesses have repeatedly failed in corporate acquisitions and diplomatic policy due to a lack of understanding of Western countries, provoking angry responses from these countries.

    If Japan supports China, failures due to such a lack of understanding would be precluded, and such support would be quite beneficial to China, Western countries, and Japan.

    On the other hand, China should first start to consider specific conditions for joining the TPP Agreement.

    Formerly it was difficult for China to join the TPP Agreement because of its characteristic economic system, but as the result of internal economic reforms promoted effectively using pressure from the U.S., the hurdle to TPP membership has significantly been lowered by now.

    The Chinese government has reached the stage at which it should discuss the possibility of joining the TPP Agreement within its organization.

    Secondly, the Chinese government should expand and enrich the shared foundation for cultural exchange between Japan and China mainly by lifting the ban on broadcasting Japanese animations on TV, promoting popularization of Japanese movies, and allowing Japanese musicians to give more concerts.

    Previously, when Japanese traveled to China, it was not unusual for many Chinese to say that they were fans of celebrities such as Ken Takakura and Momoe Yamaguchi and that they knew Oshin well because they watched NHK's morning drama Oshin; many would also sing Kitaguni no Haru together with the visitors from Japan.

    Through such experiences of close communication, strong affinities were felt between Japanese and Chinese. Animations, movies, and concerts are extremely effective in promoting personal exchange at the grassroots level.

    If the proposals listed above are agreed to, the economic and cultural exchange between the two countries would further deepen, and mutual understanding and trust would further be promoted. That will lay the stable foundations for Japan-China relations in the long run, solidifying the win-win relations between the two countries even further.

    By the time President Xi visits Japan next spring, what economic and cultural exchange projects will be developed, and what results will follow when he visits Japan? The author is looking forward to new developments in the months to come.

    (This article was translated from the Japanese transcript of Mr. Seguchi's column published by JBpress on July 18, 2019.)