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Nos.13-15 ,Economy ,KUDO_Yasushi  Mar 03, 2013

(NO CONFLICTS DESIRED) Japan and China Can Ill Afford to Be at Loggerheads

Photo : Tugami Toshiya, Marukawa TomooAs China is gradually recovering its confidence as a major power, Japan has come to feel threatened by it both economically and militarily. While this is taking place in the context of China’s rapid economic growth, one wonders if the general assessment of the Chinese economy is an overestimation? In a recent discussion, Mr. Toshiya Tsugami and Mr. Tomoo Marukawa, both experts on the Chinese economy, were divided over the economy’s potential for growth. Meanwhile, they shared the view that both Japan and China are faced with various inherent problems in their respective economies and that they cannot afford to be wasting time in being at odds with each other over the issue of the Senkaku Islands.

Moderator:
Yasushi Kudo, representative of The Genron NPO (editor-in-chief, chairman of the editorial board of Discuss Japan-Japan Foreign Policy Forum)

Participants:
Toshiya Tsugami, expert on modern China, president of Tsugami Workshop
After graduating from the University of Tokyo in 1980, Tsugami joined the Ministry of International Trade and Industry. He later served as a counselor at the Japanese Embassy in China and as a senior fellow at the Research Institute of Economy, Trade and Industry, before becoming president of Toa Capital Corp. in 2004. He took up his current post in 2012.

Tomoo Marukawa, professor at the University of Tokyo’s Institute of Social Science
Marukawa joined the Institute of Developing Economies in 1987 after graduating from the University of Tokyo and worked as a researcher there until 2001. During that time he was posted to China as a visiting scholar at the Institute of Industrial Economics of the Chinese Academy of Social Sciences. He became associate professor at the University of Tokyo’s Institute of Social Science in 2001 and attained his current post in 2007.

Chinese Economy’s Problems Not Only Short Term, But Medium and Long Term

Kudo: Sino-Japanese relations continue to be extremely tense since the latest tension over the Senkaku Islands. The backdrop to this is China’s expansion economically and militarily into a major power, which is seen as a threat by many in neighboring countries including Japan. We have invited Mr. Toshiya Tsugami, an expert on modern China, and Mr. Tomoo Marukawa, professor at the University of Tokyo’s Institute of Social Science, to discuss this with the focus mainly on the Chinese economy. In Mr. Tsugami’s book “Chugoku Taito no Shuen” (The End of China’s Rise) published by Nikkei Publishing Inc. in January, the band-wrap read, “China will never overtake the United States.” While there have already been assessments that China’s economic growth faces various problems, this is the first book to pinpoint the issues so precisely. Why have you changed your view on the Chinese economy?

Tsugami: I would like to mention four major points. I wrote the book based on my analysis of problems that will arise during various stages of the Chinese economy from now on – the short term (until around 2015), medium term (until 2020) and long term (2020 and beyond).
First, let me start with the short term. Economic stimulus since 2009, said to total some 4 trillion yuan in investments, has achieved such enormous and impressive effects that at one point everyone turned to China and believed that “China will save the world economy.” Now, however, it has become clear that there are tremendous aftereffects. To put it simply, extremely large-scale stimulus measures cannot last forever, which means they will eventually be scaled down at some point. When this happens, the economy will face downward pressure and fall even below its original growth rate.
I believe that China’s economic growth has already fallen to around 5 to 6 percent. Even if its original strength was in fact around 5 to 6 percent, I would not be surprised if it drops further by about 2 to 3 percent. That is the problem in the short term.
Then in the medium term, it is a slightly more deep-rooted problem. I think that in recent years, the Chinese economy has tended to be dominated by state capitalism, with bureaucracy always at the forefront while the private sector is shunted off to take a backseat. If this continues, the Chinese economy will find it difficult to achieve growth even in the medium term.
The reason is that, as an unmistakable characteristic of the Chinese economy recently, labor costs have been rising at an incredible pace. This is going up at an annual rate of some 15 percent. What this means is that the country has now come to the stage where it must completely change its growth model, which has until now drawn on the massive supply of underused labor from villages as is the case with developing countries. In plain words, I believe China has entered a phase in which there will be no growth in real terms unless companies or the economy improve productivity and value-added at a rate above that of increases in labor costs and commodity prices. Can productivity and value-added really be raised when the economy is managed with total dependence on the government? I think that is impossible. That is why I believe it will be very difficult to attain growth in the medium term unless China makes a drastic change in policy to move from the current trend of dominant state capitalism as described in the Chinese catchphrase “guo jin min tui” in which state enterprises advance rapidly to increasing market share while the private sector retreats, back once again to the “guo tui min jin” of 10 years ago under which state-owned companies gradually withdrew to make room for a more vibrant private sector.
As for the long term, the issue is with China’s demographics. It has gradually become clear recently that contrary to the extremely optimistic views up to now, China is going to become an aging society with fewer children or experience a decrease in its total population earlier than expected. The Japanese economy is right now suffering from exactly those negative impacts and is finding it difficult to achieve any growth. What Japan is experiencing is demographics that are negative for the economy to begin with, and it can attain positive growth only if it has extra capacity left after making up for this disadvantage. China too is approaching this same stage in the not-so-distant future and that is the issue of concern in the long term.
Not only is the commitment of manpower going to decrease, but the increase in savings, a major source for investments that have been a pillar supporting the Chinese economy so far and which has been on the rise readily even as a ratio of gross domestic product (GDP), is also now peaking out. So from now on, the workforce is going to shrink while the number of elderly keeps increasing steadily, which means savings can no longer be wasted the way they are right now. If that is the case, when considering prospects beyond 2020, I believe this problem will have a significant impact on economic growth.
The above is my basic scenario but I would like to add one last point, which is a bright aspect that I have come to realize recently and was not included in the book. In the latter part of the administration under Hu Jintao and Wen Jiabao over the past five years or so, fiscal injections into rural districts as well as the transfer of public finances from the central government to local governments appear to have increased tremendously. In addition, due partly also to booming business in the midwestern region, income levels have risen drastically even in farming villages and rural areas in China’s midwest. Social security programs are also becoming more widespread. As a result, even in rural districts, there are now two to three privately owned cars in every 10 farming households. I have been able to get hold of this kind of information recently. Urban dwellers who returned to their hometowns during the Spring Festival holiday (Lunar New Year) posted a vast amount of such information on social networking services and reading through them one notices that radical changes that we have not been aware of are now taking place in the Chinese countryside. This I think is a good thing.
However, if this is how fiscal spending is implemented, China must put an end to its old practice of allocating finances to wasteful investments in infrastructure that are extremely detrimental, such as building way too many steel plants, and switch to this approach now. Otherwise, the nation’s finances will not last. In that sense, this is news that also gives the impression of an even stronger need for China to change the direction of its economic policy management in the medium term.

Kudo: So despite discussions out there that the Chinese economy could overtake the United States’ in 2017 or 2020, you are saying that would be impossible?

Tsugami: Given that GDP is not really such a precise statistic, one wonders if it is truly significant to focus on whether or not China has surpassed the United States simply in numerical terms. But in any case, I think it is necessary to reconsider the scenario that the world has been imagining up to now – that China will continue its rapid growth for another decade or more, and that it will soon surpass the United States and become a major world economic power.

China Still Has Surplus Strength to Improve Productivity and Investments

Kudo: How about you, Mr. Marukawa? I heard that you too have read Mr. Tsugami’s book. Any counterarguments to what he has just said?

Marukawa: I would like to start instead with the long-term issues. My forecasts for China’s economic growth rates are 7.7 percent for the 10 years until 2020 and 7.1 percent for the decade between 2020 and 2030. These figures are the so-called potential growth rates, in other words, China’s potential if it effectively utilizes the resources it holds. Mr. Tsugami’s point is that the population will begin to shrink earlier than expected and that is something that I too have already factored in. One thing that made a very strong impression on me in Mr. Tsugami’s book is that he conducts an independent estimation of China’s future population. While I have not conducted such precise estimates myself, my bet is that the workforce will in any case decrease.
Another point is that as a trend, the proportion of people who are actually working out of the total population of those who can possibly be part of the workforce is falling. At the same time, however, savings remain high, and even if they are decreasing they are still very high and there is more money than can be consumed domestically. Besides, I believe improvement in productivity is very promising. This is because China is still behind in many respects and these can become much better even if China simply copies existing technologies in advanced nations. These are my thoughts for the long term.
Next, with regard to the medium term, I too am very skeptical about the argument that state capitalism is the way to go. I think instead that having private companies as the core of the economy would be the right thing to do and would benefit China. Where I agree with Mr. Tsugami is that the Chinese government is starting to take a defiant attitude and thinking that it is alright to stick with state capitalism. Yet in reality, the presence of state-owned enterprises has been diminishing year after year and this has not been reversed even once. So, while this may sound a little cynical, China is progressing steadily toward privatization despite the intentions of the government and the Communist Party. Furthermore, with regard to the rise in labor costs, I think that is a good thing. The greatest concern for growth from now on is not on the supply side but rather on demand. As China cannot depend on further demand from abroad, it will be important to steadily expand domestic demand. In that sense, rising labor costs are a very positive element to bring about an expansion in domestic demand. Figures released just recently on China’s income distribution show that, while only very slightly, it has been gradually moving toward more equality since 2008. I therefore think that we are seeing some bright prospects in terms of demand.
As for the short term, I agree with the point Mr. Tsugami made that China has gone too far with infrastructure investments in the past few years and that it will be met by a downward shift in the economy. However, there are still many ways in which China needs to invest in its infrastructure and that have been implemented just a little in advance. While the only important thing is whether the nation’s finances can be sustainable, I do not think it has come to the stage where infrastructure investments have reached their limits. However, the government must not depend too much on spending on public works. After all, it must steadily expand consumption and that I think is most important.

Excessive Investment Will Lead to Economic Collapse

Kudo: Mr. Tsugami, what Mr. Marukawa just said is that there are still necessary infrastructure investments to be made in China and that productivity improvement and consumption are still promising, so high growth to a certain extent is believed to be possible. What do you think of that?

Tsugami: I too think that in the rural economies there is still demand for infrastructure and investments. However, the economy cannot run on demand alone and when it comes to investment for infrastructure, the question is whether there is the financial power to provide for such investment. Only when one is equipped with such financial muscle can investments be made. From such a point of view, I believe fiscal limitations will become stronger in the medium and long term. Moreover, unlike in Japan where fiscal spending is conducted with tax revenues in hand, it is done on a massive scale using debts with interest. I think this kind of approach is a little far-stretched. While it is true that there is demand, when it comes to whether China can really afford the investments, it seems rather difficult. Investing excessively is only going to make it more likely to lead to a financial collapse. In addition, although the rise in salaries is a good thing, such an increase if not accompanied by improvement in value-added or productivity would fit into the typical pattern of a nation falling into the “middle income trap.” So the issue is how is China to raise its productivity and added value? Dr. Marukawa is saying there is still room for such improvements, but I think rather that given that productivity enhancement over the past decade has been so very drastic, the curve for improvement is going to level off from now on and be close to peaking. Of course there may be betterment, but I imagine it will not be in as drastic a form as it has been so far.

“Middle Income Trap” Is the Key Factor for the Chinese Economic Outlook

Kudo: Mr. Marukawa, you have acknowledged that the Chinese economy faces many problems such as fiscal sustainability but still, the scenario is that the Chinese economy will continue to expand further and further? When you mentioned 7 percent, is that high from your point of view or are you predicting it will go just about that far given the various problems that exist?

Marukawa: There is a good possibility that China can continue its high growth. However, rather than the issue of whether it will surpass the United States or not, what is crucial for China is the “middle income trap,” which Mr. Tsugami has mentioned. I believe there are many traps lying in wait for China on the road ahead. There are many views about this, but in any case the issue is how smoothly and swiftly can China move through from the stage of being a middle-income country to becoming a high-income nation. This is the challenge confronting the administration of Chinese President Xi Jinping. Although it is most likely that the goal of becoming a high-income nation will not be accomplished during the Xi administration, I believe the scenario I have come up with can be achieved by around the mid-2020s. There will, however, be various traps. There could be an economic collapse, and there are such issues as the income gap and impact from environmental problems. With regard to the graying of the population, there is still a bit of time to spare as the nation will enter the phase of an aged society, with 14 percent of its population being elderly, around 2020.
One thing I found particularly striking in Mr. Tsugami’s book is that the birthrate has fallen significantly. However, even if it fell in 2010, its impact on the workforce will not be felt until some 20 years later.

Xi’s Administration Seems to Have Sense of Crisis over Economic Prospects

Kudo: Mr. Tsugami, you have said before that, in fact, policymakers in China too are very much aware of an impending crisis with regard to this kind of macroeconomic management and that deep inside they are aware that stable growth cannot be maintained unless they carry out reforms properly.

Tsugami: For example, with regard to the population issue, those with a sense of urgency have been speaking out about it for at least 10 years. But for a long time, society – including top leaders – has turned a deaf ear to such concerns. Yet results of the 2010 census showed that the nation’s total fertility rate was 1.18. Although I think in reality it was not as low as 1.18 and probably around 1.3, ever since that figure came out society’s perception including among the top leadership has changed significantly in the sense that people now realize “This is serious.” Right now, I think China is in the midst of a changing tide. Even when looking into literature and documents of the Chinese Communist Party, references to population policies have clearly been changing over the past half a year or so. I feel that finally even the top leaders are sharing this sense of crisis.
Even with other issues, I guess there is a certain time lag. On the issue of state capitalism, or the aftereffects of the 4-trillion-yuan stimulus, over the past six months or year a truly significant number of people have finally begun to share this sense of urgency. Although there was a period before when China had been bold and self-assured, perceptions are gradually changing. However, I have a feeling that Xi Jinping and those in his administration do realize they will likely be starting from a rather difficult situation.

Kudo: How do you know?

Tsugami: For example, there was news that Xi Jinping chose Shenzhen, where the reform and opening-up policy started, as the venue for his first inspection tour as party general secretary. This was welcomed by the sluggish stock market as a very good piece of news and stock prices rebounded considerably. This was because the stock market took it as a signal that the new government would “once again speed up measures to reform and open up.” While it may not have been immediately obvious to foreigners, in fact this news about the inspection tour to Shenzhen is a contrast with the event 10 years ago when Hu Jintao picked the party’s revolutionary holy ground as the destination for his first inspection trip. In retrospect, I think Hu Jintao was a person leaning very much to the left and placed emphasis on public ownership. That is why he took the trouble to choose the revolutionary holy ground for his trip as a declaration that he would be different from his predecessors, Jiang Zemin and Zhu Rongji. In a way, the fact that Xi Jinping, obviously aware of such an episode a decade ago, deliberately picked Shenzhen – the frontier of China’s reform and opening up – even has a whiff of insinuation against Hu Jintao. Given such circumstances, Xi’s choice of venue was interpreted by the Chinese people as “an indication of his intention to accelerate reform and opening up.” Of course, one cannot conjecture everything based on this single event. However, from the way signals have emerged through various channels soon after his assumption of office, I believe there is a very strong awareness that China is not in a situation where it can lay back and live in clover.

Is “State Enterprises Retreat, Private Companies Advance” Policy Regressing?

Marukawa: It happens that Japanese Prime Minister Shinzo Abe and Xi Jinping have become their nations’ leaders at around the same time, but one distinct difference I feel is that Abe has set out his priorities very clearly, that “my job is to bring Japan out of deflation.” Meanwhile, reading literature related to the new administration of Xi Jinping, it seems to want to please everyone and gives no clue to what exactly he wants to do. Basically, nothing has changed. Particularly with regard of the issue of state enterprises as Mr. Tsugami too has pointed out, I think not a single inch of progress has been made when compared to the Chinese Communist Party’s policy set in 1999. What is written in the current five-year plan is exactly the same as that in 1999. If the new administration can clearly hammer out a policy to “further limit the role of state-owned enterprises,” that would be of great significance.

Kudo: What was said in 1999?

Marukawa: It mentioned that state-owned companies serve as the core enterprises in industries having to do with the nation’s security, those involving natural monopolies, those providing important public goods and public services, as well as “pillar industries” and hi-tech industries. This all remains unchanged. Given that state enterprises have enormously strong political clout, I think change will absolutely not take place unless the top leader issues a new policy direction.

Kudo: So Mr. Marukawa is saying that Xi Jinping’s message is not adequate with respect to clearly indicating his intention to pursue reforms.

Tsugami: For example on March 5, the government’s operational report was presented to the National People’s Congress by Premier Wen Jiabao. Right now the government is still in a handover period and Xi Jinping is just the secretary general. Hu Jintao is still the president and so the new administration will not start in the real sense until March 15. In that sense, since this is a period of change in between two administrations, I believe consideration must be given to the peculiar circumstances that during this time there are things that remain vague even if we want to see them. But hearing what Dr. Marukawa said just now, I recall that when the document was adopted at the Fourth Plenary Session of the 15th Central Committee in 1999, I myself trumpeted the “state retreats, private sector advances” declaration that state enterprises will fade to the background to make way for private companies to take the lead. Back then, it was highly acclaimed because if implemented steadfastly China could almost reach the level the West had achieved with its mixed economies around the 1970s. That was how we interpreted and commented on it at that time. But now, when one tries to run a search on the Internet on the 1999 Fourth Plenary Session, the elements related to the policy to “aim for privatization” have all been removed. The whole point of the policy, that “state enterprises will be engaged only where necessary and retreat otherwise,” and other elements alike have all vanished. Yet to take all that out of the Fourth Plenary Session means that what remains is like leftover coffee grounds and so now only meaningless text remains on the Internet. Dr. Marukawa said not a single inch of progress has been made, but I see it as a clear regression. That probably was what Hu Jintao had intended. He was a man who placed a lot of weight on Sino-Japanese relations, which I can appreciate, but when it comes to economic policies I feel he probably held the view that “I disagree with the privatization approach advocated by Jiang Zemin and Zhu Rongji.” The fact that only meaningless words are left on the Internet when searching for documents from the Fourth Plenary Session is indeed a symbolic reflection of the situation.

Kudo: Amid talk that China is rapidly developing into a major power and will surpass the United States sooner or later, Japan and other neighboring countries have come to feel threatened not only economically but also in terms of national security. In response to this atmosphere, Mr. Tsugami’s book conveys the message that “things are not that straightforward.” The argument is that it is not a matter of China being “a threat because it is expanding” and “how much more powerful is it going to become?” He advocates that this is not the time to engage in economic conflicts with each other and that we have come to a phase where we must face each other in earnest. Mr. Marukawa, what are your views on this?

Marukawa: I think China is already a major power. What is discussed here is GDP in U.S. dollar terms, but if we consider that real capacity is measured by purchasing power parity, then it is possible to conclude that China is even more powerful than it seems. It is often said that Chinese statistics are overestimated, but I think that with regard to the tertiary industry and private companies they are rather underestimated. Of course, there are many challenges ahead that must be overcome, which otherwise would lead China into the traps, but I believe it cannot be denied that the country will continue to grow. Indeed, China’s attitude has clearly changed since the time when it overtook Japan in terms of GDP in 2010 – the same year when the collision involving a Chinese trawler and Japan Coast Guard vessels in waters off the Senkaku Islands occurred. But I think that should be a discussion separate from the matter of whether it is a major power or not. It is not as if one can be at ease just because China may not be a major power, nor that it is a threat simply because it may become a major power.

Why the Change from “Rising China” to “The End of the Rise?”

Kudo: Mr. Tsugami, in the past, you won the prestigious Suntory Prize for Social Sciences and Humanities in Japan for your book “The Rise of the Chinese Economy,” but this time you published a book that is the exact opposite. What has happened in the meantime?

Tsugami: In terms of the economy, I wrote the book on China’s rise in 2003. The Chinese economy I saw at that time was undergoing the privatization approach indicated by the Fourth Plenary Session resolution, as Dr. Marukawa also mentioned, and I was hopeful that China would achieve remarkable things down the road. It was with such sentiment that I wrote that book. Yet things went into reverse more and more in the 10 years that followed and I thought, “This is not how it was supposed to be.” I guess one can say that I wrote “The End of China’s Rise” partly to express my feelings of protest against the regression of the past decade.
Regarding the view that China is a threat, this feeling that the Chinese economy is a threat had spread in Japan too in the early 2000s, not only among politicians but also those in industry and the mass media, and even among scholars. I thought it was total nonsense and therefore wrote the “China’s Rise” book as a counterargument, in an attempt to convey my view that “this rise can no longer be stopped so why don’t we think about how to make good use of it instead?” At that time, China adopted the approach of a “peaceful rise.” But even on the diplomatic front, in the end there has been a significant shift since around 2009 and 2010. Seeing the marked contrast between the collapse in Europe and the United States following the Lehman shock of 2009 and China’s remarkable recovery, I think a certain kind of irreversible change took place in the minds of the Chinese people.
When discussing this issue, we must do so from the premise that over the past 150 years the Chinese people have endured an extremely difficult time having been bullied, invaded and mocked by foreign nations. But now, it has finally reached the point where it can emerge from that period and resurrect itself to become the world’s top or second major power. Surely there are positive aspects to this, but at the same time it has also led to dangerous debates about “seizing back national interests lost in the past” as well as assumptions that “Europe and the United States are without a future, they are wrecked.” Then there come problems such as territorial issues, which are supposed to be the most serious diplomatic issues that nations have to deal with. Increasingly the atmosphere in China is that one must stick to the stance of “not compromising an inch” with regard to such matters and that anyone who says otherwise is to be cursed as a traitor. This I believe is inextricably related to the mentality that in economic terms China has come within reach of the United States and that surpassing it would only be a matter of time.
China’s development in itself is a good thing, but if this is supplemented by such mentality as “It is now our turn to redeem the national interests we have lost” then certainly it is a situation different from when I said in 2003 “Stop all this nonsense about taking China as an economic threat.”
Right now, rather, there are many traps lying ahead for China’s economy, as Dr. Marukawa has indicated. Amid the risk of being trapped and finding it impossible to be fully reinstated, the Chinese themselves try to head in a dangerous direction as they see the warning signs, while neighboring nations see a China like that and increase their vigilance, thinking it probably means an invasion. I think this is truly ridiculous and meaningless. This is really to bring harm to oneself and I hope relations will return to the proper path toward a peaceful world and more happiness for all.

Kudo: Indeed, economic development leads to some sort of self-consciousness as a major power. The spread of such a mentality is a problem per se.

Tsugami: If economic growth and the fruits of prosperity are being distributed relatively equally among the population of 1.3 billion, then perhaps people can look back objectively at the past with a touch of maturity. But in China right now, income distribution is not like this at all. There are people who have made vast riches, but there are also many people bottled up in discontent that not only has life not improved for them a bit, but actually it has become worse. Given that kind of rift in society, no matter how big a power China becomes as a whole, I think it will be difficult for the nation to adopt a more mature attitude and attempt to heal its emotional wounds from the past with an open mind.

China Must Face Squarely the Grave Challenges Ahead

Kudo: When China’s rise hits a snag, what should be done in terms of Japan-China relations?

Tsugami: I think the sort of mentality in China that “It is just a matter of time that we become the world’s number one economic power, and Europe and the United States are a bunch destined for a downfall” is some kind of inflated illusion. I hope China will wake up from such a fantasy soon and squarely face the grave challenges ahead. It will then undoubtedly realize that with regard to sovereignty and territorial issues it cannot afford to be talking such nonsense as that it will not yield an inch or will not rule out the use of force. That is what I want to say to China. The country is facing the impending issue of an aging society and yet there are almost no pension savings.
On the other hand, for Japan, originally the rapid economic growth of a neighboring country should have been something to be thankful for. Throughout the 2000s, Japan’s economy would have become even more miserable had it not been China’s rise, so I believe we have benefited enormously. Nowadays, however, the Japanese people are no longer at ease with China’s economic growth. What the Japanese economy should be considering from now on is not just to manufacture in China or to sell products in the Chinese market, but, for example, to promote the attractions of areas in Japan and lure Chinese tourists to come and spend their money here. Another example is to get Chinese companies to invest in various fields in Japan such as in real estate. I believe we are in an era where it is necessary to grasp hold of benefits in all forms. Yet if under the current state of Japan-China relations we adopt an attitude fearing that “China may come to snatch away Okinawa before long,” we would ourselves be tossing away such benefits if they existed. Nowadays, whenever the issue of investments or acquisitions coming from Chinese companies comes up, behind the abstract noun “Chinese companies” people see the name “Chinese Communist Party.” And they become terrified. This again is doing harm to one’s own interests.

Negative Aspects of Becoming a Global Power Are Matters of Concern

Kudo: How about you, Mr. Marukawa? How do you think Japan-China relations should be?

Marukawa: In its reform and opening up, especially since its accession to the World Trade Organization, China has been very generous in distributing the fruits of its growth to foreign companies. In other words, it has been extremely open, with many foreign companies having forayed into the market, and trade has also expanded rapidly. Japan, therefore, has benefited enormously. Meanwhile, when we look at Japan, although it is very open in terms of its import policies relative to those in Europe and the United States, foreign investments in Japan are disappointingly low. When comparing investments from Japan to China with those from China to Japan, there is a gap of about 80 to 1. Considering that the scale of China’s economy has already exceeded that of Japan’s, this is extremely abnormal. Even though the reasons for this may be as much to do with Japan’s overall system for introducing foreign capital, nonetheless there is a lot of room for improvement. I am not too sure what should to be improved, though. In that sense, there are still all kinds of hidden potential where we can deepen Japan-China ties. In particular, while investments in China have mainly focused on the manufacturing industry up to now, as China’s income level shifts from that of a middle-income nation toward a high-income nation, the time will come when products that used to be too expensive for the Chinese public will easily be absorbed by the market. Therefore, considering these conditions objectively, opportunities for Japan-China relations should be expanding.
On the other hand, I think China’s posture in opening up its market has become slightly suspicious of late. It attacked Japanese companies over the Senkaku issue. It has ultimately resorted to this despite having succeeded in separating politics from economics. Since then, discussions regarding foreign companies in general have changed tremendously. While not much action in concrete form has been taken, the trend is that even calls for foreign companies to “get out” have surfaced boldly and this is, after all, a negative side of the process of becoming a major power. From the mentality aspect, this is damaging for China itself and is of course also worrying for its neighbors including Japan. This is something I am really concerned about.

Kudo: Since the deterioration of the situation over the Senkakus, the Japanese and Chinese economies have been significantly affected. What are the economic ramifications should this situation continue or in the case that a conflict arises?

Marukawa: The impact from the boycotting of Japanese products, which in fact has been a phenomenon mostly limited to automobiles, is subsiding. To begin with, Japanese-made products are often internal parts of commodities and therefore only a relatively small proportion really stands out in the eyes of consumers. In that sense, I believe the impact is ceasing to be as terrible as initially feared. That said, of course it dealt a blow to tourism – a friend’s travel agency went bust as a result of the slump in Japan’s tourism industry. Supposing a conflict arises and the two sides actually exchange fire, this would deal a severely damaging blow to business sentiment also as Japanese companies are extremely sensitive.

Contingency Must Be Avoided at All Costs

Tsugami: I said earlier that China is not growing as much as expected and that the road ahead is very rugged. On the other hand, even if we suppose that growth over the next few years will be around 5 percent, it is true that there is no other country anywhere in the world that will be growing at around that level with an economy of this size. So even one thinks “We won’t go to China because it is dangerous,” if companies that have forayed into the Chinese market return to Japan will there be a future for them? They had gone to China because they thought there would be no future in Japan to begin with, so I think they should not easily give up the business opportunities in China. However, as you said, an accidental incident may occur over the Senkakus. If that happens, what erupted in September last year would be repeated and businesses that have finally got back on their feet would suffer yet another blow. In that case, the scenario of “aiming for the Chinese market that is still growing at 5 percent even though it is lower than before” will not stand for Japanese companies anymore. The most difficult point right now is that there is no guarantee whatsoever as to when and how clashes are going to happen again.
I personally think that it is almost beyond all hope for the two sides to bring the Senkaku issue back to where it used to be. I believe there is no choice but to think about the future of Japan-China relations on the basis of the current situation, and I hope the two governments will do whatever it takes to avoid any accidental contingencies. I think it is the responsibility of politics to ensure that something like this does not happen. I truly hope the Japanese and Chinese governments will create a mechanism that would prevent a situation in which something terrible unfortunately happens even though it is not intended by either side. If such circumstances arise and develop into an actual exchange of fire, the financial markets will likely experience severe and instantaneous shocks.

Marukawa: Aside from armed conflict, military expansion has both positive and negative impacts on the economy and so we cannot make sweeping statements about it. Of course, spending money on military expansion brings no merit at all to either side. Between December and February, the spread of air pollution in Beijing became major news. Through this perhaps China will finally come to realize first hand the distortions from its rapid economic growth and perhaps it will reflect on its insistence on economic scale and expanding its economy. I therefore believe that for China, too, this is no time for military expansion if it is to take this opportunity to start tackling issues such as quality of life and the distortions of economic growth, as these would require substantial spending.

Neither Side Can Afford to Be Damaging Other’s Economy

Tsugami: The most important thing I want to say is that neither Japan nor China can really afford, in terms of time and economic capacity, to be damaging each another in bilateral relations over such issues as territorial disputes that are impossible to resolve instantly.
With regard to China, I have said earlier that the farmers’ livelihoods are improving, but aside from that many tasks remain unaddressed and need to be dealt with, such as the pension system and pollution control measures. Considering all that, the road ahead is certainly not an easy one. To hold one’s ground at such a time and insist only on one’s own logic in order to redeem national interests once lost is obviously an absurd argument. The same applies to Japan. Recently, Japan has been said to be “tilting to the right,” which I believe basically stems from feelings of unease toward China. My view is that China is not such a great country that will grow continually, because it too is burdened with numerous problems, and so we can just calm down. The basic principle for a nation to attain happiness is to maintain a peaceful environment and proceed with no serious blunders in international relations. From such a standpoint, I hope Japan will think seriously about what its top priorities are right now. In a nutshell, “There is no time for either side to be wasting time over such a trivial dispute. Therefore, it is better for both nations to emphasize peace and not do anything to harm each other’s economy.”

Kudo: Let us wrap up today’s discussion here. Thank you very much.

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Translation of a roundtable discussion “Japan and China Can Ill Afford to Be at Loggerheads” (The Genron NPO, March 2013)

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