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Tuesday, Nov. 13, 2012

SENTAKU MAGAZINE

China's risky anti-Japan policy

Recent anti-Japanese street demonstrations in China may signal the start of economic decline for a nation that won its reputation as the "world's manufacturing factory" in the late 1990s and surpassed Japan in 2010 to become the second-largest economy after the United States.

Although the riots were ostensibly meant as a protest against the Japanese government's purchase of three Senkaku Islands in the East China Sea, which are also claimed by Beijing, a more fundamental undercurrent behind the violence was China's growing economic woes, including the widening rich-poor gap, declining international competitiveness because of rising labor and other costs, and lagging efforts by local industries to move up the value chain.

China could very well be heading toward economic self-destruction if it continues to ostracize foreign-owned businesses that provide state-of-the-art technologies and products while clinging to monolithic rule under the Communist Party.

Signs of China's economic deceleration are evident in recent data. Gross domestic product grew 7.4 percent in the July-September period, down from the 7.6 percent increase in the previous quarter. It marked the seventh consecutive decline in quarterly growth rates.

It appears certain that growth for the entire year will fall short of 8 percent — a far cry from the 12.7 percent growth in 2006, 14.2 percent in 2007, 9.6 percent in 2008, 9.2 percent in 2009, 10.4 percent in 2010 and 9.2 percent in 2011.

Some analysts see the slowdown as a temporary cyclical problem, attributing it to sluggish exports to European countries hit hard by the sovereign debt crisis. In reality, however, Chinese exports are not stagnant, as they hit a record $186.35 billion in September, and the January-September exports total rose by 7.4 percent from the same period last year.

Rather, the real threat is the slowdown in domestic demand, which has been the driving engine of the Chinese economy in recent years.

A symbolic example of the projects that had inflated domestic demand is the 42-km Jiaozhou Bay Bridge — the longest in the world — connecting the city center of Qingdao in Shandon Province with the Huangdao district across the bay. The project brought a huge boom to the area during bridge construction from 2005 to 2011. After its completion, however, there was a loss of jobs in the local economy.

Five of the world's 10 longest bridges are in China. Construction of these bridges, as well as highways, tunnels, large office buildings and other forms of infrastructure — including projects deemed wasteful — have propped up domestic demand.

At the same time, however, those projects have placed serious financial burdens on local governments that took charge of construction. In the aftermath of the Lehman Brothers shock of 2008, the central government announced a 4 trillion yuan stimulus to shore up demand through public works projects. But it was local governments that shouldered more than half of the expenses —and are now stuck with the subsequent debt.

It should be noted that the recent anti-Japanese demonstrations came against the background of such economic realities, which rarely get reported. Japan's nationalization of the Senkaku Islands provided Beijing with a golden opportunity for turning people's attention away from domestic economic woes.

There was one common characteristic among the angry demonstrators who took to the streets of Beijing, Qingdao and Changsha in Hunan Province: Even though they acted violently, they appeared quite well organized — reportedly under the leadership of the Communist Youth League of China and some of the major state-owned enterprise — for attacking and damaging specific targets.

Targets of demonstrators led by the youth league were the embassy and other Japanese government facilities; those organized by state-owned enterprises consisted of migrant workers hired to attack factories and Japanese-owned stores.

Many of the state-owned enterprises are in dire straits as they face slowing exports and consumer spending. Knowing that they cannot compete in the market with foreign competitors, particularly Japanese firms, with regard to product quality and safety, those Chinese enterprises are thought to have viewed the destruction of Japanese plants and stores, or consumer boycotts of Japanese products, as an effective means of hitting the rivals.

Damage done to Japanese firms was quite serious, as sales of Japanese-brand automobiles in September plummeted 40 to 50 percent from the year before. Many other products of Japanese origin were either shunned by the local consumers or had to be pulled out of store shelves.

This, coupled with rising wages for Chinese workers and appreciation of the renminbi, has led some Japanese companies that have invested in China to consider relocating their production bases away from China, which they view as losing its competitiveness.

With countries like Vietnam, Thailand, Singapore, Myanmar and Cambodia making active bids to lure investments by Japanese manufacturers, a China business consultant predicts that the number of Japanese firms operating in the country, which now stands at 14,400, could fall below 10,000 within three years.

What many Chinese leaders do not seem to realize is the consequences of a massive exodus of Japanese manufacturers from China. They may be right in their assessment that any vacuum created by the Japanese would be filled by local firms or others from the U.S., Europe or South Korea. But this view ignores the fact that Chinese firms, especially in the sectors of home electric appliances, automobiles, clothing and food, have consistently had to learn from, or even imitate, the technologies of manufacturing, product development and engineering from Japanese firms that have invested in China.

Indeed, Japanese companies have long endeavored to build human resources among local Chinese staff in such fields as production management, quality assurance and product development. A number of those who have gained these skills while working for Japanese firms have moved on to Chinese manufacturers, which in turn have been able to elevate their technological standards.

The Chinese electronics industry owes much of its success to what has been learned from Panasonic Corp. (formerly Matsushita Electric Industrial Co.), which has extensively invested in the country over the past three decades.

Baoshan Iron & Steel Co. has gained its position as the overwhelming top Chinese steelmaker only with the help extended by Nippon Steel Corp.

This has not been the case with American and European manufacturers, which have tended to keep their production processes in the "black box" so that the Chinese could not imitate them.

It will likely take several years before the Chinese leaders come to the realization that anti-Japanese campaigns and boycotts of Japanese firms and products could ruin the foundations of China's own industries and slow its economic growth.

This is an abridged translation of an article from the November issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.


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