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Monday, July 4, 2011

China, Japan to deepen ties, housing risk overblown: expert


Staff writer

Despite the short-term disruptions to bilateral trade caused by the Great East Japan Earthquake, economic relations between Japan and China are likely to deepen once again over the long term, according to an expert on the Chinese economy.

News photo
Kwan Chi Hung

After taking massive damage to their supply chains from the March 11 earthquake and tsunami, Japanese manufacturers will increasingly move to diversify their parts-supply networks overseas in the coming years, with China inevitably becoming their No. 1 choice, said Kwan Chi Hung, a senior fellow at the Nomura Institute of Capital Markets Research.

Kwan made the comments Tuesday at a seminar organized by the Keizai Koho Center on the prospects for the Chinese economy and their implications for Japan.

China relies a lot on Japanese parts and materials for production, and companies in China — particularly those affiliated with Japanese firms — suffered heavy damage after the natural disasters forced automobile and electronics parts makers in Tohoku to halt production, he said.

In April, China-bound exports from Japan — now the world's largest exporter to China — fell 6.8 percent from the previous year, forcing Chinese manufacturers to trim output. Toyota Motor Corp.'s production in China, for example, plunged by 30 to 50 percent of normal for six weeks starting in late April, Kwan said.

To reduce future exposure to such risks, Japanese firms are likely to accelerate moves to diversify their supply chains, which are concentrated in Japan, and China is expected to emerge as the logical choice for fresh investment, he said.

After Japan's political ties with China began unravelling in the mid-2000s, Japanese companies grew wary of putting all their eggs in China's basket, allowing combined investment in such emerging powers as India, Russia and Brazil to eclipse the level in China in recent years, Kwan said.

However, they are likely to turn once again to China, given its geographical advantage, developed industrial base and a growing economy that is outperforming all the other emerging powers, he said.

New investment is expected to focus on high technology rather than China's cheap, labor-intensive operations, and China sees this as a prime opportunity to help its industries advance into higher value-added segments of the global market, Kwan said.

And China will no longer simply wait for those investments to arrive. Its cash-rich firms will aggressively seek out mergers and acquisitions of Japanese companies to obtain their higher value-added operations, including research and development, key component technologies, marketing and brand power, he pointed out.

Chinese attempts to acquire or invest in struggling Japanese companies with excellent technologies and established names has been rising in recent years and is likely to grow even further, given the economic problems created by the March 11 disasters, Kwan observed.

As for the prospects for the Chinese economy, Kwan noted that GDP growth will continue to gradually decelerate into the latter half of this year, with second quarter growth likely to slow to around 9 percent from 9.7 percent in January-March.

Inflation, which statistically trails GDP growth trends by about three quarters, is nearing its peak and will start coming down perhaps as early as next year, paving the way for China to loosen monetary policy to again spur growth later in 2012, he said.

Kwan said it is unlikely that the Chinese real estate bubble will get out of control, given that the government has been taking action to tame the overheating market since last year and noting that it has already entered a correction phase.

While it is not clear whether the measures taken so far are having the desired effect, there is no doubt that the Chinese government is "quite serious" about taming the bubble and will take additional steps if current measures prove insufficient, Kwan said, adding that he does not foresee a further uncontrolled rise in housing prices.

One positive factor for Chinese growth next year, Kwan noted, is that the Communist Party's national convention is scheduled in the fall of 2012.

Over the three decades that have passed since economic reforms set in, Chinese growth in the year of the party's convention, which is held every five years, has been 1.2 points higher than the average growth rate of 11.3 percent. It has not been analytically proven why this happens, but the Communist Party's leadership, who can no longer rely on the ideology or charisma of past leaders like Mao Zedong and Deng Xiaoping, is apparently trying to use good economic performance as a way to justify their grip on power, he said.

And 2012 will be one of those rare years when China's five-year political-economic cycle coincides with the presidential race in the United States, where growth also tends to be higher than average in an election year.

This will in fact be the first time this has happened in 20 years, Kwan said.



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