More Uncertainties to the Sino-Japanese Economy

On September 11， the Japanese government an- nounced its intention to “purchase” the Diaoyu Islands so as to implement the so-called “nationalization”. Sino-Japanese relations were once depicted as “remote politics yet close economic ties”， now the Japanese government’s move has been considered ‘rash’ by some observers and has allegedly impacted every and each domain of the bilateral economic trade between the two countries. However， statistics recently published by the General Administration of Customs shows that in September the SinoJapanese trade volume totaled USD 30.084 billion， down 4% year-on-year， while up 8% month-on-month. Many experts regard that the import export commodities delivered in September were from orders earlier， and the Sino-Japanese geopolitics factors have not yet exerted impact， which may reveal in the fourth quarter.

Many fields are impacted by the so-called purchase of Diaoyu Islands

In a recent conference， Shen Danyang， spokesman from the Ministry of Commerce said that Japan’s illegal “island purchase” farce will undoubtedly impair the Sino-Japanese ties. As the Diaoyu Islands disputes keep escalating， the bilateral trade between Japan and China ranging from tourism to Japanese household appliances and autos has been negatively affected during this period.

From January to July， Japan welcomed a large number of 1.19 million Chinese tourists， a considerable consumption base for the Japanese tourism. Over 60，000 round-trip tickets have been cancelled by Chinese people， according to statistics from Japan’s two major airlines. During the“golden holiday” of the Chinese National Day， approximately 100，000 Chinese tourists canceled travel plans to Japan， which significantly hit the Japanese tourism， said the Japanese TV station TBS citing statistics from the Japanese Ministry of Land， Infrastructure， Transport and Tourism， according to the Japanese official statistics. The soured Sino-Japanese relations will wield impact on the Japanese tourism and its commercial effect has been likened to the violent Japanese earthquake in 2011.

The Japanese brands are leading the household appliance sector. However， the ever escalation of the Diaoyu Islands disputes has substantially dragged down the sales volume of the Japanese household appliance brands since August. In Gome and Suning stores， Japanese color TV brands such as Sharp， Sony， Panasonic and Toshiba slumped sharply in sales ranking， Nanfang Daily reported on August 28. Suning’s statistics in August shows that in its stores， the Japanese color TV market has been nibbled up by the Korean brands as well as the home-grown brands represented by TCL and Skyworth. Moreover， Panasonic and Toshiba have been forced out of the top 10 on the sales list.

The Diaoyu Islands disputes hurt the domestic consumers and thus the sales of the Japanese household appliance brands are affected; in the mean time， what cannot be ignored is that the Japanese brands lack innovation and their marketing approaches are quite conservative， said Lu Renbo， research specialist in the household appliance sector.

As for the auto market， the China Association of Automobile Manufacturers published data on October 10 that in September the Japanese brand passenger vehicles saw a sales slide of 40.8% in China. Toyota witnessed sales volume of 44，000， a sharp drop of 48.9% year-on-year; Honda’s sales in China slashed 40.5% to 34，000 with a daily sales production decrease of 76，000 by 35.3%.

“The gloomy sale of Japanese auto brands is attributed on the one hand to the worsening Sino-Japanese relations and on the other hand to the aftermath of the destructive Japanese earthquake，” said Cui Dongshu， Deputy Secretary General of the China Passenger Car Association. In last July and August， the Japanese auto enterprises canceled production vacation due to great sales in China and a high year-on-year base. However， Cui said that in the current Chinese auto market， the best sellers are the autos sold at around RMB 100，000， but the Japanese auto brands are not very competitive in this aspect.

The impact also begins to show in the economic domains. At the international financial conference held in the wake of the financial crisis， China always plays a significant and indispensable role. Vice Minister of Finance Zhu Guangyao and Deputy Governor of the People’s Bank of China Yi Gang will lead delegations to attend the upcoming 2012 autumn annual conference held by IMF and the World Bank in Tokyo. But the four staterun banks—Industrial and Commercial Bank of China， Agricultural Bank of China， Bank of China and China Construction Bank all determined earlier not to attend this year’s annual conference.

Their non-attendance of this year’s annual conference held by IMF and the World Bank is apparently related with the deterioration of the Sino-Japanese relations. The Agency France Press attributed this as a protest against the island disputes. It is noteworthy that the worsening Sino-Japanese relations have concerned the global economic sphere. Statistics from IMF shows that in 2011 the world’s 2nd and 3rd largest economy China and Japan registered a GDP of USD 7.298 trillion and USD 5.869 trillion respectively， accounting for around 10.48% and 8.43% respectively in the global economy. If the two economic powers China and Japan， with a total economic portion of nearly 19% in the world’s total， have problematic bilateral economic trade， a new risk will be posed to the global economy. The whole world cannot afford the consequences incurred by prolonged Sino-Japanese disputes， said Christine Lagarde， head of IMF.

China still is one of the important profit sources for Japanese enterprises

The overall economic situation assessment in September issued by the Japanese government was “stagnating recovery”， while October’s assessment is to be “downward trend”， if so it will be the third time Japan degrades its economic assessment during three consecutive months， according to reports by Nikkei. In 2011， Japan’s imports from China reached USD 183.4 billion and its exports to China was worth USD 161.4 billion; Japan’s trade volume to China accounts for a portion of 20.6% in its total foreign trade， according to statistics from JETRO. If Japan fails to make up with China in terms of the island disputes， its exports will probably be seriously influenced and even the real economic growth objective which was already lowered to 2.2% in mid July cannot be achieved.

According to the statistics published recently by the Ministry of Commerce， Japan invested a total of USD 100 million in China during the first three quarters， achieving a year-on-year rise of 17%. Some Japanese experts remarked that the majority of the Japanese enterprises rely on the overseas markets as their important profit source， in particularly the Chinese market. Many Japanese sectors like the Japanese electronics sector are reaping profits mainly from the Chinese market. As a result， once China resorts to economic sanctions， the Japanese enterprises will without question bear the brunt.

Supposing Japan’s Foreign Direct Investment (FDI) was not successful in China， the Japanese sectors， which are going through transition and restructuring， will be confronted with severe challenges to survive， said Mei Xinyu， researcher from the Chinese Academy of International Trade and International Cooperation under the Ministry of China. As China is among the few economic powers which possess high economic growth and import growth as well as stable macroeconomic stability， sectors or enterprises aiming at dominating the global market will necessarily go to failure if they cannot manage to nudge into the fast-growing Chinese market. At the same time， last year’s destructive earthquake and the resulted losses in consumer base and market share have forced many Japanese technique- and capital-intensive enterprises to consider transferring at least part of their production capacity to the overseas markets. Although they were reluctant to favor the Chinese market as their production relocation destination， many enterprises are not able to afford being excluded from China and relocation there provides important access to a heated investment destination.

However， Mei also reminded that we should keep a cool head over the recent boycott of Japanese products. Only equipped with fully-developed advanced manufacturing can China afford to boycott Japanese products in some relevant domains without hurting itself. China must still progress forward in advanced manufacturing.

The straining Sino-Japanese relations have caused some Japanese enterprises to quicken their “de-Sinification” pace by diverting the investment and manufacturing sites to some other countries such as the Southeast Asian countries， Japanese media reported earlier. Japan may reinvest some labor-intensive businesses to Southeast Asia， but the Chinese market cannot be completely replaced. Not only because the Chinese market boasts of vast land， a full range of infrastructure and abundant human resources， but also because that the Japanese investments in China usually involves an entire industrial chain， which is not easy to be transferred at a large scale， said Ma Yu， Director from the Foreign Investment Department of the Chinese Academy of International Trade and International Cooperation under the Ministry of China.

The current economic turbulence between Japan and China brings uncertainties to their shared economy. China shall uphold two basic principles for handling the Sino-Japanese economic and trade ties， of which the first and foremost is that the government is supposed to deal with economic exchanges between the two countries in accordance with the existing rules， namely the international rules and contracted duties， and within the scope of the Chinese laws and policies， said Ma. “Governmental-level sanction is a double-edged sword， only leading to losses at both sides， whereas the market force may avoid mutual hurt，” Ma explained， “Bringing the market force into full play is not only an approach for China to assimilate its counterpart but also a soft approach for self preservation.” As far as Ma is concerned， localization is crucial to transnational investments， which embraces multirelations between the transnational companies and the local governments， communities， consumers as well as employees. Once national citizens’ feelings are hurt， consumers’ choice preference will inevitably be affected and the transnational enterprises will have to spare more cost in treating their relations with the local governments and communities. If the Sino-Japanese relations remain strained， the Japanese transnational enterprises will face a rising cost in investing in China， and their competitiveness will be then blunted with poor operating efficiency; consequently， these Japanese enterprises may put pressure on the Japanese government.