Relationship between Japan and the PRC

5.1 Japan-PRC economic relations: Complementary but asymmetric

Recent discussions about Japan-PRC economic relations seem to center on two key concepts: complementarity and asymmetry. The complementary effect of bilateral trade and capital flows, particularly the impact of Japan’s increased FDI to the PRC in recent years, has greatly benefited both countries. PRC has prospered from Japan’s transfer of capital, high technology and corporate governance structures and has also benefited from the resulting job creation that has alleviated social pressures related to unemployment. For Japan the growing demand for commodities such as steel and machinery has dramatically increased Japanese exports to PRC. At the same time Japan’s FDI in PRC has allowed many ailing Japanese companies to reduce production costs by shifting production lines there. Overall the economic partnership has facilitated industrial restructuring in each country, impacting PRC’s market reforms as well as Japan’s economic recovery. As evidence, the benefits from economic interdependence are gradually changing the old perception of PRC as an economic “threat” to Japan.

However asymmetric trends in the Japan-PRC economic partnership are becoming more pronounced as international competition for FDI and market share in PRC increases (see Tables 1, 2 & 3 page 42). From the Japanese perspective trade relations with the PRC have expanded significantly over the past few years. Between 1990 and 2003 Japanese exports there increased ten-fold while exports to the United States declined 9 percent. During the same period Japanese FDI to PRC increased from 3.7 percent to 15 percent while FDI to the United States dropped by 17 percent. This increase suggests that Japan has intensified its reliance on a Sino trade partnership, but the same doesn’t hold true for the PRC. Even though Japan remains a major capital exporter to the PRC the Japanese share of its import/export markets and foreign trade is shrinking. And while bilateral trade and investment in the PRC now play a much larger role in Japan’s global trade strategy, the internationalization of PRC’s markets has reduced its reliance on the trade relationship with Japan.

Until now Japan and PRC have tried to separate politics from economic interests. Many characterize this complex dynamic between the two as “chilly politics and warm economics” ( “zheng leng jing re”). But it remains to be seen whether the current political climate will lead to equally “chilly” economic ties, an unwelcome outcome that would serve neither country’s interests. Because Japan and PRC are at different stages of economic development and have different comparative advantages, the two stand to gain from closer economic ties that would optimize resource allocation and promote mutual economic development. And as important economic neighbors, productive and warm economic relations between the two would most likely encourage regional cooperation and promote mutual understanding in the Asia/Pacific region as a whole. (2 May 2005)

5.2 Localization of Japanese companies in the PRC

In recent years, many foreign companies have invested in the Mainland, establishing production lines with cheap labor costs. Japanese companies are no exception. However, the localization of staff remains one important difference between Japanese and Western companies. Chinese nationals represent nearly eighty percent of Chief Operating Officers (COO) in US and European companies, whereas according to Japan’s white paper on international trade, only twenty- eight percent of COOs in Japanese mainland-based firms are Chinese nationals. Senior positions within Japanese companies continue to be held primarily by Japanese expatriates.

Another characteristic of Japanese companies is that important decisions remain under the discretion of the parent company in Japan and little authority is delegated to local offices. Because Japanese manufacturing companies primarily produce commodities for export with few targeting the mainland market, these companies prefer to use cheap labor ( “yuangong”) for assembly line jobs. To facilitate good communication between their offices, parent companies tend to send Japanese managers to oversee operations. A survey by the Japan External Trade Organization (JETRO) found that companies targeting domestic markets represent only one third of total Japanese companies operating in the PRC and export-oriented manufacturing companies account for more than half.

Without question, the quality of management staff has a significant impact on a company’s development yet the nationality of the CEO or COO may not matter. Some Chinese companies show poor performance despite all management staff being Chinese and some successful Japanese companies in Japan have expatriate CEO or COO. In the PRC context, foreign-invested companies are increasingly eyeing the potentially huge demand from this domestic PRC market and as a result, competition among foreign invested companies, and between foreign and domestic companies, is intensifying as foreign companies focus on gaining domestic market share. While one clear advantage to local leadership is that locals can guide foreign companies through the maze of administrative procedures that are legally required for business transactions in the PRC. Moreover, local Chinese management staff can provide valuable personal networks with authorities. This can prove indispensable to a company’s growth and profits.

Due to the limited opportunities for promotion to senior managerial roles, Japanese companies find recruiting top-tier local hires difficult. A recent survey that listed the most popular companies to work for among Chinese employees found Japanese companies only ranked 17^th and 32^nd, which suggests that Japanese companies are now in a disadvantageous position to recruit local labor. Many Japanese expatriates claim that they are well aware of this situation, but nearly all say this is because the parent company in Japan does not fully understand the dynamics of the local labor market. Promoting communication between local and main offices, delegating real authority to the local offices, and actively pursuing localization are increasing matters of urgency for many Japanese companies. (11 October 2005)

5.3 Rethinking Japan’s overseas development assistance (ODA) to the PRC (part 1)

Since late 2004 authorities in Japan and the PRC have been discussing whether the PRC should “graduate” from Japan’s ODA program. Japan’s ODA to the PRC over the past 25 years amounts to roughly 3,400 billion JPY, or about two-thirds of the total ODA received from foreign countries. Yen loans account for 90 percent of Japan’s aid and the remainder has been given in grants and technical cooperation. Most of the aid has been spent on physical infrastructure development such as ports, railways, airports, and exploitation of coal and oil.

In determining whether Japan should continue ODA to the PRC, one must consider the PRC’s growing military presence in the region. Japan’s ODA Charter was revised in August 2003 and now, for the first time, clearly states the objective of ODA as “to help Japan’s own security and prosperity”. This has led some Japanese to argue that Japan’s ODA runs counter to this charter because it contributes to PRC military development. It is true that since the 1990s the PRC has been trying to modernize its military. However, this modernization is primarily aimed at replacing obsolete military equipment, reallocating resources, and restructuring inefficiently organized military personnel. In fact, in recent years the ratios of publicly announced national defense expenditure to total fiscal expenditure and GDP in the PRC have been stable at around 8–9 percent and 1.2–1.7 percent, respectively.

As concerns ODA, whether the announced figure for PRC national defense expenditure is reliable and reveals the whole picture is another difficult question. A 2005 US Pentagon report estimates that the PRC’s real defense expenditure may be double or triple the officially announced figure. Japan’s own 2005 white paper on defense also referred to a lack of transparency in PRC military expenditure and expressed concern about the modernization of military equipment. The PRC aspires to becoming a leading nation in the world by strengthening its influence both economically and politically. However, because the PRC is committed to continuing its reform policies to open up to the outside world, it is unlikely to use its military presence as a “diplomatic card.” Furthermore, the PRC is preparing for the Beijing Olympics in 2008 and the World Expo in Shanghai in 2010. And the country has also taken initiative in multilateral negotiation to stabilize the political situation in northeast Asia. Accordingly, the PRC’s military modernization and expenditure may not be the best justification for reducing Japan’s ODA.

There is a second question to consider, which is whether or not the PRC is really facing a shortage of financial resources. The main role of ODA is to give financial assistance to developing countries that face financial shortages, in particular shortages of foreign currencies, so that they may build physical infrastructure during the initial phase of economic development. At the outset, the ODA to the PRC was no exception, but financial circumstances may now be different. Although the PRC suffers fiscal deficits, the problem is not serious by international standards. Furthermore, infrastructure investment is coming to rely increasingly on private funds, which are not in short supply. Household savings in the PRC have almost doubled over the past several years, amounting to 10 trillion RMB (1.2 trillion USD) at the end of 2003. Foreign reserves have also accumulated dramatically in recent years, standing at 659.1 billion USD at the end of March 2005—about a 50 percent increase compared with the corresponding period in 2004. Therefore, the more immediate problem facing the PRC is how to mobilize these resources for investment. Assuming the role of ODA is to provide help developing countries make up for a lack of financial resources, the PRC’s need for traditional ODA is definitely diminishing. (1 November 2005)

5.4 Rethinking Japan’s ODA to the PRC (part 2)

Because the PRC no longer needs funding to build physical infrastructure, Japan’s shift in ODA focus seems to be well founded. In recent years ODA has focused more on structural problems, such as environmental degradation, poverty, rural development, and human resource development. Whether Japan terminates its ODA to the PRC, and what the appropriate timing would be, certainly requires additional political consideration and judgment. Yet even if Japan’s ODA were to wind down, there are ways to enhance better understanding through education exchanges and training programs.

One Chinese scholar who studied in the United States points out that although the US does not provide any direct ODA to the PRC, it reaps many benefits from non-governmental assistance provided through university education exchange programs. Many Chinese benefit from generous scholarship programs that US universities provide to foreign students including those from the PRC. And in many cases, the positive experiences of studying and living in the US greatly contribute to better understanding and friendly sentiments towards the US. The scholar went on to point out that apart from sensitive historical issues, it would be unfortunate for Japan if the tremendous amount of past ODA contributed neither to improving relations nor to achieving mutual understanding between the two countries, particularly since a country that does not provide ODA enjoys a more favorable perception.

What can Japan do to address this problem? One measure would be to increase funding for education exchange and scholarship programs with the PRC. Additionally, Japan could generally offer cooperation for human resource development. One avenue for cooperation would be for Japan to share its experiences of the late 1960s to the early 1970s in fighting environmental damage caused by industrial development. The most important achievement during the course of that fight was the success in enhancing public awareness about the need for environmental conservation and sustainable economic development. In viewing the issue of the environment as a “market externality,” the PRC could learn from Japan’s experience addressing market externalities by trying to “internalize” them. Towards this effort, Japan could grant financial resources to environmental projects or transfer environmentally friendly technologies to the PRC while sharing expertise through training programs that enhance public awareness of environmental issues.

As previously noted, the PRC is now facing the problem of mobilizing its citizens’ enormous domestic savings for investment. With Japan’s long history of transforming its own economic structure from external demand-driven to domestic demand-driven growth, the opportunity to learn from Japan’s efforts could prove useful to the PRC. Although education and training exchange may take some time to produce a fruitful outcome, such programs have a great potential for future cooperation between the two countries. Japan’s aid to the PRC may be most effective with such a change in focus. (2 November 2005)

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