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China-Japan relations

Japanese firms now more willing to invest in China, after years of decline over political tensions

Annual survey finds that sentiment is improving amid a thaw in relations between the two countries and a changing business environment

PUBLISHED : Thursday, 22 June, 2017, 8:03am
UPDATED : Thursday, 22 June, 2017, 4:26pm

Sagging Japanese investment in China is expected to pick up after several years of declines, as better relations between the two nations boost business confidence.

That’s according to a white paper released yesterday by the Japanese Chamber of Commerce and Industry in China.

But it also called for fair treatment, more transparent administrative procedures, and a further opening of the market.

Of the 8,852 Japanese businesses surveyed late last year for the white paper, some 40.1 per cent said they were willing to expand their business on the Chinese mainland, while 7.1 per cent wanted to scale down or withdraw. That compares to 38.1 per cent wanting to expand in 2015, and 10.6 per cent keen to scale down or leave.

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It was the first time the proportion of Japanese businesses aiming to expand in China had grown, albeit only slightly, in recent years, and it was also the first time since 2011 the percentage of those wanting to exit declined.

“Our current conclusion is that Japanese business would act more positively towards investing in China from now on,” said ­Yoshihisa Tabata, director of the Beijing office of the Japan External Trade Organisation, and lead ­researcher and author of the white paper.

Tabata noted that there was a strong correlation between business sentiment data gleaned from the annual survey and the actual foreign direct investment (FDI) figure the following year.

Japanese businesses signalling their willingness to invest in China reached the lowest level in the 2015 study, and the following year FDI from Japan fell 3.1 per cent year on year to US$3.1 billion – the lowest investment since 2001. It was the fourth straight year FDI from Japan had declined. Last year’s FDI from Japan was also half that of the peak in 2012, when Japanese investors poured some US$7.4 billion into China.

Political factors were partly to blame, Tabata said. Relations between the two countries deteriorated in 2012 after the Japanese government said it would nationalise the disputed Diaoyu Islands in the East China Sea, which Japan controls and calls the Senkakus.

Changes in the mainland business environment, including rising labour costs, are also likely to have played a role.

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The nature of Japanese investment was evolving alongside these changes, said Akihiro Ueda, chairman of the Japanese Chamber of Commerce and Industry in China. “Japanese investors used to take China mainly as a manufacturing base for exports. But as a domestic consumption market, China has become increasingly attractive,” Ueda said.

Businesses in export-oriented industries such as textiles, fibres and metals were the least willing to invest in China. But more than half of those in telecoms and software, wholesale and food wanted to increase their stake in China.

The white paper also urged progress on a free-trade agreement between China, Japan and South Korea, which is stalled after a dozen rounds of negotiations, partly due to tense relations between the East Asian neighbours.

Those surveyed also complained about market restrictions and complex administrative procedures in China, the white paper said. Nearly 40 per cent said the legal system and its implementation was not good enough.