Japan's investment in China last year was noticeably less than the previous year, while its total investment overseas grew by a big margin year-on-year. What exactly caused the contrasting developments? This writer believes a complex set of political, economic and security-related factors lie behind the phenomenon.

 

On the political front, though Sino-Japanese relations have been improving and leaders of the two nations have reached consensus on building a "strategic mutually-beneficial relationship" since Japanese Prime Minister Shinzo Abe's China visit last October and Chinese Premier Wen Jiabao's Japan trip in April, people must not overlook the fact that Sino-Japanese ties and the feelings of the two peoples toward each other have been hurt in the past few years, and the damage has been so great, that relations between the two nations are still "fragile."

 

There is still a long way to go and a great deal of effort is required on the part of the two countries to repair bilateral ties and feelings.

 

The decrease of Japan's investment in China, to a certain extent, is due to the aftermath of the "chilled political ties." As far as the economic community is concerned, corporate Japan was left "in the cold" as some Japanese government departments, economists and the media exaggerated the political risks of investing in China. Some others advocated the so-called "China plus 1" investment strategy -- directing part of investments to India or Vietnam, where "political ties-related risks" do not exist.

 

Despite repeated assurances by Chinese experts that China is a safe place to invest and their objections to the claim that "investing in China comes with risks," corporate Japan was still unsure about the positive comments by leaders of the two nations on constructing a "strategic relationship of mutual benefit," and wished to see this turned into action. They were aware that some of the major disputes between the two countries were yet to be resolved. Some were even worried Sino-Japanese relations could turn sour again.

 

Some people in Japan's economic circles believed direct investment in China's major manufacturing industries was almost saturated, which is one of the reasons why Japan's investment in China decreased last year. As a result, Japanese enterprises directed their investment into financial, logistics, and other services. In the meantime, labor costs and other expenditures in China's coastal areas were rising, motivating Japanese companies to move investment to countries where labor costs were lower.

 

As for high-tech industries engaged in state-of-the-art technologies or basic research in manufacturing technologies, some of the enterprises moved their production bases back to Japan because China, though rich in labor resources, lacks highly skilled workers. Another reason for the withdrawal of such firms was the fear of losing core technology to Chinese competitors.

 

Some Japanese economists in recent years have also spread rumors that China's economy had many bubbles and this would burst around the time of the Beijing Olympic Games in 2008 or the Shanghai World Expo in 2010. However, China's economy and national conditions are vastly different from Japan's during its bubble economy era in the 1980s.

 

Chinese economists have stated time and again the Chinese economy is unlikely to "crash-land" or even "collapse" but the "experts" trumpeting the theory of "China's bubble economy" in Japan wield an influence that cannot be ignored.

 

A few commentators particularly hostile toward China went so far as to suggest Japan should step up activities that "inflate bubbles" so as to make "China's bubble economy" burst sooner. Many average investors were thus worried they might suffer financially.

 

On the security issue, the "China threat theory" is all the rage these days as some influential scholars and media entities have misinterpreted China's peaceful development as an effort to revive "the Chinese empire" and restore the "territorial map" of the past, claiming all countries that used the word "peaceful" had ulterior motives.

 

With this pretext, Japan has tightened control on the export of technologies that could be used for military purposes and even punished companies that sold unmanned aircraft, designed for farm use, to China. Unmanned aircraft and other military robotic hardware are one of the next-generation weapon systems the United States is developing as part of its future military strategy.

 

In the area of high-tech transfer, Japanese manufacturers not only have to be mindful of their government's close watch but also keep in mind a lesson from the "Toshiba incident" of the 1980s (the Japanese conglomerate was severely punished by Washington for selling a digitally-controlled multi-axel processing center that can be used in making advanced submarine propellers to Russia) and remember they are under ever closer monitoring by the US.

 

This reality is no doubt seriously hampering direct investment and technology transfer to China by Japanese companies.

 

On the environmental front, despite gaining the title of "the world's factory," China has paid dearly in terms of environmental damage, especially in the eastern coastal regions, where the eco-environment has been harmed as industrialization expands.

 

China is now restricting the development of manufacturing enterprises that consume too much energy and water, while applying tighter vetting of foreign manufacturers seeking to invest in the country. Because the manufacturing industry occupies a significant portion of Japan's investment in China, the tighter eco-environment regulations have affected Japanese manufacturers' investment in China.

 

Even so, Japanese enterprises will continue to invest in China in the future, though this writer thinks the direction and focus will be different from what it has been so far. It might take on some new trends.

 

First, the Chinese government is pushing for the implementation of its scientific development philosophy, which offers enormous opportunities for Japan's energy-saving and environmental protection industries. From China's perspective, it needs to absorb advanced technology and management in energy saving and environmental protection from foreign countries.

 

It is only logical for Japan, as a model of energy efficiency, to be a key investor in our country's relevant industries. It would help encourage Japanese enterprises to invest in China's energy saving and environmental protection projects if the two countries carry out cooperation in the area with Japan transferring related technology to China.

 

Second, food is more important than everything else. It is natural for China, with its population of 1.3 billion, to view agriculture and farm produce as a key to maintaining food security and social stability. If China acquires the latest farming technology from Japan it will not only help improve China's agricultural production but also enable the country to export more.

 

Japan's Asahi Brewery established its first solely-owned pilot farm (100 hectares) in Laiyang of Shandong Province with state-of-the-art farming technology that incorporates the whole process from planting, production, processing to distribution and sales.

 

This form of investment should be encouraged.

 

Third, China and Japan should increase cooperation in the transformation of deserts and wastelands. For years non-government organizations in Japan have sent members to China to help carry out tree-planting and forestation campaigns. In fact, transforming and utilizing deserts and wastelands can also be profitable and an important area for Japanese enterprises to invest in as well.

 

To be more specific, Japanese investment is needed in such efforts as planting resilient trees that can survive desert conditions. A Japanese enterprise holds the patent for a technology that makes high-end building materials out of the poplar, spreading solar power generation in desert areas, reclaiming pastures devoured by deserts and turning wastelands into fields of crops.

 

Fourth, China is keen on obtaining Japanese technology and funds for sewage treatment and seawater desalination.

 

Fifth, we should also seek more Japanese capital and technology for the development of the vast western region, logistics networks and building railways, which are more suitable to China's national conditions than highways. The latter takes up more land and causes more pollution.

 

Raising a green Asia and protecting the eco-environment in East Asia is key to the common interest of China and Japan. For this we have reason to believe the two governments will support and encourage Japanese enterprises to invest in the above-listed areas.

 

The author is a researcher with the Institute of Japanese Studies at the Chinese Academy of Social Sciences

 

(China Daily August 21, 2007)