How Hard Will The China-Japan Islands Dispute Hit The Chinese Economy?

How Hard Will The China-Japan Islands Dispute Hit The Chinese Economy?
Yang Xing and Zhu Ni*


BEIJING - The “Made in China” export label is by now an integral part of the entire Chinese economy. With Japan as its fourth-largest trading partner, Bejing is starting to ask what weight the ongoing China-Japan islands dispute will have on the Chinese economy.

China's Ministry of Commerce reports that direct investment by Japanese companies in China this year totaled $460 million, a nearly one-third drop from last year. Japan’s total direct investment in China was knocked down from an annual growth rate of 17% in the first nine months of 2012 to 11%.

Moreover, the dispute over the Diaoyu Islands (or Senkaku in Japanese) has triggered a series of consumer reactions and dragged down the performance of major Japanese brands on the Chinese market. According to the China Association of Automobile Manufacturers, Japanese automobile sales in September were down 41% from last year, while their market share in China decreased by 6%. The market share of Japanese home appliance brands such as Sony, Panasonic, Toshiba and Sanyo have also declined.

China’s economy is currently stabilized at the bottom of the cycle and is in a critical period of structural adjustment. Although China’s dependence on foreign trade has decreased in recent years, it still accounts for more than 50% of its economy, and remains an important factor for economic growth.

China’s electronic and automotive industries are bearing the immediate brunt, with an overall drop of economic growth forecast for the fourth quarter of this year. Among imported commodities from Japan, the four major categories: machinery and electronic products, transport equipment, base metals and chemical products, account for over 70%. They are mostly located on the upper reaches of the industrial supply chain and are the critical core components and parts for China’s electronic and automobile sectors.

The possible degree of substitution in China’s domestic market is very low or non-existent. Once a supply shortage appears, the negative impact on the relevant industries’ production is tremendous.

The decreased sales of Japanese goods in China will have two impacts.

Firstly, it provides an opportunity for European, American and even Chinese brands. In September, for instance, American, French and Korean car manufacturers increased their Chinese market shares from 0.47% to 0.62%. Meanwhile, the Chinese Great Wall Hover H6 has squeezed out the Japanese Honda CR-V, which has long been the champion of sales, with more than 15,000 cars sold.

In addition to the gradual desertion of Japanese products, the China-Japan dispute will accelerate the rise of domestic brands and the shrinking of the Japanese commodity market share in China.

The damage to Japanese brands will also have a negative impact on China's economy and society. For instance, in 2011 Toyota had about 500 dealerships and over 30,000 employees in China. The Diaoyu Islands standoff has hit Toyota’s sales in China hard, and forced it to make adjustments to its development strategies and objectives in the Chinese market. This will impact local joint ventures, dealerships, employment, but also Chinese fiscal revenue.

In the aftermath of the 2011 earthquake and tsunami, the energy shortage and the appreciation of the yen, Japan has accelerated the pace of outsourcing, especially in the manufacturing sector. From an industrial point of view, as China's comparative advantage has changed, the focus of Japanese investment has shifted toward Southeast Asia.

In 2011, Japanese investment in the ASEAN (Association Of South East Asian Nations) reached 1.5 trillion yen ($18.3 billion), up 2.4 times from 2010. From January to August of this year, Japan's foreign investment grew by 45%, while the growth rate of its investment in China was only 16%.

In this context, the fear of political escalation risks becoming an "accelerator" for the withdrawal of Japanese companies from China, prompting Japan to speed up its industrial expansion in Southeast Asia.

Last month, Japan announced that it would be importing rare earth elements (REEs) from India in order to get rid of its long-term REEs dependence on China. China accounts for around 90% of the world’s global REEs output. Meanwhile, Japan is also looking for ways to limit its industrial dependence on REEs, an important component in certain manufacturing sectors. Panasonic, for instance, has developed a technology of recycling neodymium from used home appliances. Honda is extracting REEs from batteries used in hybrid vehicles.

Developing cross-border transactions

Japan’s investment transfer will certainly not help the Chinese economy. What’s worse, China has lost an opportunity to optimize and upgrade its industrial structure through Japanese industrial transfer.

In December 2011, China and Japan signed a financial cooperation agreement, focusing on promoting the use of the yuan and the yen in cross-border transactions; developing markets for direct exchange of the two currencies and encouraging the private sector to develop yuan and yen dominated financial products and services in overseas markets.

But since the escalation of the islands dispute, the pace of financial cooperation has slowed down and high-level exchanges have suffered a setback. The annual meeting of the International Monetary Fund (IMF) and the World Bank was held in Tokyo last month, but China's finance minister, central bank governor and the four major banks were a no-show.

China and Japan had agreed to buy each other’s sovereign debt, but this has been put on hold, while the stability of the yuan and the yen’s exchange rate has been impacted as well. Since September, due to the debt crisis in Japan, Chinese investors have been getting rid of their yen and Japanese government bonds.

Japan is the first G7 country to have made the yuan a reserve currency. Once the yuan becomes Japan's reserve currency, it will be a huge step in the internationalization of China’s currency and toward the emergence of the yuan as a new global reserve currency. However, the slowdown of bilateral financial cooperation in the second half of this year has affected expected progress.

China is still highly dependent on foreign trade. In this period of weak market demand from Europe and the U.S., its economic recovery will be adversely affected by the islands dispute. The boycott of Japanese goods will create a negative impact on Japanese-Chinese joint ventures, on the employment of Chinese workers and on local governments’ fiscal revenue. Japanese companies will leave China for Southeast Asia. All of this will have a disastrous impact on China’s much needed industrial upgrade and structural adjustement.

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Paying tribute to the victims of the attack in Kongsberg

Terje Bendiksby/NTB Scanpix/ZUMA
Carl-Johan Karlsson

The bow-and-arrow murder of five people in the small Norwegian city of Kongsberg this week was particularly chilling for the primitive choice of weapon. And police are now saying the attack Wednesday night is likely to be labeled an act of terrorism.

Still, even though the suspect is a Danish-born convert to Islam, police are still determining the motive. Espen Andersen Bråthen, a 37-year-old Danish national, is previously known to the police, both for reports of radicalization, as well as erratic behavior unrelated to religion.

Indeed, it remains unclear whether religious beliefs were behind the killings. In an interview with Swedish daily Dagens Nyheter, police attorney Ann Iren Svane Mathiassens said Bråthen has already confessed to the crimes, giving a detailed account of the events during a three-hour interrogation on Thursday, but motives are yet to be determined.

Investigated as terrorism 

Regardless, the murders are likely to be labeled an act of terror – mainly as the victims appear to have been randomly chosen, and were killed both in public places and inside their homes.

Mathiassens also said Bråthen will undergo a comprehensive forensic psychiatric examination, which is also a central aspect of the ongoing investigation, according to a police press conference on Friday afternoon. Bråthen will be held in custody for at least four weeks, two of which will be in isolation, and will according to a police spokesperson be moved to a psychiatric unit as soon as possible.

Witnesses have since described him as unstable and a loner.

Police received reports last year concerning potential radicalization. In 2017, Bråthen published two videos on Youtube, one in English and one in Norwegian, announcing that he's now a Muslim and describing himself as a "messenger." The year prior, he made several visits to the city's only mosque, where he said he'd received a message from above that he wished to share with the world.

Previous criminal history 

In 2012, he was convicted of aggravated theft and drug offenses, and in May last year, a restraining order was issued after Bråthen entered his parents house with a revolver, threatening to kill his father.

The mosque's chairman Oussama Tlili remembers Bråthen's first visit well, as it's rare to meet Scandinavian converts. Still, he didn't believe there was any danger and saw no reason to notify the police. Tlili's impression was rather that the man was unwell mentally, and needed help.

According to a former neighbor, Bråthen often acted erratically. During the two years she lived in the house next to him — only 50 meters from the grocery store where the attacks began — the man several times barked at her like a dog, threw trash in the streets to then pick it up, and spouted racist comments to her friend. Several other witnesses have since described him as unstable and a loner.

The man used a bow and arrow to carry the attack

Haykon Mosvold Larsen/NTB Scanpix/ZUMA

Police criticized

Norway, with one of the world's lowest crime rates, is still shaken from the attack — and also questioning what allowed the killer to hunt down and kill even after police were on the scene.

The first reports came around 6 p.m. on Wednesday that a man armed with bow and arrow was shooting inside a grocery store. Only minutes after, the police spotted the suspect; he fired several times against the patrol and then disappeared while reinforcements arrived.

The attack has also fueled a long-existing debate over whether Norwegian police should carry firearms

In the more than 30 minutes that followed before the arrest, four women and one man were killed by arrows and two other weapons — though police have yet to disclose the other arms, daily Aftenposten reports. The sleepy city's 27,000 inhabitants are left wondering how the man managed to evade a full 22 police patrols, and why reports of his radicalization weren't taken more seriously.

With five people killed and three more injured, Wednesday's killing spree is the worst attack in Norway since far-right extremist Anders Breivik massacred 77 people on the island of Utøya a decade ago.

Unarmed cops

As questions mount over the police response to the attack, with reports suggesting all five people died after law enforcement made first contact with the suspect, local police have said it's willing to submit the information needed to the Bureau of Investigation to start a probe into their conduct. Police confirmed they had fired warning shots in connection to the arrest which, under Norwegian law, often already provides a basis for an assessment.

Wednesday's bloodbath has also fueled a long-existing debate over whether Norwegian police should carry firearms — the small country being one of only 19 globally where law enforcement officers are typically unarmed, though may have access to guns and rifles in certain circumstances.

Magnus Ranstorp, a terrorism expert and professor at the Swedish Defence University, noted that police in similar neighboring countries like Sweden and Denmark carry firearms. "I struggle to understand why Norwegian police are not armed all the time," Ranstorp told Norwegian daily VG. "The lesson from Utøya is that the police must react quickly and directly respond to a perpetrator during a life-threatening incident."

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