China’s economy: Japanese companies bail out

In an era defined by geopolitical risks and worries about China’s faltering growth, the economic math no longer holds true for the likes of Nippon Steel Corp., which said in July it was exiting its China joint venture. Mitsubishi Motors Corp. suspended its local operations indefinitely last year, a victim of declining car sales and China’s rapid shift to electric vehicles.

Nearly half of Japanese firms in China surveyed in a recent survey said they would not spend more or cut back on investment this year. Companies listed rising wages, falling prices and geopolitics as the biggest issues they faced.

“We are now past Japan’s peak economic engagement with China,” said Robert Ward, director of geoeconomics and strategy at the International Institute for Strategic Studies in London.

The obstacles range from technological competition between the US and China to rising tensions in the Taiwan Strait, according to Ward. “Geopolitics is a significant factor” in changing attitudes, he said.

The slow-motion rupture threatens an economic bond that dates back more than four decades, when Japan began giving China trillions of yen in development assistance through low-interest loans. Trade and commerce have been a mainstay of an otherwise contentious relationship between the two Asian giants – summed up among academics by the phrase “hot business, cold politics”.

This time, the chill of the geopolitical wind is proving difficult to contain.

New foreign direct investment is on track to stagnate near a multi-year low in 2023 after first-quarter volumes fell to the lowest since 2016. It’s a turnaround for Japanese companies that have built up a stockpile of nearly ¥130 billion in FDI. dollars in China until the end. of last year.

This is a reversal from previous periods of bilateral tension, which did not affect investment much. Even in 2010-2012, when the territorial dispute between the two sides was hot and Beijing temporarily blocked shipments of rare earths to Japan, companies increased their investment stock by an average of 13 percent each year.

China appears concerned about the decline and has tried to entice Japanese companies to invest more, according to a Tokyo official involved in Chinese politics who asked not to be named on official matters.

The political context is also much less benign. Last month, a Chinese military aircraft entered Japan’s airspace for the first time, an incident soon followed by a Chinese naval vessel entering Japanese territorial waters.

Moreover, threats to the well-being of the Japanese within the country arose.

A knife attack on a Japanese woman and her child in central China’s Suzhou in June — which the Chinese government called an “isolated” incident — sparked concern throughout the Japanese community and increased security at schools across the country . Japan is still asking authorities in Suzhou to provide detailed information about the incident, according to a statement from an embassy spokesman.

The detention of a Japanese pharmaceutical executive early last year also raised public alarm about the safety of Japanese citizens in China. The man was charged with espionage earlier this month.

Japanese firms are also caught up in wider geopolitical tensions, with the US pressing Tokyo to tighten restrictions on high-tech exports for its semiconductor sector and China threatening retaliation if it does so.

Some of the Japanese companies even talk about China as a threat, not an opportunity. The head of one of the nation’s biggest trading firms has called for government assistance to help the country’s businesses compete in places like Southeast Asia, where Chinese firms such as BYD Co. I quickly make inroads.

For Nippon Steel — one of Japan’s first investors in China — the local business has become an obstacle in its bid to buy US Steel Corp., with politicians in America portraying it as a national security threat.

Looking away

As the focus for Japanese companies shifts elsewhere in Asia and beyond, China’s struggling economy bears much of the blame. Of the 1,760 firms surveyed by the Japan Chamber of Commerce and Industry in China, 60 percent said the economy now is worse than last year.

China’s importance to Japanese exporters is not the same as in years past as firms adapt to US tariffs and other changes, including incentives from Tokyo to move factories out of China.

China took less than 18 percent of Japan’s exports last year – the lowest level since 2015 – with values ​​down nearly 7 percent compared to double-digit growth to the US and European Union. As a result, the US has overtaken China as Japan’s largest export market for the first time in four years.

Komatsu Ltd. is an example. The maker of excavators and heavy equipment is selling significantly less in China as the economy slows, construction slumps and competition intensifies.

While Komatsu’s China revenue for construction and mining equipment fell 57% last financial year from a peak in 2019, it rose nearly 46% globally over the same period.

Last year, there were about 31,000 Japanese companies in China, according to Japan’s Ministry of Foreign Affairs, down about a tenth from 2020. During the same period, about 4,000 firms set up offices elsewhere in the world.

“Right now, companies are restructuring their businesses to stop losses,” said Masami Miyashita, managing director of the Japan-China Economic Association in Beijing. “It’s not time invested.”

At a recent conference in the Chinese port city of Qingdao designed to attract foreign companies, the mood was similarly somber. None of the half-dozen senior Japanese executives who spoke to Bloomberg said they planned to expand investment, expressing little optimism for the economy this year or next.

However, not all Japanese firms are pulling back.

Panasonic Holdings Corp. planned to invest more than ¥50 billion ($350 million) since early last year to build new home appliance factories, according to the Nikkei newspaper, while Kobe Steel Ltd. recently announced it would form a joint venture with a Chinese company.

But much more will be needed to mend economic ties.

Chinese companies have become more competitive, and the geopolitical confrontation between the US and China is scaring Japanese firms from investing in certain sectors, such as semiconductors and emerging technologies, according to Kazuto Suzuki, a professor of global political economy at the University of Tokyo. .

“Japanese companies don’t see an immediate recovery in the Chinese economy, so it doesn’t make sense to increase investment,” he said. “Other factors, such as geoeconomic concerns and a lack of transparency, will make it difficult to invest on a large scale like they used to.”

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