China in Transition

# Japan's "China Syndrome" Dissipating as exports to China surge

Chi Hung KWAN
Consulting Fellow, RIETI

With China-related business booming, the argument that China is a threat to Japan, or Japan's "China Syndrome," is rapidly receding. Exports to China, especially, are surging and soaring demand in China is becoming a driving force behind the recovery of the Japanese economy.

According to Japanese statistics, Japan's trade with China in 2003 totaled $132.4 billion, marking a record high for the fifth consecutive year. Of this amount, exports to China surged 43.6% to$57.2 billion, while imports from China rose 21.9% to $75.2 billion. In contrast to the steady rise in its trade with China, Japan's trade with the United States is slumping, with exports falling 2.6% and imports increasing by a scant 1.7% in 2003. Reflecting this, Japan's imports from China have been exceeding those from the U.S. since 2002, and in 2003 they came to comprise 19.7% of total imports to Japan (imports from the U.S. make up 15.4%). In terms of Japan's exports, those that were China-bound made up 12.2% of the total, and while still way behind the 24.6% for the U.S., when combined with Hong Kong and Taiwan, Japan's exports to "Greater China" exceeded those to the U.S. for the first time ever in 2003 ( diagram ). The driving forces behind Japan's China-bound exports are general machinery, electric equipment and transport equipment ( table ). Among these, there have been notable increases in semiconductors and other electronic parts (45.6%), semi-finished audio-visual equipment (113.9%), telecommunications equipment (54.7%) and visual equipment (114.9%), as well as industrial machinery such as construction machinery and office machinery. Furthermore, against the backdrop of increased automobile production in China, there was a continuous and sharp rise in the growth of exports of such items as auto parts (104.9%), automobiles (30.1%) and steel and chemical products that are chiefly used in automobile production. China's economic expansion is one factor behind the increase in Japan's China-bound exports, but the growth in China's exports and investment and the rise in the number of Japanese firms setting up business in China are creating an especially advantageous export environment for Japanese firms whose strength lies in the machinery sector. First, China's exports rose 34.6% in 2003, the largest year-on-year increase since 1979. Because China's trade centers on processing trade, its import of interim goods rises in line with the increase in its exports. According to official Chinese statistics, 55.2% of its exports and 39.5% of its imports were categorized as processing trade in 2003. Second, it is investment, rather than consumption, that is supporting China's economic expansion. Fixed investment for all industries increased by 26.7% in 2003, with the figure rising to 39% when limited to the industrial sector. Of this rise, growth in fixed investment was especially high in such industries as steel (96.6%), aluminum (92.9%), cement (121.9%), automobiles (87.2%), textiles (80.4%) and coal (52.3%) (figures from the Statistical Communique on the 2003 National Economic and Social Development, National Bureau of Statistics of China). Furthermore, direct investment in China by Japanese firms is also on the rise. Reflecting the improvement in the investment environment following China's entry into the World Trade Organization and better access to the domestic market, Japanese direct investment in China grew a year-on-year 20.5% to$5.05 billion in 2003, the highest figure ever (on an implementation basis, according to Chinese statistics). In addition to the large amount of capital goods brought over from Japan when building factories, these facilities are dependent on imports from Japan for many intermediate goods, such as parts, after production begins.

Japanese companies basically have two choices when considering how to access the expanding Chinese market - "local production and local sales" and "production in Japan for export to China." Other things being equal, the latter option is less risky and can also create more employment opportunities at home. As the current boom in China-bound exports plainly shows, Japan still has international competitiveness in technology-intensive industries such as machinery, and it is well-positioned to profit by producing domestically and exporting to China. If the comparative advantages of both countries can be realized through trade, China's rise will not be a threat to Japan, but rather a win-win game.

March 1, 2004

March 1, 2004

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