Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : World Outlook -- Ignore unavailable to you. Want to Upgrade?

To: Don Green who wrote (935)	9/6/2002 11:40:35 PM
From: Les H	Read Replies (2) \| Respond to of 48792

Asia Pacific: Japan's Business Is Marching to China Andy Xie (Hong Kong) (The following appeared in today's South China Morning Post) China has just replaced the United States as the largest source of imports for Japan. While the United States remains the most important market for both, China and Japan are truly joined at the hip. Cheap Chinese products have become essential for pensioners to survive Japan's high cost of living, while Japanese investments are providing jobs for tens of thousands of Chinese. One might think that China and Japan are the best of friends, judging from the burgeoning trading and investment relationships. The reality is far from it. Last month Japan's Economy, Trade and Industry Ministry published a report warning Japanese companies to guard their technologies against their Chinese joint-venture partners in the automobile industry. Public opinion surveys in both countries show deep unease towards each other. The Chinese are deeply troubled by Japan's attitude towards its wartime past. Japanese attempts to rewrite history keep Chinese emotions boiling. While Japanese companies have a significant presence in China, the Chinese do not harbour hopes of long-term careers with these firms as they are usually kept out of senior positions. The best and brightest in China certainly do not aspire to work for Japanese companies. The Japanese, for their part, believe that Chinese are ungrateful despite Tokyo's billions of dollars in aid, and play up the past only to extract more money. Japan is also increasingly anxious about losing its leading position in Asia to China, while a significant chunk of the population worries that a strong China will seek to settle old scores from the Japanese occupation of China in the 1930s and 1940s. As China booms, Japanese distress grows. While China and Japan are not enemies, they are clearly not friends. How is it that the two countries have become so entangled economically while remaining deeply suspicious, even hostile, towards each other? When China and Japan established diplomatic ties 30 years ago, Japan had just emerged from a decade of double-digit growth in its economy, while China was at the tail end of its self-destructing Cultural Revolution. Japan's economy was nearly twice as big as China's. In the mid-1950s, the Chinese economy was twice as big as that of Japan's. The gap between the two countries continued to rise and peaked in 1994, when Japan's economy was nearly nine times as big as China's but with one-tenth as many people. But the tables have begun to turn. Last year, Japan's economy was merely 3.4 times as big as China's. If the current trend continues, the Chinese economy could become bigger than Japan's sometime in this decade. Even so, China's living standards will remain far lower than Japan's due to its much larger population. It will take another three decades for China to catch up with Japan in living standards. The economic relationship has blossomed despite the troubled relationships between the two countries. Japanese companies first went into China thinking that they would set up assembly operations in order to avoid high mainland tariffs on imports. Unexpectedly, Chinese companies learned to produce the same goods with Chinese components that were much cheaper. And the story did not end there. In the early 1990s, Korea and Taiwan learned to make many of the products that Japan was making. They sold these products at much lower prices in the international market. To remain competitive, the Japanese had to find a cheaper production base. China was virtually the only possibility. It had a large, educated and cheap labour force. It had built up its infrastructure to the same standard as in Japan or the Tiger economies. Japanese companies were drawn to China for survival. Now, China is learning to make the same products as the Tiger economies did 10 years ago but at a much faster pace. Chinese labour costs are merely a fraction of the Tigers then. Further, China's labour force is seven times as large as that of Japan and the Tiger economies combined. Chinese labour costs are unlikely to rise quickly, even as its manufacturing capability improves rapidly. This will put huge pressure on Japan's export pricing power over the course of the decade. China's market share in US imports is likely to exceed Japan's this year. China's total exports could exceed Japan's in just three years. The loss of export pricing power will put pressure in turn on Japan's living standards. Japan has built up its wealth through exports. This wealth is no longer growing. Its ageing population will run down its savings over the coming decades. Unless Japan finds a way to increase wealth, its living standards will decline. To slow the decline in its wealth, Japan needs to cut its living costs. This is what Chinese imports in Japan are for. Japan's imports from China have risen 12 times as fast as its economy in the past decade. Inexpensive Chinese shitake mushrooms and 300-yen (HK$20) Chinese umbrellas will allow Japanese pensioners to maintain their living standards for many years. On the other side of the equation, China's number one priority is to create jobs. Its 750 million-labour force is hugely under-utilised. More than half of China's labour force was educated after the Cultural Revolution. They are well informed of the high living standards in other countries and demand similar opportunities. China now turns out 2.5 million college graduates every year. It is understandable that China welcomes foreign investment, whatever the source. The mutual interests are so powerful that China and Japan are becoming each others' primary economic partner despite the problems on a human scale and periodic flare-ups in the political relationship. The continuation of the status quo is the most likely scenario for the foreseeable future. The global economy could remain sluggish for years to come, accelerating the loss of pricing power for Japanese exporters. Japan's population is becoming older by the day. Its need for cheap Chinese goods can only grow. China's need for jobs is becoming more intense with state enterprise retrenchment. Its annual college enrolment is rising and could hit four million in this decade. China will only become friendlier to foreign investment, no matter where it comes from. A dark alternative is, of course, possible. People care about their relative, not just absolute, standards of living. In the late 1980s, when US fear of Japan was at a peak, Americans were ready to restrict trade with Japan even if it meant suffering slower growth at home. The Japanese might turn in the same direction, shutting the door on trade with China despite its obvious benefits. The best scenario would be one in which China and Japan moved beyond distrust on a human and political level, and together embraced a plan to eliminate barriers to the flow of goods, services, and capital across East Asia, elevating the value of Japanese capital in a regional context. Such a plan would anchor both countries in a regional framework, enabling Japan to maintain its influence for much longer. Japan needs to pursue a regional free trade area to start this process. But Tokyo has been reluctant to do so, since it has been unable to pacify the domestic interests that would be hurt by import competition. Moreover, psychologically, I see the Japanese as being reluctant to accept their Asian identity and identifying more with the West. This will likely intensify Japan's dilemma and could undo its tremendous success as the first non-Western country to modernise. Japan's future is centered in Asia. morganstanley.com