Japan-China Economic Ties Remain Strong

UNCLAS SECTION 01 OF 07 TOKYO 000831 SIPDIS SENSITIVE SIPDIS DEPT PASS USTR FOR AUSTRS CUTLER AND STRATFORD TREASURY FOR EAST ASIAN NATIONS - DOHNER/KOEPKE TREASURY ALSO FOR INTERNATIONAL - LOEVINGER AND SOBEL TREASURY ALSO FOR IMB - SUSAN BANKER COMMERCE FOR ITA/OFFICE OF JAPAN-NMELCHER/DAS LEVINE AGRICULTURE FOR ITP - SHEIKH AND HENKE E.O. 12958: N/A TAGS: ECON ETRD EINV EAGR EFIN PREL CH SUBJECT: Japan-China Economic Ties Remain Strong Despite Political Tensions REF: Tokyo 822 ¶1. (SBU) Summary: The economic relationship between Japan and China has continued to expand in spite of political frictions, according to Japanese Government trade and investment statistics. Japan's total trade with China (with the inclusion of trade with Hong Kong) again exceeded that between Japan and the United States in 2005. Japanese exports to China increased over eight percent while imports rose 17 percent. The pattern of trade continued to show strong complementarities between the two economies, with intermediate goods dominating Japan's exports to China and finished consumer goods and food items forming the most significant portion of Chinese exports to Japan. Japanese direct investment in China also continued to show strong growth, rising close to 50 percent year-on- year. End summary. -------------- -------------- China (plus HK) Again Japan's Top Trading Partner -------------- -------------- ¶2. (U) On a straight bilateral basis, the United States was Japan's top trading partner in 2005, according to statistics from the Japanese Ministry of Finance. Total trade (exports plus imports) with the United States equaled JPY 21.9 trillion (approximately USD 190 billion at an exchange rate of JPY 115:USD 1). Exports to the United States rose nearly eight percent while imports increased over four percent. China came a close second in total trade, with the combined value of exports and imports between the two countries reaching JPY 20.8 trillion (approximately USD 181 billion). (Table 1) Total Japanese exports to China rose by close to 11 percent, but imports from China grew substantially faster, exceeding 17 percent year-on- year. (Table 3) ¶3. (U) If total trade with China's Hong Kong Special Administrative Region -- a substantial portion of which, perhaps as much as 95 percent, could have the Chinese mainland as its final destination -- is added to the China figure, however, the "Greater China" total accounts for slightly over 20 percent of Japan's global trade as opposed to about 18 percent in the case of the United States. Export growth to China and Hong Kong combined slowed by about half in 2005, declining to about eight percent from a rate of just over 17 percent a year earlier. Imports, however, continued to show strong growth, rising 17 percent year-on-year in 2005, slightly faster than the 16.7 percent rate recorded in ¶2004. (Interestingly, trade with Hong Kong as compared to mainland China was relatively sluggish with Japanese exports growing only 3.6 percent and imports actually falling 1.4 percent year-on-year.) ¶4. (U) More important, however, is the difference in TOKYO 00000831 002 OF 007 the trade balance between Japan's two main commercial relationships. Although Japanese figures for trade with China alone show a substantial trade deficit of JPY 3.1 trillion (about USD 27 billion),the inclusion of Hong Kong and its deficit with Japan of nearly JPY 3.8 trillion indicates that Japan enjoyed a small overall trade surplus with "Greater China" of JPY 668 billion (USD 5.8 billion). This surplus is, in fact, about half of what it was in 2004 and 2003. In contrast, Japan's trade surplus with the United States in 2005 was nearly USD 83 billion, according to U.S. Commerce Department data. -------------- --- Trade Patterns Highlight Complementary Economies -------------- --- ¶5. (U) The structure of China-Japan trade is also, not surprisingly, different from China-U.S. trade. General machinery, electronics, and transportation equipment (including automobiles) account for about 65 percent of Japan's global exports. (These three categories make up about 75 percent of exports to both the United States and the European Union.) In the case of China, although the proportions of Japanese machinery and electronics exports (21.2 percent and 25.9 percent respectively) are consistent with the global totals (20.3 percent and 22.2 percent, respectively),transportation equipment only accounted for a mere five percent of Japan's exports to China and motor vehicles only about two percent. (Table 4) Transportation equipment, however, composed nearly 37 percent of Japan's exports to the United States, with automobiles alone accounting for close to 27 percent. ¶6. (U) Chinese customs figures for 2005 list Japan, at 15 percent of all imports, as China's leading import supplier. Japanese data indicate that much of this trade consisted of processed goods and materials, much of which was likely reprocessed into Chinese exports. In particular, China (including Hong Kong) absorbed nearly one-third (31 percent) of Japan's exports of electronics parts (switches, fuses),parts for audio- visual equipment, and semiconductors and over a quarter (26 percent) of all electronics exports. In addition, Japanese exports to China of manufactured goods (excluding machinery, electronics, and transportation equipment) made up over a quarter of Japan's exports in this category. Steel, in particular, figured prominently in this category, comprising seven percent of Japan's total exports to China, according to Japanese figures. ¶7. (U) On the Japanese side of the equation, goods from China, while constituting only about 21 percent of all of Japan's imports, dominated a few categories. (Table 5) Most notably, over four-fifths (81.2 percent) of Japan's imported clothing and accessories TOKYO 00000831 003 OF 007 came from China in 2005. Furthermore, China produced over half of all computers (55 percent) and of audio- visual devices (52 percent) imported into Japan last year. Fifteen percent of Japan's imported food (particularly seafood) also originated in China. -------------- -------------- Japanese Investment Growth in China Remains Strong -------------- -------------- ¶8. (U) Japanese direct investment into China in 2005 totaled JPY 726 billion, making China the second largest recipient of Japanese investment after the United States, which received over JPY 1.3 trillion last year. Japanese investment in China increased almost 48 percent over 2004, an acceleration of 10 percentage points but still not as great a rise as the 65 percent gain recorded in 2003. ¶9. (U) Time series data on Japanese exports also appear to indicate a rapid expansion of Japanese investment outside the Pearl River Delta region of Guangdong Province next to Hong Kong. Although this area still seems to account for about 40-50 percent of consumption of such Japanese-produced intermediate goods like switches and semiconductors, the share of exports to Hong Kong as a proportion of overall exports to China and Hong Kong combined has fallen from nearly 50 percent in 2000 to only 30 percent in 2005. ¶10. (U) Nevertheless, Japanese foreign investment in China remains highly concentrated in a few areas and industries. Data for Japanese companies operating in Japan collected by Japan's Ministry of Economy, Trade, and Industry shows that in 2003, half of all Japanese firms operating in China were located in the East China region (Shanghai Municipality, Jiangsu Province, and Zhejiang Province). (Table 7) Data for the January- September period of 2005 also shows that manufacturing accounted for 77 percent of Japanese investment in China by value. Three industries combined -- transport equipment (16 percent),electrical equipment (13 percent),and chemicals and pharmaceuticals (10 percent) -- accounted for nearly 40 percent of all Japanese investment in China through the third quarter of 2005. (It is worth noting, however, that investment in the transport equipment industry accounted for close to 37 percent of all Japanese direct investment in China in 2004.) Outside manufacturing, wholesale and retail trade and finance and insurance were the two dominant areas of investment, each accounting for about JPY 38 billion and 7-8 percent of total investment, respectively. -------------- Comment -------------- TOKYO 00000831 004 OF 007 ¶11. (SBU) Although the available statistics cannot fully capture the depth and complexity of the economic relationship between Japan and China, the latest data do support the conclusion that the trade and investment ties between the two countries continue to grow in spite of the frosty state of their diplomatic relations. (REFTEL) Notably, the Anti-Japanese demonstrations in China of April 2005 did not lead to a slowing of investment (although it is difficult to determine whether the increase in investment might have been greater had the demonstrations not taken place). Trade between the two largest Asian economies also continues to be highly complementary, with Japan largely supplying inputs to Chinese industry and China producing consumer goods for export to Japan and elsewhere. That said, China appears to be the more vulnerable partner in the relationship, as its imports from Japan are both more important to maintaining other industries and less readily available from other suppliers. One shared characteristic, however, is that Japan and China both have their largest trade surplus with the United States, suggesting that both have an interest in maintaining the health of the U.S. economy and Americans' capacity to consume. ¶12. (U) Tables: Table 1 Japan's Top Trading Partners (2005) (Unit: JPY Billion) Country/ Total Trade Exports Imports Balance Region -------------- -------------- -------------- -------------- -------------- U.S. 21,878 14,807 7,071 7,736 China (ex HK) 20,806 8,839 11,967 -3,128 (Hong Kong 4,142 3,969 173 3,795) ASEAN 16,346 8,342 8,004 338 EU 16,119 9,653 6,467 3,186 South Korea 7,840 5,143 2,696 2,447 Taiwan 7,628 4,810 1,991 2,818 Source: Japanese Ministry of Finance Table 2 Top Trading Partners' Share of Japan's Global Trade (2005) (Unit: Percent) Exports Imports -------------- -------------- United States 22.5 12.4 China (plus HK) 19.5 21.3 EU 14.7 11.4 ASEAN 12.7 14.1 Middle East 2.8 17.0 TOKYO 00000831 005 OF 007 Source: Japanese Ministry of Finance Table 3 Japanese Trade with China and Hong Kong 2000-2005 (Unit: JPY Billion. Number in parentheses is percent change from previous year.) Exports Imports Balance 2000 China 3,274 (23.2) 5,941 (21.9) -2,667 Hong Kong 2,930 (16.9) 180 (-11.3) 2,750 Total 6,204 (20.1) 6,121 (20.5) 83 2001 China 3,764 (15.0) 7,027 (18.3) -3,263 Hong Kong 2,826 (-3.5) 177 (-1.7) 2,649 Total 6,590 (6.2) 7,204 (17.7) -614 2002 China 4,980 (32.3) 7,728 (10.0) -2,748 Hong Kong 3,176 (8.4) 178 (0.6) 2,998 Total 8,156 (23.8) 7,906 (9.7) 250 2003 China 6,635 (33.2) 8,731 (13.0) -2,096 Hong Kong 3,455 (8.9) 156 (-12.4) 3,299 Total 10,090 (23.7) 8,887 (12.4) 1,203 2004 China 7,994 (20.5) 10,199 (16.8) -2,205 Hong Kong 3,831 (10.9) 176 (12.8) 3,655 Total 11,825 (17.2) 10,375 (16.7) 1,450 2005 China 8,839 (10.6) 11,967 (17.3) -3,128 Hong Kong 3,969 (3.6) 173 (-1.7) 3,796 Total 12,808 (8.3) 12,140 (17.0) 668 Table 4 Japanese Exports to China and Hong Kong (2005) (Unit: JPY Billion) Commodity World China HK China plus HK/ World (%) -------------- -------------- -------------- -------------- -------------- All Goods 65,662 8,839 3,969 19.5 Food 319 39 49 27.6 Raw Materials 743 298 18 42.5 Mineral Fuels 475 135 28 34.3 Chemicals 5,849 1,150 346 25.6 Manufactures 7,397 1,454 395 25.0 --Steel 3,037 618 94 23.4 Machinery 13,324 1,874 460 17.5 Elec. Machinery 14,561 2,287 1,534 26.2 --Semiconductors 4,402 716 718 32.6 --Electrical Apparatus 1,686 361 190 32.7 --Audio-Visual Parts 1,302 311 195 38.9 TOKYO 00000831 006 OF 007 Trans. Equip. 15,198 446 201 4.3 --Motor vehicles 9,929 142 64 2.1 Source: Japanese Ministry of Finance Table 5 Japanese Imports from China and Hong Kong (2005) (Unit: JPY Billion) Commodity World China HK China plus HK/ World (%) -------------- -------------- -------------- -------------- -------------- All Goods 56,881 11,967 173 21.3 Food 5,557 868 3 15.7 Raw Materials 3,469 185 1 5.3 Mineral Fuels 14,552 361 0 2.5 Chemicals 4,321 471 1 10.9 Manufactures 5,415 1,446 23 27.1 Machinery 5,634 2,027 20 36.3 --Computers 2,053 1,110 12 54.7 Elec. Machinery 7,414 2,300 29 31.4 --Audio-visual Equipment 1,598 825 6 52.0 Trans. Equip. 2,062 173 2 8.4 Clothing and Accessories 2,469 1,999 6 81.2 Source: Japanese Ministry of Finance Table 6 Japanese Direct Investment in China 2000-2004 (Units: Projects; JPY Billion; percent change from previous year in parentheses) Share of Japan Projects Value Outward FDI (pct.) -------------- -------------- -------------- 2000 106 (34.2) 111.4 (29.8) 2.0 2001 189 (78.3) 181.9 (63.3) 4.5 2002 263 (39.2) 215.2 (18.3) 4.8 2003 332 (26.2) 355.3 (65.1) 8.7 2004 361 (8.7) 490.9 (38.2) 12.8 2005 N/A (N/A) 725.8 (47.9) 14.4 Source: Japanese Ministry of Finance Table 7 Japanese Companies Operating in China (2003) (Unit: Enterprises. Numbers in parentheses are TOKYO 00000831 007 OF 007 percent of "All China" total.) All China East South North NE Cent. West -------------- -------------- -------------- -------------- -------------- -------------- -------------- Total 4,864 2,451 688 971 471 107 176 (100) (50) (14) (20) (10) (2) (4) of which: Food 302 82 36 119 43 7 15 (6) (27) (12) (39) (14) (2) (5) Textiles 629 405 40 106 51 16 11 (13) (64) (6) (17) (8) (3) (2) Chemicals 481 234 95 80 41 8 23 (10) (49) (20) (17) (9) (2) (5) Machinery 378 194 57 66 39 12 10 (8) (51) (15) (17) (10) (3) (3) Electrical Equipment 640 275 163 121 58 10 13 (13) (43) (25) (19) (9) (2) (2) Transport Equipment 224 77 43 42 9 15 38 (5) (34) (19) (19) (4) (7) (17) Wholesale Industry 483 361 35 50 33 2 2 (10) (75) (7) (10) (7) (0) (0) Services 309 140 29 85 32 6 17 (6) (45) (9) (28) (10) (2) (6) Source: Japanese Ministry of Economy, Trade, and Industry, "White Paper on International Economy and Trade 2005" SCHIEFFER