JAPANESE BUSINESS SEEKS INDEPENDENT CHINA

C O N F I D E N T I A L TOKYO 000904

SIPDIS

SIPDIS

DEPT PASS USTR FOR AUSTRS CUTLER AND STRATFORD
TREASURY FOR EAST ASIAN NATIONS - DOHNER AND KOEPKE
TREASURY ALSO FOR INTERNATIONAL - LOEVINGER AND SOBEL
COMMERCE FOR ITA DAS LEVINE AND OFFICE OF JAPAN - NMELCHER

E.O. 12958: DECL: 02/17/2016
TAGS: ECON EINV EFIN PGOV PREL JA CH
SUBJECT: JAPANESE BUSINESS SEEKS INDEPENDENT CHINA
COMMUNICATION AND ANALYSIS

REF: A. TOKYO 822

B. TOKYO 831

Classified By: Ambassador J. Thomas Schieffer; Reason: 1.4 (B,D)


1. (C) Summary: Confidence in the Japanese Government's
capacity to analyze and to interpret events in China is
waning among Japan's business community, according to some
Japanese and expatriate Chinese researchers and academics.
The anti-Japanese demonstrations of spring 2005 also
alerted Japan's business leaders to a need for their own
sources of analysis and channels of communication regarding
China. Recent surveys of Japanese businesses undertaken by
the Japanese Government indicate that a number of firms
with China investments are looking to establish a presence
in other Asian countries as a way to hedge against the
possible political risk to their China operations. Though
apparently not underway at this time, any substantial shift
of economic interests away from China could reduce the
business sector constituency in favor of steps to improve
bilateral relations. End summary.

-------------- --------------
Japanese Investors Gain New Awareness of "Original Sin"
-------------- --------------


2. (SBU) According to C.H. Kwan (Guan Zhixiong),a
researcher at Nomura Securities Institute of Capital Market
Research, Japanese firms with operations in China had only
recently become sensitized to what Kwan called their burden
of "original sin" for Japan's past aggression against
China. He noted that until the demonstrations in the
spring of 2005, many Japanese in China had failed to grasp
the depth of residual Chinese anger against Japan for the
events of the Second World War. A number of Japanese
firms, he indicated, have begun to finance "social projects"
in China designed at winning over the general populace.
(Note: The January 28 edition of the economic weekly Toyo
Keizai carries a report listing a number of projects and
activities sponsored by over a dozen major Japanese
companies like Toyota, Matsushita, and UFJ -- most
prominently in education but also in other fields ranging
from social welfare to environmental protection. End
note.) Kwan added that the Ministry of Foreign Affairs had
also explored the possibility of increasing cultural
interaction with China as a way to improve bilateral
relations but noted that the Foreign Ministry had been
unable to gain political-level approval to finance its
proposal.


3. (SBU) Kwan concluded that the investment data (ref B)
did not yet reflect the change in sentiment and that a
decline in Japanese investment flows to China would emerge
before too long. Already Japanese companies were paying
more attention to other promising developing economies such
as Brazil, Russia, and India. Kwan cited a recent survey
of Japanese firms with overseas operations by the Japan
Bank for International Cooperation (JBIC),which indicates
that positive sentiment on further investments in China was
declining among the surveyed companies, to support his
analysis. He also pointed to the 2005 Ministry of Economy,
Trade, and Industry (METI) White Paper on International
Trade and Investment, which stressed the importance for
Japanese firms of diversifying the geographic risk in their
investment portfolios. (Note: The JBIC Survey is
available on-line in English at
http://www.jbic.go.jp/english/research/report /review/index.
php. Similarly, the METI 2005 White Paper is also
available at:
http://www.meti.go.jp/english/report/index.ht ml.
End note.)


4. (SBU) Kwan was fairly upbeat about the prospects for
Japanese investment in China's financial sector. In
particular, Chinese banks remained attractive to many
Japanese investors because, first, the Chinese Government
would not allow the banks to fail and second, the debt
burden of the Chinese Government, though high, was still
substantially less than Japan's, indicating the government
had the resources needed to keep the banks solvent should a
crisis arise. Although the current limits on foreign
ownership of Chinese banks meant that the impact of foreign
investment on the management of the banks would be
relatively small in the near term, Kwan voiced confidence
that those restrictions would decline over time, thus
paving the way for improvements in corporate governance.


5. (SBU) For its part, Kwan's employer, Nomura, has seen
mixed benefits from the beginning of a shift away from
China by Japanese investors. On one hand, a Nomura-
invested industrial estate in Vietnam that had lulled in
the doldrums had suddenly picked up over the past year. On
the other, the Garden Hotel in Shanghai, one of Nomura's
premier investments in China, had fallen on relatively hard
times. Nomura, which is already a "qualified financial
institutional investor" (QFII) in China, is also looking to
establish a joint-venture securities firm with a Chinese
partner.


6. (SBU) Kwan said his Chinese contacts were also
pessimistic about the future of Sino-Japanese relations.
Statements by the leading ruling party contenders to
replace Prime Minister Koizumi and recent comments by the
leader of the Japanese opposition had led those Chinese
observers to whom he had spoken to express the view that
any significant change in the Japanese Government's
attitude toward China was unlikely even in the event of a
rise to power of the Democratic Party of Japan (DPJ) at
some later point. Kwan's interlocutors believed that even
if China and Japan achieved some resolution of their
differences regarding the controversial Yasukuni Shrine,
there would still remain too many potential areas of
disagreement such as the dispute over development of oil
and gas resources in the East China Sea and the possible
amendment of Japan's current constitution to a allow for a
higher-profile Japanese military.

-------------- --------------
Industry Confidence in Government China Analysis Weakens
-------------- --------------


7. (SBU) Toyogakuen University Professor Zhu Jianrong
noted that the purging of the "China School" in the
Ministries of Foreign Affairs and of Economy, Trade and
Industry over the last two years had left relatively few
officials with any substantial knowledge of China in
positions with influence on Japan-China relations. In
addition, he stressed that a longstanding flaw of Japanese
official China analysis was the tendency to overspecialize;
officials in the Japanese diplomatic mission in China
tended to be technical experts who produced very detailed
and well researched reports on specific issues but who
often failed to make the connections to larger Chinese
strategies or trends, thus missing the "big picture."


8. (SBU) According to Zhu, Japan's business community had
realized these failings on the part of the government and
has established its own China-watching infrastructure.
This expertise, often embodied in expatriate Chinese living
in Japan, is located in individual companies but not in the
broader business associations like the Japan Federation of
Business ("Keidanren"). Zhu added that expatriate scholars
like himself were also part of that infrastructure. He
showed econoff a list of members of a "study group"
(benkyokai) on China including the names of the heads of
several dozen of Japan's major corporations (Toyota,
Toshiba, Matsushita, etc.) that had been organized by the
Nihon Keizai Shinbun Corporation. The lecturers for this
group were exclusively expatriate Chinese academics. Zhu
cited as an example of the topics covered the new strategy
for urbanization announced in the Chinese Communist Party
Central Committee's "Proposal" for the 11th Five Year Plan.

-------------- --------------
Political Frictions Could Impede Needed Economic Dialogue
-------------- --------------


9. (SBU) The chief threat to the China-Japan economic
relationship from deteriorating political ties is the
potential for a breakdown of needed government-to-
government communication, according to Kazuko Inoue, a
researcher at the Mitsui Global Strategic Studies Institute
(MGSSI). (Note: MGSSI is the in-house think tank of the
Mitsui Corporation. End note.) Inoue stressed that,
although there were no critical issues in the economic
relationship at the moment that needed political-level
government intervention, should such an issue emerge, the
ongoing political friction could impede the capacity of
both countries to handle the situation. In Inoue's view,
the Chinese leadership has been looking for ways to improve
the relationship with Japan but lacked a concrete method
for doing so. In addition, the popular sentiment in China
toward Japan had become more difficult for the authorities
to control, thus complicating their efforts to manage
economic relations.


10. (SBU) Characterizing Prime Minister Koizumi's stated
rationale for repeatedly visiting the Yasukuni Shrine as
"twisted," MGSSI Chairman Jitsuro Terashima was more
sharply critical of Japan's leaders for the downturn in
relations with China and Korea, and he suggested this
situation had damaged Japan's standing among Asian
countries as a whole. Koizumi's foreign policy, Terashima
said, had overemphasized the relationship with the United
States to the detriment of Japan's potential role as a
"bridge" to East Asia. Terashima floated the idea of
cooperation on economic topics among China, South Korea, and
Japan -- for example, promotion of economic development in
Southeast Asia through the Asian Development Bank or joint
measures to preserve financial stability in the region like
the Chiang Mai Initiative -- as a way potentially to begin
to rebuild trust among the three countries. According to
Terashima, certain members of the Japanese leadership
stratum -- notably former Chief Cabinet Secretary Yasuo
Fukuda -- held views similar to his own on the need to
improve relations with China and Korea.


11. (C) Keidanren Chairman Hiroshi Okuda echoed
Terashima's criticism in a February 15 lunch with the
Ambassador. Asked about the qualities most needed in a
successor to Prime Minister Koizumi, Okuda unhesitatingly
replied that the capacity to manage relations with China
and Korea would be the most critical skill required in a
new Premier. Okuda also indicated that, in his view, the
leading candidates to succeed Koizumi were noticeably
lacking in this regard.

--------------
Comment
--------------


12. (C) Although our contacts expressed varying degrees
of concern about the possible effect of the current "cold"
political climate between Japan and China, they were
generally in agreement on the point that the Japanese
political leadership does not view improving relations with
China as a priority. As a result, major Japanese
corporations and business leaders have increasingly begun
to look for their own alternative channels to the official
relationship to secure and to further their interests in
China. The anti-Japanese demonstrations of the spring of
2005 obviously added a sense of urgency to this effort.
Adding a new consideration of political risk to existing
worries over possible "overheating" in the Chinese economy,
the demonstrations also appear to have accelerated a trend
among Japanese firms to hedge their China operations by
establishing a complementary presence in another nearby
Asian country such as Vietnam (the so-called "China plus
one" strategy). Insofar as this phenomenon does not seem
to be leading to a diminution of the overall Japanese
presence in China, it is probably both a sound business
strategy and a good reminder to the Chinese authorities of
their economic vulnerability should political frictions get
out of hand. At the same time, however, should Japan's
business community substantially shift its interests away
from China, it could weaken the influence of those in Japan
looking to find a way to ease the present political
tensions.
SCHIEFFER