JAPAN-CHINA RELATIONS BACK ON TRACK IN SHANGHAI

UNCLAS SECTION 01 OF 04 SHANGHAI 000178

SIPDIS

SENSITIVE
SIPDIS

STATE FOR EAP/CM, EAP/J, EB AND E
TREASURY FOR OASIA - DOHNER AND CUSHMAN
COMMERCE FOR ITA DAS KASOFF, MELCHER AND MCQUEEN
NSC FOR KURT TONG

E.O. 12958: N/A
TAGS: EFIN EINV PREL CH JA
SUBJECT: JAPAN-CHINA RELATIONS BACK ON TRACK IN SHANGHAI

REF: 05 SHANGHAI 932


1. (SBU) Summary. According to Japanese contacts in Shanghai,
Japanese Prime Minister Abe's October 2006 breakthrough visit to
Beijing has dramatically improved the climate for Japanese
investment in Shanghai, as well as led to an overall increase in
cultural exchanges. The number of Japanese Chamber of Commerce
members and travel between the two countries hit record highs in

2006. While new Japanese investment in China has slowed,
contacts said this was natural as "those who should be here are
already here" and some firms had begun considering moving
operations to less expensive areas such as Vietnam. Though
anti-Japanese sentiment among Chinese youth remained a concern,
recent internet postings appear to be less virulent than in the
past. Contacts noted that a lot was riding on Premier Wen
Jiabao's April trip to Japan and speculated both sides would
likely try to downplay any public differences until after the
trip. End summary.

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"Those Who Should Be Here Are Already Here"
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2. (SBU) Pol/Econ Chief and Econoff met with Bank of
Tokyo-Mitsubishi UFJ's Shanghai Branch General Manager and
former head of the Shanghai Japan Chamber of Commerce Makoto
Motooka on March 16 to discuss the current economic climate for
Japanese businesses in Shanghai. Motooka provided a positive
assessment of the environment in Shanghai and noted that the
number of Chamber members was at an all-time high of
approximately 2000. Recent figures from the Chamber indicated
that there were between 6,000 and 7,000 Japanese-owned
businesses in Shanghai, including approximately 1,000-2,000 very
small-scale enterprises.


3. (SBU) Motooka noted that new Japanese investment in China was
down in both numbers of projects and total value and the rate of
growth in the number of Chamber members had slowed to just 10
percent in 2006, after 25 percent increases in both 2004 and

2005. He was not concerned by this slowdown and said it was
natural since the initial wave of investment had ended and
"those who should be here are already here." He added that
although some speculated that the April 2005 anti-Japanese
demonstrations in Shanghai and other cities in East China (see
reftel) played a role in this slowed growth, their long-term
impact had not been very significant.


4. (SBU) Contacts from the Japanese Consulate in Shanghai in a
series of meetings in mid-March shared the same view as Motooka
and reported that a "reassessment" of Japanese investment in
China had begun even before the demonstrations. The rising
costs of operating in coastal areas, especially salaries, and
exchange rate fluctuations over the past three to five years had
led many Japanese firms in East China to consider moving
operations to lower cost regions in Southeast Asia such as
Vietnam. Increasing concerns about the political situation
after the demonstrations coincided with this economic
reassessment, but should not be seen as the direct cause of the
slowing growth of new investment.

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Increasing Disposable Incomes Benefit Japanese Companies
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5. (SBU) According to Motooka, short-lived calls for boycotts of
Japanese products in 2005 have had no lasting impact, as
Japanese brands were highly admired by Chinese for their
superior quality, even those products made in China. Major
Japanese retailers such as Isetan, Sogo, Sanrio, Uniqlo and Muji
remained extremely popular in increasingly fashion-conscious
Shanghai. During the initial phase of Japanese investment in
China, the focus was on building assembly capability in China

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for export to overseas markets. Most current investment
projects, however, were now aimed at increasing or improving
production capability intended for domestic Chinese markets.
With the rapid rise in the number of Chinese with annual incomes
approaching USD 10,000, consumers were becoming much more
sophisticated and demanding. Just as in Japan 35 years ago,
increased disposable incomes had changed behavior, with more
consumers willing to pay more for "intangibles" such as quality,
style and ease of use - traditional strengths of Japanese
manufacturers.

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Abe's Visit to China "Dramatically" Changed Climate
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6. (SBU) According to Motooka and Japanese Consulate contacts,
Prime Minister Abe's breakthrough October 2006 visit to Beijing
had "dramatically" changed the climate for major Japanese
investment. Motooka cited the example of the international
consortia bidding to construct the Shanghai-Beijing high-speed
rail system. Motooka opined that in this new environment,
"Japan can be selected."

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Second Largest Expat Community in Shanghai
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7. (SBU) According to a Japanese Consulate contact, there were
currently 45,000 long-term Japanese residents in Shanghai.
Though the rate of new growth was slowing, Japanese still
constituted the second largest expatriate community in Shanghai
after Taiwan. [Note: There are approximately 20,000 long-term
AmCit residents in the Shanghai consular district. End note.]
Informal discussions with several private sector contacts and
their families confirm that life in Shanghai remains very
comfortable, with most enjoying the creature comforts which
their similar position in Japan could not provide. None of our
contacts expressed any concerns of personal safety or had
directly experienced anti-Japanese sentiment in either their
daily lives or travels in China.


8. (SBU) Motooka noted that the number of Japanese employees
assigned to work in China had been leveling off recently,
although overall numbers remained strong. He added that with
dramatic improvements in the quality of life in China's most
cosmopolitan cities, Japanese employees were willing to take
assignments in Shanghai or even Beijing. Recruiting staff to
work in China's smaller cities, however, remained a major
challenge. According to Motooka, with such a large presence,
corporate social responsibility was becoming increasingly
important to the entire Japanese community. The Japan Chamber
of Commerce had recently built two schools in Anhui Province,
provided financial assistance to 100 local students and donated
500,000 RMB to the Special Olympics ahead of the September 2007
Games in Shanghai. The Bank of Tokyo-Mitsubishi UFJ similarly
provided 200,000 RMB per year to underwrite a series of 15
lectures on financial issues in the Masters of Public Policy
program at Fudan University.

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Inbound and Outbound Tourism Hits Record Highs in 2006
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9. (SBU) After a brief but significant drop-off in the number of
Japanese visitors to China in the months following the April
2005 demonstrations, the situation has dramatically improved.
The Japan National Tourist Organization reported that a record
3.745 million Japanese visited China in 2006 (vs. 3.334 million
in 2004). According to Motooka, due to the geographic proximity
and shared cultural affinity, many Japanese travelers still
considered China to be an attractive destination. Chinese

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visitors to Japan in 2006 increased 24 percent to 811,700 (vs.
616,000 in 2004),also an all-time. Japanese Consulate contacts
reported that growth in travel from Shanghai was particularly
robust, as the Consulate issued more than 100,000 visitor visas
to Chinese travelers in 2006, 25 percent more than in 2004.
Consulate contacts also indicated that the thaw in relations
since PM Abe's Beijing visit has resulted in a similar deluge of
GOJ officials, often accompanied by business delegations, coming
to China to meet their counterparts and survey the situation on
the ground for themselves.


10. (SBU) One Japanese Consulate contact noted that to
facilitate the rapidly growing number of travelers, establishing
shuttle service between Tokyo's in-town Haneda Airport and
Shanghai's Honggqiao Airport remained an important priority for
both countries - and a key potential deliverable for future
high-level meetings. [Note: Currently, all China-bound flights
from Tokyo depart from Narita Airport, approximately 70 km from
central Tokyo and all Japan-bound flights from Shanghai depart
from Pudong Airport, approximately 30 km from the city center.
End note.]

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Increasing Exchanges
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11. (SBU) The serious interest in Japan and Japanese culture can
be seen in the increasing number of Chinese students studying
Japanese. According to Motooka, a record 210,000 Chinese
students took the Japanese Proficiency Exam for Foreigners last
year, 15 percent more than in 2005. Although anti-Japanese
sentiment among young Chinese continued to be a concern,
speaking Japanese was still a highly marketable skill,
especially in Shanghai. Similarly, the number of students in
Japan studying Chinese was also on the rise and interest in
China was growing. As Motooka noted quite simply, "It pays!"


12. (SBU) On the cultural front, the situation in Shanghai has
dramatically improved since PM Abe's visit to Beijing. Chinese
event organizers now felt comfortable using the phrase
"China-Japan" instead of "international." In fact, the press
statement following Abe's visit announced that 2007 had been
named the "Japan-China Year of Culture and Sports," in
commemoration of the 35th anniversary of the normalization of
bilateral relations. The campaign, complete with an
eye-catching logo (the "dynamic heart") and Japanese and Chinese
catchphrases ("Carry the Hope Forward" in Japanese and "Hopeful
Heart, New Future" in Chinese),is designed to "actively develop
youth exchange" and "enhance friendly sentiment." When asked
what events were planned for Shanghai, however, contacts from
the Japanese Consulate were hard pressed to cite anything other
than the (previously scheduled) series of Asian Football
Championship matches in April and some associated soccer clinics
for local children.

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Watch What You Say
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13. (SBU) A contact from the Japanese Consulate said that
recent postings on anti-Japanese websites and chat rooms
appeared to be "less virulent" than in the past, with most
netizens seemingly in line with Beijing's current engagement
posture towards Japan. However, Japanese officials were still
cautious in what they said. The contact stated that if a
Japanese Finance Minister were to make public reference to the
"underdeveloped" nature of the Chinese economy in the way that
Secretary Paulson did during his recent trip to Shanghai, "there

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would be riots in the streets."

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Nanjing Massacre Anniversary Should Not Disrupt Relations
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14. (SBU) Despite the upcoming the 70th anniversary of the
Nanjing Massacre in December and the slew of Chinese, Japanese
and even American films timed to coincide with the event,
contacts said the commemoration was not a major concern and
would not seriously affect the current state of generally
positive relations between the two countries.

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Expectations For Wen's Trip
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15. (SBU) While interlocutors were optimistic about Japan-China
relations, many indicated that there was much riding on the
success of Premier Wen Jiabao's April trip to Japan. Many
anticipated that a successful outcome of the Wen visit could lay
the groundwork for a visit to Japan by President Hu later this
year. They said that in the meantime, there would be no
significant changes to the status quo, and both sides would
likely try to downplay any public differences which may arise
before then.
JARRETT