Can the Chinese growth locomotive pull Japan out of trouble?
China overtook Japan in nominal GDP for the second quarter of 2010, raising an essential question, can China’s awesome economic performance rouse Japan out of her torpid 0-1% annual GDP growth rate trend, or will Japan somehow find a way to balls it up?
There are two simple ways China’s growth should be able to lead to GDP growth in Japan. First, Japanese companies increase their sales in China, hire more people in Japan, and pay higher salaries. This is already happening. China-Japan growth has increased 20% a year for the past decade, to its current level of $140bn in the first half of 2010, some 20% of Japan’s total trade.
Second, Chinese companies come into Japan, buy up companies with excellent products but lousy management, hire lots of people, and start selling to Japan, and other regions. The Suning investment in Laox is along these latter lines. Japanese managers of Laox have been unable to translate Chinese interest in Laox’s excellent electronic products into China sales. So, Chinese managers are coming over to show the Japanese managers how it’s done.
Such added competition from Chinese firms should also raise productivity in Japan’s service sector. As anybody who has dealt with Japanese banks, hospitals, telecommunication service providers, or schools knows well, these leave something to be desired.
The big danger for Japan regarding the first strategy is hollowing-out. This would mean that Japanese companies selling into China decide to move all their factories to China, and could end up listing on the Shanghai or Hong Kong stock markets. If they list abroad, their profit dividends fail to return to Japan. Given how fast the Chinese market is growing, it also makes sense to keep re-investing in China (rather than repatriating the cash to Japan, as the government has been suggesting).
Japan isn’t alone in this respect. Lots of large companies don’t necessarily provide profits to their country of origin. On the other hand, fungible capital means that UK pension funds from the UK can leverage a successful Japanese company by investing in it, to the benefit of future UK pensioners. The problem with Japan is that so much money ($8 trillion in household assets, and some $2 trillion on corporate balance sheets) is stuck in Japan – feeding the ravenous maw of government bond issuance, rather than more productive investments in the private sector, either domestically or abroad.
So the risk from the first course is that individual Japanese companies and their shareholders will make pots of money in China, without this noticeably boosting Japan’s GDP.
The risk attending the second strategy, of allowing Chinese investment into Japan, is of course Japanese fear of low-priced competition from unruly foreigners. A couple of deals have been done, to much fanfare (the Laox deal, and also the Shandong Ruyi investment in apparel company Renown), but Chinese FDI into Japan is still quite small, just 1.2% from China and Hong Kong combined in 2008.
Interestingly, both investments are in very traditional, unexciting sectors – apparel and household electronics. But what would happen if a Chinese company decides to invest in a school, mobile phone company, hospital or bank? These are sectors the Japanese government has preferred to be able to influence directly. From a social point of view, this may be a good thing, but economically it’s a big lost opportunity.
If the Chinese card is played well, Japan could reap immense benefits. But the outcome is not certain. Only $20bn of Japanese FDI goes to Asia, out of a $140bn total. Until Japan gets more enthusiastic about its backyard, the Japanese government could still let this historic opportunity slip through its fingers.