David Pilling, definitely the man to watch at the FT ( sorry Brad ) has some sound sense for us about Japan/China relations. Meanwhile I'm afraid I don't buy at all the thesis that China is good news for Latin America - my god why do I have to be so contrarian, anybody got a good astrological calendar handy, I must have been born under a bad, bad moon:
Japan's economy may still be four times bigger than China's, but some time ago it passed the baton marked "economic powerhouse" to its large northern neighbour. China's economy is ripping along at 8-10 per cent a year. Japan's is shrinking in nominal terms. China is attracting record foreign direct investment, Japan a relative trickle.
Worse, China's gain is Japan's loss. China is swamping Japan with cheap exports, fuelling its seemingly endless deflationary descent. Japanese manufacturers, unable to compete, are fleeing to China, causing the "hollowing out" of domestic industry and pushing unemployment towards post-war highs. Clearly, the future now leads to Beijing, Shanghai and the Pearl River Delta. Tokyo, Osaka and Kobe are of the past. But there's a feeling investors with this view may have jumped the gun. Abandoning Japan for China is too simplistic. Far from being a threat to Japan's economy and companies, China may be Japan's way out of a fix. The two countries, bitter rivals for years, could be highly complementary.
This is the basic thesis of a new note by Goldman Sachs - entitled Friend, not foe - the latest in a series of Japanese research that seeks to redress widespread misconceptions about the Japan-China relationship. Take trade. Quite contrary to common perception, Japan is not being swamped by Chinese exports, but is running a trade surplus with China - about $1.5bn in 2002. Many of these exports are of machinery and inputs to Japanese companies operating there, some of them bound for re-export to Japan or for shipment to third countries. But Goldman's says the pattern is shifting, with more Japanese goods being consumed within China.
China has recently overtaken the US as the largest exporter to Japan. But at about 1 per cent of gross domestic product, many think it is far-fetched to blame cheap Chinese goods for Japanese deflation. To the extent that these imports change the relative price of goods, such price falls may be a good thing. Most imports from China are of labour-intensive goods, with 60 per cent concentrated in textiles, food and basic materials. Japanese exports to China are sophisticated, capital intensive goods. In other words, both countries are producing and exporting according to their comparative advantage - something economists would say is mutually beneficial.
So how can this work for the investor? One way is to buy shares in Japanese companies with smart investments in China. Again, contrary to perception, Japanese companies have been relatively slow on to the Chinese mainland, leaving room for further moves. In 2001, Japanese foreign direct investment into China rose 64 per cent on the previous year to Y181bn; officials think it increased sharply again last year. According to a recent survey by the Japan-China Investment Promotion Organisation 82 per cent of Japanese investors in China say they are already profitable. Robert Feldman, senior economist at Morgan Stanley in Tokyo, says many Japanese companies have been successful at raising profit margins by investing intelligently in China and other low-cost producers. As tariff barriers come down, companies that export to China also stand to benefit. Japanese companies struggling as capital investment slides at home could be in for a big fillip.
Source: Financial Times
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