By Feng Zhaokui (China Daily)
Updated: 2007-08-21 15:56

Japan's investment in China last year was noticeably less than the previous year, while its total investment overseas grew by a big margin year-on-year. What exactly caused the contrasting developments? This writer believes a complex set of political, economic and security-related factors lie behind the phenomenon.

On the political front, though Sino-Japanese relations have been improving and leaders of the two nations have reached consensus on building a "strategic mutually-beneficial relationship" since Japanese Prime Minister Shinzo Abe's China visit last October and Chinese Premier Wen Jiabao's Japan trip in April, people must not overlook the fact that Sino-Japanese ties and the feelings of the two peoples toward each other have been hurt in the past few years, and the damage has been so great, that relations between the two nations are still "fragile".

There is still a long way to go and a great deal of effort is required on the part of the two countries to repair bilateral ties and feelings.

The decrease of Japan's investment in China, to a certain extent, is due to the aftermath of the "chilled political ties". As far as the economic community is concerned, corporate Japan was left "in the cold" as some Japanese government departments, economists and the media exaggerated the political risks of investing in China. Some others advocated the so-called "China plus 1" investment strategy - directing part of investments to India or Vietnam, where "political ties-related risks" do not exist.

Despite repeated assurances by Chinese experts that China is a safe place to invest and their objections to the claim that "investing in China comes with risks", corporate Japan was still unsure about the positive comments by leaders of the two nations on constructing a "strategic relationship of mutual benefit", and wished to see this turned into action. They were aware that some of the major disputes between the two countries were yet to be resolved. Some were even worried Sino-Japanese relations could turn sour again.

Some people in Japan's economic circles believed direct investment in China's major manufacturing industries was almost saturated, which is one of the reasons why Japan's investment in China decreased last year. As a result, Japanese enterprises directed their investment into financial, logistics, and other services. In the meantime, labor costs and other expenditures in China's coastal areas were rising, motivating Japanese companies to move investment to countries where labor costs were lower.

As for high-tech industries engaged in state-of-the-art technologies or basic research in manufacturing technologies, some of the enterprises moved their production bases back to Japan because China, though rich in labor resources, lacks highly skilled workers. Another reason for the withdrawl of such firms was the fear of losing core technology to Chinese competitors.

Some Japanese economists in recent years have also spread rumors that China's economy had many bubbles and this would burst around the time of the Beijing Olympic Games in 2008 or the Shanghai World Expo in 2010. However, China's economy and national conditions are vastly different from Japan's during its bubble economy era in the 1980s.

Chinese economists have stated time and again the Chinese economy is unlikely to "crash-land" or even "collapse" but the "experts" trumpeting the theory of "China's bubble economy" in Japan wield an influence that cannot be ignored.

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