When it comes to Japan, China seems torn. On security issues, it is becoming increasingly hawkish -- witness its recent declaration of an Air Defense Identification Zone (ADIZ) over the Senkaku (Diaoyu) Islands in the East China Sea. But on economic ties -- from Japanese imports to Japanese investments -- it is becoming increasingly dovish. In short, China has started to delink economics from politics.

This represents a big reversal from last year, when the Middle Kingdom believed that it could use Japan’s dependence on the Chinese market to wrest territorial concessions from Japan. In the summer and fall of 2012, riots and boycotts of Japanese products -- some of them encouraged by the Chinese government -- spread across China after Yoshihiko Noda, who was then Japan’s prime minister, bought from their private Japanese owner some of the Senkaku (Diaoyu) Islands, which are controlled by Japan but also claimed by China.

A sign that China has given up on that gambit was seen in Chinese media reporting on the visit of a top-level Japanese business delegation to Beijing in November. China’s state-owned TV network, CCTV, reported, “Putting aside their countries’ diplomatic deadlock, the two sides are seeking better economic ties.” To be sure, the normalization of economic ties could be interrupted by Japanese Prime Minister Shinzo Abe’s widely criticized December 26 visit to the Yasukuni Shrine, which is controversial because it honors, among others, 14 Class-A World War II–era war criminals. But otherwise, Chinese-Japanese economic relations (but not political ties) are set to get better, not worse.

The delinking limits the ways that Beijing can pressure Tokyo -- or induce Japanese business to pressure Abe. In turn, it forces China to rely on policies, such as the ADIZ, that could alienate other Asian neighbors. For example, in its ADIZ, China has included air space not only above the Senkaku/Diaoyu Islands but also above a Korean-held island. Moreover, China’s ADIZ, unlike those of other nations, affects civilian passenger jets from the many countries just passing through the area. This adds to the sense in the region that China has shifted from a charm offensive to increasingly abrasive tactics in pursuit of its territorial and maritime ambitions.  

At the heart of China’s reversal of last year’s tactics toward Japan is the economic reality that China needs Japan just as much as Japan needs China. China’s own export sector hinges on parts coming from Japan (for example, the Toshiba flash drives used in the iPhones that are assembled in China). Already facing an economic slowdown, the country is loath to give up the jobs, investment, and technology transfers that come from Japanese firms expanding their facilities in China. In October, executives from ten leading Chinese companies in Guangdong Province even visited Japan to seek more Japanese investment. They met with Yoshihide Suga, chief cabinet secretary and a key Abe administration power broker, and Hiromasa Yonekura, the head of the Japan Business Federation. Then, in November, Yonekura headed an economic mission to Beijing, where Vice Premier Wang Yang received him. The Chinese press publicized a comment by Xu Dunxin, former Chinese ambassador to Japan: "We hope the communication between high-profile business entrepreneurs will help result in a turnaround of the strained China-Japan relationship."

The specifics of the Guangdong mission suggest that the initiative to delink economics from politics is coming from China’s business community and provincial and local political leadership rather than from Beijing. Reportedly, the Guangdong leaders had to ask the Chinese Communist Party for permission to travel to Japan three times before the party granted it -- and only then if they agreed not to meet with Abe. Even some Chinese companies that are said to be close to the military, such as Huawei Technologies, seem ready to give economics primacy. Huawei has said that it will boost the share of Japanese parts in its high-performance smartphones from 50 percent to 70 percent as part of its effort to upgrade its product line to higher-performance, higher-priced models.

The normalization of economic ties is apparent in Chinese import figures: as a result of the riots and boycotts last autumn, Japan’s real (price-adjusted) exports to China plunged 26 percent between July 2012 -- when Noda announced the Senkaku (Diaoyu) Islands purchase -- and February 2013. Since then, exports to China have rebounded to almost pre-crisis levels. Consequently, Japan’s exports to China are once again on a higher growth trajectory than its exports to the rest of the world.

Similarly, local sales by Japanese affiliates in China, to both firms and consumers, are rebounding. The biggest example is car sales, which halved during the boycotts but are now above pre-boycott levels. Toyota is on track for a record year. Nissan, the largest Japanese automaker in China, doubled its sales since last November, and Honda has done the same. Then there are all the Chinese and foreign manufacturers who need Japanese equipment and parts for the products that they manufacture or assemble in China. About two-thirds of Japanese exports to China consist of such equipment and parts.

These figures seem promising. But provincial and local Chinese governments still have a reason to worry, namely about a slowdown in Japan’s Foreign Direct Investment (FDI) into China. In recent years, China has been upgrading its manufacturing sector from textiles to high-tech industry, largely thanks to foreign direct investment in Chinese facilities by multinationals. Japanese businesses have traditionally been the largest foreign investors in China. However, if the first three quarters of this year are any guide, Japanese FDI into China could fall by 36 percent from the record level set in 2012. To be sure, the fall comes after a surge in 2011 and 2012 that virtually doubled FDI from its 2010 level. So, although total FDI in 2013 seems set to be lower than the total last year, 2013 has, in fact, been the third-best year on record. At $6.5 billion, Japanese FDI in China in the first ten months of 2013 was slightly more than that from the EU and twice as much as that from the United States.

More important, it is unclear whether the decline in 2013 reflects a temporary lull or a more lasting change. Certainly, some companies are adopting a wait-and-see stance before committing new funds to China. And many are adopting a “China plus one” strategy of making sure that they fund facilities in at least one other Asian country besides China. But two-thirds of all sales made by Japanese affiliates are to customers inside China, and Japanese firms still need to be in China to service that market. Japanese experts expect Japanese investment to rebound, but are unsure whether it will grow as rapidly as it has in the past. The main political point is that Chinese companies and officials are worried enough to send delegations to Tokyo to woo more investment even as Beijing provokes Japan with the ADIZ declaration.

So far, Beijing has acquiesced to business and provincial leaders’ drive to better economic relations in spite of a hard-line security policy. But there are those in China who desire even more: that improved economic ties be used to help heal overall relations. Yang Bojiang, deputy director of the Institute of Japanese Studies at the Chinese Academy of Social Sciences, wrote in the Communist Party–owned China Daily, “If the China-Japan relationship breaks down, neither can afford to bear the strategic cost. To break through the stalemate in relations and push bilateral ties back onto a positive track, the key in the near term is to enhance cooperation, reduce confrontation, and properly handle the issues in bilateral relations.” China is definitely not of one mind on how to deal with Japan.

Japanese firms are watching very closely whether Abe’s visit to the Yasukuni Shrine will interrupt, or even temporarily reverse, the economic normalization. So far, there are no reports of any widespread Chinese boycotts on Japanese products, let alone anything like the vandalism and riots of 2012. There have been some calls for a boycott on Weibo, China’s equivalent of Twitter. A temporary drop in car sales and tourist visits to Japan would not be surprising and, if severe enough, could even prove to be the canary in the coal mine. But, unlike in 2012, the state media has not endorsed a harsh reaction. For example, on December 27, the Communist Party–affiliated Global Times ran an editorial calling for countermeasures but limited those to barring Japanese politicians who have visited Yasukuni from coming to China for five years. The next day it ran an editorial arguing against mass boycotts or even mass demonstrations. If the anti-Japan nationalism stoked by the Chinese regime leads to sufficient private actions, Beijing may have little choice but go along -- at least for a while. That’s what has happened in the past. But, so far at least, our Japanese sources see no sign of a repeat of 2012.

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