The new leadership in China may need to catch an avalanche of popular unrest that continues to snowball in the wake of the anti-Japanese demonstrations. Protests in China aimed at Japanese investment have strained diplomatic relations. Yet, most worrying, may be the long-term economic rift between the two countries as well as China’s international reputation as a secure economic investment.
There have been a number of provocations, albeit most civilian in nature, between China and Japan in recent months. The latest have been Chinese military vessels continuously passing the contiguous zone around Okinawa. While the maneuver was legal under international law it nevertheless proved sensitive and potentially volatile in the light of the tension around the Senkaku/Diaoyu islands conflict.
Economic tensions have also flared up. The refusal of China’s Central Bank governor and finance minister, Xie Xuren, to attend the IMF/World Bank meeting in Tokyo was one of the latest indications that economic relations between China and Japan are souring. Political relations have been relatively, yet manageably, cold for a long time. Worrying is that economic relations have caught the same influenza hovering over the East China Sea. Even if a militarized conflict remains unlikely, the casualty from rising tensions will be the economy.
There is much to lose for both sides if an economic rift ensues. The recent months of tensions have witnessed anti-Japanese riots in China, the destruction of Japanese property and a Chinese boycott of Japanese products. Notably, there is a willingness amongst many Chinese leaders and leading organizations to stay the course, and not quell the unrest, despite the very real threat to the Chinese economic growth.
At stake is Sino-Japanese trade, worth over $340 billion in 2011. Despite the cold political climate foreign direct investments in China from Japan increased by more than 50% from 2010 to 2011. While such an increase appears unlikely to happen again in the current climate, so far there has been no large withdrawal of investment or trade.
With this in mind it is apparent that protests in China will also hurt Chinese companies, as the boycotts will backfire on Chinese assembly workers, dealers and the Chinese suppliers that export to Japan but also provides the Chinese market with sought after goods. There are millions of workers that are directly working for Japanese companies and many more that are indirectly dependent on continued good relations. Further, long-term damage to China’s image and its climate for investment could fester and slow growth in an already fragile economy.
The question that needs to be asked here is why is the Chinese leadership willing to allow such an economic hara-kiri? The answer: they have little choice. China is divided into several factions that are more or less hardline towards Japan. It is not so much a question of nationalism but rather the reluctance among more radical, and influential, segments of the population to compromise with Japan. China, as these groups understand it, has returned as a regional leader, a position it deserves after strong growth. Why should it then kowtow to Japan? There is a growing perception that China should take a more prominent role and regain its national prestige. Compromises with Japan are particularly hard to stomach due to a history of Japanese aggression.
It is not so much the government that is fomenting tension with Japan, as this will in fact create more instability and decrease potential for economic growth, but rather the leadership is reacting to elements that are well represented among the Internet community and to some degree in the policy community. Domestic pressure for more forceful action toward Japan is something that the leadership cannot ignore despite the economic costs, as the political domestic costs could potentially be higher.
The announcement of the next leadership group at the 18th Party Congress is fast approaching, scheduled for Nov 8. It is thus difficult for any leader to upset the faction that is more radical (and vocal) and less willing to compromise, this faction views the economic aspects as secondary and the political aspects tend to be more important. In fact, some even would harbor the flawed perception that Japan and the outside world “owes” China continued support for its economic growth. For any leader to be viewed as accommodating toward Japan would touch a nerve in China, with unpredictable consequences. Yet if growth continues at current rates it will be increasingly necessary to deal with these elements in China, as continued tension will hurt China’s economy long-term.
Following current trends in China, political debate and foreign policy are increasingly uncompromising, not least toward Japan. This is not due to the political logic in following this trend; on the contrary, it rather shows the growing input of greater segments of the Chinese society. Greater diversity and open communication should be encouraged but the reality that the vocal, young and angry web-enabled society is more uncompromising and willing to sacrifice than the political leadership has been before. The silent majority is less radical and much more interested in long-term growth but these groups are not heard in today’s debate as much as the more uncompromising groups. As a result, China opening up to greater input from civil society could be a double-edged sword in a community waiting for a long overdue return to its regional (and future international) role. What is certain is that the new leadership has its plate full before it has even sat at the table.© Japan Today