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Global Economics

With Tensions Rising, Japanese Investment in China Plummets

Another consequence of the worsening Sino-Japanese relations: Japanese investment into China dropped by nearly half in the first six month of 2014, according to a new report by China’s Ministry of Commerce. As recently a 2012, Japanese investment posted growth of 16.3 percent, reaching $7.28 billion. The decline actually started last year, with a 4.3 percent drop.

Zhang Jifeng, director of the Japanese economy department in the Chinese Academy of Social Sciences, told the China Daily that Japan’s entrepreneurs are “waiting and watching.” He added: ”They’re profoundly aware of the connection between the political climate and their commercial performance [in China]. They don’t want to put their assets at risk.”

China and Japan are in a dispute over the ownership of the uninhabited Diaoyu Islands in the East China Sea. Japanese Prime Minister Shinzo Abe further angered Beijing in December when he visited Tokyo’s Yasukuni shrine, a temple that honors Japanese soldiers but also its war criminals. Earlier this month Japan’s cabinet passed a resolution reinterpreting its pacifist constitution so its military can defend its allies.

On July 7, the anniversary Beijing marks as the beginning of its resistance against Japan’s occupation of China during World War II, President Xi Jinping attacked its neighbor for misrepresenting its wartime aggression. “Anyone who intends to deny, distort, or beautify history will not find agreement among Chinese people and people of all other countries,” Xi said in a nationally televised speech, as reported by the official Xinhua News Agency.

“It is impossible for two major powers to forge a relationship that solely consists of economic contacts. [Problems] in the political arena definitely will trigger a spillover effect in the economic domain. It’s just a matter of time,” Jin Baisong, an expert at the Chinese Academy of International Trade & Economic Cooperation, said in an interview with China Daily.

Investment from the U.S. fell 4.6 percent, while that from the European Union was down 11.2 percent. By contrast, investment from South Korea and the U.K. increased 45.6 percent and 76.4 percent, respectively. Total foreign direct investment was up 2.2 percent, to $63.33 billion.

“In the near future, China’s FDI inflow will probably enter a new phase marked by restructuring and slow growth,” said Shen Danyang, a spokesman for the Ministry of Commerce. “Foreign investment centering on the Chinese market offers bright prospects following the opening of the service sector, although foreign investment oriented toward exports and manufacturing will further decline.”

Investment in services rose 14.8 percent in June and accounted for 56 percent of the total; manufacturing fell 13.9 percent and accounted for 36 percent of the total. Investment in agriculture, meanwhile, amounts to a tiny, and shrinking, 1 percent.

Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief. Follow him on Twitter @dtiffroberts.

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