Anti-Japan Protests Raise Risks for China’s Leadership Shift

Anti-Japan protesters march with a poster of former Chinese leader Mao Zedong during a protest over the Diaoyu islands issue, known as the Senkaku islands in Japan, in the southern Chinese city of Shenzhen on September 18, 2012. Photograph: Peter Parks/AFP/GettyImages Close

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Anti-Japan protesters march with a poster of former Chinese leader Mao Zedong during a protest over the Diaoyu islands issue, known as the Senkaku islands in Japan, in the southern Chinese city of Shenzhen on September 18, 2012. Photograph: Peter Parks/AFP/GettyImages

Demonstrations across China against Japanese businesses and property pose a growing risk for the country’s leaders as the economy slows and the Communist Party prepares for a once-a-decade transition of power.

With growth in danger of reaching a 22-year low, ousted Politburo member Bo Xilai’s case still pending public resolution and the biggest diplomatic spat with Japan since 2005, any uncontrolled protests risk undermining authority before the handover. Thousands waved flags and brandished Mao Zedong portraits yesterday at Japanese diplomatic posts in Beijing and Shanghai in a sign of public fury over a territorial dispute.

“They do not want things to get out of control; there will be more attempts to contain the protests,” said Joseph Cheng, a political science professor at the City University of Hong Kong. The portraits of Mao “are implicit criticisms of the present leadership,” he said. Bo Xilai championed resurrection of Mao slogans before his downfall as Chongqing party boss this year.

Toyota Motor Corp. (7203), Sony Corp. (6758) and Fast Retailing Co. were among companies that halted operations in China after protesters attacked Japanese cars and shops. The Shanghai Composite Index (SHCOMP) of stocks recorded its biggest back-to-back loss since March.

China regards organizations not sanctioned by the government as illegal. Political protests, including those held by students in Tiananmen Square in 1989 and by practitioners of the Falun Gong spiritual group a decade later, have been forcibly suppressed.

Orchestration Undermined

The smooth orchestration of China’s leadership handover has been undermined by the downfall of Bo, whose wife was convicted last month of murdering a British businessman. Wang Lijun, the former Chongqing police chief whose flight to an American diplomatic office in February triggered the country’s biggest political crisis in two decades, yesterday confessed to defecting after a two-day trial.

“What the protests underscore is the level of frustration within society about many things: the slowing down of economic growth, the job market for young graduates,” Jean-Pierre Cabestan, head of the department of government and international studies at Hong Kong Baptist University, said in a telephone interview. “And you have this opaque political system with leaders jockeying for position behind the curtain.”

Xi Jinping, President Hu Jintao’s heir apparent, disappeared from view for two weeks before re-emerging without explanation on Sept. 15. The dearth of information prompted speculation about his health and who else might oversee an economy struggling to overcome a widening wealth gap.

Ambassador’s Car

At the Japanese embassy in Beijing, protesters threw bottles and branches at the building’s walls, which were spattered with eggs and paint. In Shanghai, protesters marched through the streets waving Chinese flags and shouting slogans saying “Down With the Japanese.”

Demonstrators in the capital caused minor damage to the official vehicle of U.S. Ambassador Gary Locke yesterday as it was about to enter the embassy grounds, spokesman Nolan Barkhouse said. Some of the people had Chinese flags and looked to be leaving protests taking place at the nearby Japanese embassy, said a U.S. official who wasn’t authorized to speak publicly on the matter. Locke was in the car at the time of the incident, the official said.

The recent demonstrations escalated after Japan last week purchased the islands, called Diaoyu in Chinese and Senkaku in Japanese, from a private Japanese owner. The islands have been under Japanese administrative control since 1895.

Japanese Occupation

Some demonstrators said they were also protesting Japan’s World War II occupation. China Central Television observed a moment of silence yesterday to commemorate the 81st anniversary of the Manchurian Incident, a staged attack on a Japanese railway that was used as an excuse to start an invasion that would see Japan take control of much of China.

Japanese Prime Minister Yoshihiko Noda last night said the anniversary was one reason for the demonstrations and said both sides must work to repair ties.

“If our relationship remains strained for a long period, it will be harmful not only to our two countries but to the region and the world economy,” he said on TBS Television. “We should keep a cool head, but take a firm line. It is important to at least talk, exchange information and communicate.”

The worst bilateral diplomatic crisis since 2005 is endangering a trade relationship that has tripled in the past decade to more than $340 billion. Japanese retailers in China closed their doors and covered up their logos as protests spread to dozens of cities.

Hot and Cold

The tensions complicate efforts to fortify growth in each country as Europe’s debt crisis saps demand for exports. China was the largest market for Japanese exports in 2011, while Japan was the fourth-largest market for Chinese exports.

“Sino-Japan relations are often described as hot in trade but cold in politics, but now even the trade relationship is getting cold,” said Zhang Jifeng, a researcher with the Institute of Japanese Studies at the Chinese Academy of Social Sciences in Beijing. “It’s hard to tell which side would suffer more from the cooling trade, but it’s sure that the pain will be deep for both.”

Shares of Fast Retailing Co. (9983), owner of the Uniqlo clothing brand, fell the most in three months in Tokyo trading after the company closed 42 stores in China. Seven & I Holdings Co. (3382) closed 211 stores and Aeon Jusco shut 30 outlets.

Prevent Harm

“If this dispute doesn’t end soon, it could be a very serious problem for Japan, especially when global demand is slowing,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. “Japan would also diversify foreign direct investment away from China to China’s neighbors.”

The Japanese government yesterday urged China to “take all measures to prevent any further harm to Japanese citizens or companies,” Chief Cabinet Secretary Osamu Fujimura told reporters in Tokyo.

Japan “totally caused” the current crisis and should “take responsibility,” Chinese Defense Minister Liang Guanglie told reporters in Beijing yesterday in a joint appearance with U.S. Defense Secretary Leon Panetta. “We will very closely watch the evolution with regards to this dispute and we reserve the right for further actions.”

A Chinese fishing ban in waters surrounding the islands ended Sept. 16, and Chinese and Japanese media aired footage of fishing vessels heading out to sea. The state-run China News Service reported on Sept. 17 that 1,000 fishing boats typically go to the region and the government would send more vessels than in recent years. Hong Kong-based activists may go to the region as early as today, the Apple Daily newspaper reported.

Fishing Boats

Fujimura said that while 10 Chinese patrol boats have been spotted in waters adjacent to Japan’s territory, Japan has no information about the fishing boats. He confirmed yesterday that two Japanese temporarily landed on one of the islands. At least two Chinese vessels entered Japan’s waters, NHK Television said last night, citing the Coast Guard.

“Considering that Japanese companies make important contributions to the Chinese economy and employment, people should look at the broader picture and act calmly,” Fujimura said.

To contact Bloomberg News staff for this story: Henry Sanderson in Beijing at hsanderson@bloomberg.net; Daryl Loo in Beijing at dloo7@bloomberg.net

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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