Near the beginning of his nine-day trip to Japan in late February, Chinese Vice-Premier Zhu Rongji drew 900 members of Japan's business elite to a speech at a posh Tokyo hotel. Speaking without notes for almost an hour, China's economic czar laid out the case for stronger commercial ties between the two countries. Not all of his listeners were convinced: After Zhu proclaimed that China had the best investment climate in the world, many in the audience snickered.
Zhu may have the last laugh. For years, many Japanese have been skeptical about doing business with their giant neighbor--even as Western companies caught China fever. Now, however, Japan's ties with China are expanding rapidly. Last year, bilateral trade grew by 31%, to $37.8 billion (chart), and Japan has become China's second-largest trading partner, after Hong Kong. Japanese consumers are buying more low-priced Chinese apparel than ever. And Japanese direct investment has soared. "Interest in China is growing extremely fast," says Kozue Hiraiwa, a China researcher at the Japan External Trade Organization.
ACE CARD? The implications will be felt in Washington. With the Clinton Administration pressuring Japan on trade and China on human rights, improved Sino-Japanese relations may give both countries a card to play against the Americans. "If China and Japan get strongly linked together, then the issue of what the U.S. does will be less and less important," says Virginie Maisonneuve, China portfolio manager for Batterymarch Financial Management in Boston.
As long as Beijing limited foreign investment primarily to export industries, the Japanese largely ignored China. But now that parts of the huge Chinese market are open to foreigners, the Japanese are paying attention. For instance, on Feb. 28, NEC Corp. said it plans to start producing computers for the Chinese market with a Shanghai partner this year, the first such venture for a Japanese company. In the first half of 1993, Japanese investment contracts grew in number by 153% from the same period in 1992. Their value was 44% higher, or $1.2 billion.
To be sure, Japan's direct-investment performance is still dwarfed by that of Hong Kong, Taiwan, and the U.S. Japan remains a distant fourth and, despite the recent surge in spending, isn't catching up. Practically none of its investments to date is major league, unlike those by such Western companies as Volkswagen and Chrysler Corp. But the Japanese don't seem worried. "The plate is getting bigger all the time," says Kei Yokobori, a senior deputy general manager at trader Mitsui & Co. "China's demand is unlimited."
WESTERN HEADSTART. Some Japanese remain cautious, suggesting that Western rivals are taking a large chance by minimizing the hazards of investing in China's overheated economy. "We can't accept a big risk that goes wrong," says Hironori Itazu, deputy general manager of overseas operations at Hitachi Ltd. Playing it safe, Hitachi recently invested a modest $12 million in a home air-conditioner joint venture in Shanghai. If China's economy stabilizes, Itazu says, Hitachi will be ready to pour in enough money to gain a 30% share of the air-conditioner market.
Concerns about economic stability have long driven Japan's carmakers away from China. That gave Western companies a headstart in producing cars and trucks there. However, the Japanese "are catching up rapidly," says Keith C. Donaldson, an analyst at Salomon Brothers Asia Ltd. in Tokyo. Suzuki Motor Corp. gets almost 10% of its revenues from China, and it will manufacture about 170,000 vehicles there within the next year. Last March, Nissan Motor Co. entered a joint venture to assemble pickup trucks in Henan Province.
Most Chinese can't afford cars. So Honda Motor Co. has succeeded by targeting the motorcycle market. Last year, Honda exported 300,000 cycles to China. That didn't come close to satisfying demand: Six companies in China churned out another 520,000 Hondas. This year, the total should exceed 750,000. The company hopes its established dealer and service network will eventually serve as a stepping-stone for Honda to sell cars.
Despite such moves, Japanese business leaders still are quick to point out the pitfalls of doing business in China. Topping their litany of woes is the unpredictable access to foreign exchange, which cramps their ability to purchase imported key components, pay expatriate salaries, and remit dividends overseas. "China's investment climate has certainly improved, but Zhu hasn't said anything about the foreign-exchange problem," complains Akiko Mase, a deputy general manager at the Japan-China Association on Economy & Trade.
Smaller export-oriented companies also complain about high real estate and labor costs in popular areas such as Shanghai. That won't deter Japan's heavy hitters, which value China for its domestic market rather than its potential as an export platform. As trade tensions with the U.S. worsen, more Japanese exporters will be targeting the giant economy in their backyard.