China’s state-led economy could put Japan firms in tight spot

As Chinese leader Xi Jinping has increasingly endorsed the country’s unique state-run market economy as he cemented his power at the important Communist Party Congress that just ended, foreign companies, including Japanese firms, in China may face further challenges, such as Fear of technology leaks.

Beijing’s strict “zero-COVID” policy, its push for greater self-sufficiency in manufacturing amid rivalry with the United States, and its promotion of “shared prosperity” that could result in a forced narrowing of the income gap have all contributed to rising insecurity contributed in the deal with China, critics say.

Chinese President Xi Jinping (front row, 5th from left) raises his hand during the closing ceremony of the 20th National Congress of the Chinese Communist Party at the Great Hall of the People in Beijing, China, Oct. 22, 2022. (kyodo)

In a working report for the twice-decade congress, where Xi secured an unprecedented third five-year term as party general secretary, he repeatedly stressed the importance of seeking a “Chinese path to modernization” distinct from Western nations , and touted previous achievements , including radical antivirus measures.

During the week-long congress, China abruptly postponed its release of July-September gross domestic product data without specifying a new release date, fueling speculation that the delay was driven by political considerations, as lackluster results could damage confidence in Xi’s leadership.

“If the GDP release has been postponed because of bad numbers, it’s an outrageous act that completely ignores market mechanisms,” said Toru Nishihama, chief economist at the Dai-ichi Life Research Institute in Tokyo.

As Xi defended tough measures to curb coronavirus infections, which include imposing lockdowns on cities where outbreaks are occurring, in his speech to Congress, Nishihama said it had become clear that Beijing “will not prioritize the economy ‘ and that the nation’s adherence to the policy was ‘a risk factor for the global economy.’

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The economist pointed out that a two-month COVID lockdown in Shanghai, a trade and financial hub of the world’s second largest economy, earlier this year highlighted the risk of a disruption to the country’s supply chain amid a major virus outbreak.

China’s economic growth has slowed as consumer spending and real estate investment suffer from the zero-COVID policy, making it difficult to meet the target of around 5.5 percent expansion for 2022. The International Monetary Fund forecast earlier this month that China will grow by 3.2 percent this year.

There are also growing concerns among Japanese companies and other overseas companies that they may be forced to transfer technology to China under its policy of encouraging domestic production of high-tech products and excluding imported items from government procurement.

The Japan Chamber of Commerce and Industry in China has urged the Chinese government not to “treat foreign companies discriminatory” and warned against its attempt to acquire advanced technologies by pressuring foreign companies to move production to China and attract talent poach.

High-tech products include multifunction printers, of which Japanese manufacturers have a large share of the world market, and medical equipment.

Under the shared prosperity slogan aimed at correcting economic inequality in the world’s most populous nation of 1.4 billion people, Beijing has tightened restrictions on the country’s lucrative sectors, such as IT and finance.

The policy has raised fears that innovation in China’s high-tech industries could be hampered.

“Although China has become a leading player in the IT and digital sectors with the rapid spread of mobile payment transactions, such a growth engine lost momentum due to stricter regulations,” lamented a senior official at an electronics manufacturer.

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Richard McGregor, a senior fellow on East Asia at Australia’s Lowy Institute, said in an online presentation that Xi had a “much better grasp of politics than economics” and “objective reasons” for attacking some sectors.

McGregor said the Chinese leader had “little sympathy for the markets” but warned that “clumsy policy interventions could come at higher costs”. Xi thinks “the economy is a servant of state power. As long as that’s the case, you’re going to have a lot of bumps along the way,” he added.

At a Sunday press event to unveil his new leadership team, Xi said China will “remain steadfast in deepening reform and opening up across the board,” adding that Beijing will “open its door ever wider” as it “is not isolating itself.” of China can develop”. World.”

Members of the new Politburo Standing Committee under Chinese President Xi Jinping (C) pose during a news conference at the Great Hall of the People October 23, 2022, a day after the conclusion of the 20th National Congress of the Chinese Communist Party. (Kyodo) ==Kyodo

The remarks came at a time when caution has grown about “decoupling” in world markets amid US attempts to protect industries deemed essential to national security, including semiconductors.

Nishihama said China will maintain its opening-up policy by strengthening cooperation with countries that support its stance and that further decoupling of the global economy is “inevitable”.

China has deepened ties with many developing countries through its signature “Belt and Road” infrastructure initiative, which spans more than 140 countries. McGregor said Beijing may be “isolated” in the Anglosphere and other Western countries, but that’s “not really the case” globally.

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Mariko Togashi, research fellow on Japanese security and defense policy at the International Institute for Strategic Studies, told a recent news conference in Tokyo that she believes full decoupling is impossible.

The United States recently tightened export controls to China on high-end chips that could be used to manufacture advanced military systems, but it’s “unlikely that Japan will follow exactly the same level of that restriction given its varying degrees of economic risk,” she said.

Echoing Togashi’s view, Nishihama said Japan and China are economically “inseparable” because Japan must enter its neighbor’s huge market in the face of a population decline, and Tokyo cannot take measures as strict as Washington to ensure its economic security.

Speaking to Congress, Xi vowed to make China’s supply chains more resilient and secure.

Yusaku Nishimura, a professor at the University of International Business and Economics in Beijing, said China’s supply chains are integrated into global production systems, so building such chains only between China and its allies is impossible.

“Globally, building supply chains without China would result in increased costs” for doing business, he said.

Regarding Japanese companies operating in China, Nishihama said they may face “high hurdles” with more state control under continued Xi leadership and US decoupling attempts, but they should be ready to meet the challenges , if they cannot find alternative bases elsewhere.

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