Tensions take toll on China-Japan FDI

Last year's decline in China's bilateral investment with Japan is a sign that companies in Asia's top two economies are concerned about the impact of prolonged territorial disputes and strained ties, analysts said.

Japan's direct investment in China fell 4.28 percent to $7.06 billion, which represented about 6 percent of China's overall foreign direct investment, the Ministry of Commerce said on Thursday.

China's overall FDI inflows rose 5.25 percent in 2013, compared with a 3.7 percent slide in 2012.

In 2012, the country's FDI inflows from Japan surged 16.3 percent to $7.38 billion — a pace much faster than the FDI inflows from the United States or the European Union.

"Political tension was the major reason for the slide in Japan's investment in China last year. After the islands dispute, Japanese enterprises were worried about increased risks in China and shifted some of their plants to Southeast Asia," said Yao Haitian, a researcher at the Institute of Japanese Studies, which is under the Chinese Academy of Social Sciences.

In September 2012, Japan's "purchase" of the Diaoyu Islands strained its ties with China. More recently, Japanese Prime Minister Shinzo Abe's visit to a controversial Tokyo war shrine sent relations into a deep freeze.

"The impact of political tension will persist in the near future as confrontations between the two countries are expected to increase this year. This will weaken the willingness of Japanese companies to increase investment," Yao said.

"What's more, Japanese enterprises were concerned about the slowdown in China's economic growth last year. Costs in China, especially wages, rose quickly in recent years, which prompted some labor-intensive Japanese enterprises to shift their plants to emerging economies," Yao said.

Japanese investors were early movers in the Chinese market decades ago and played an important role in China's rise to the world's second-largest economy.

"Japanese enterprises will not abandon the fast-expanding Chinese market, and companies aiming at the huge Chinese market are likely to increase their investment," said Song Zhiyong, a researcher at the Chinese Academy of International Trade and Economic Cooperation, a think tank of the Commerce Ministry.

"Labor-intensive ones may shift their business from China owing to fast-rising wage costs."

He added that this year, Japan's direct investment in China is expected to be the same as last year or perhaps slightly larger.

China's outward direct investment in Japan plunged 23.5 percent in 2013, compared with the 16.8 percent increase of China's overall ODI last year, according to the ministry.

In 2012, China's direct investment in Japan jumped 47.8 percent, faster than the 28.6 percent growth of the country's total ODI.

"Chinese direct investment is very small, and it's easy to have big fluctuations from just one or two projects," Yao said.

The depreciation of the yen also curbed Chinese enterprises' spending in Japan, where labor costs are very high. Chinese companies are keen to obtain management expertise through investment in Japan, Song added.

"The Chinese government attached great importance to the islands dispute and Chinese companies are concerned about the pressure and operational risks before investing in Japan," Song said.

"Chinese spending in Japan will remain at a low level, while China will retain its attractiveness to Japanese companies."