China and Japan witnessed a remarkable growth in bilateral trade and investment in 2004, despite a few negative political factors. Experts claim 2005 is vital for economic relations between the two countries.

Trade

The trade volume between China and Japan amounted to US$167.9 billion in 2004, reflecting an increase of 25.7 per cent compared with the previous year.

China's exports to Japan reached US$73.5 billion, an increase of 23.7 per cent, while the country's imports from Japan stood at US$94.4 billion, up 27.3 per cent year on year, placing China in a trade deficit with Japan.

China, for the first time, replaced the United States to become Japan's No 1 trade partner.

On the contrary, exceeded by the European Union (EU) and the United Sates, Japan lost the position of the largest trade partner of China, which it had maintained for 11 years.

Exports of six categories accounted for over 75 per cent of China's total exports to Japan.

They included machinery and electrical equipment, textiles, base metal and its products, optical and medical equipment, food, drinks and tobacco, and metal products.

The country's imports from Japan also mainly covered six categories, including base metal, optical and medical equipment, automobile and aviation components, crude textile materials and products concerning the chemical industry.

Investment

Many Japanese companies have increased their investments in China in the past three years, according to a report published by the Chinese Academy of Foreign Trade and Economic Co-operation, the think tank for the Ministry of Commerce.

It said nine major Japanese companies have attached more importance to the Chinese market, not only as a manufacturing centre but also a site for research and development.

But in 2004, Japan was replaced by the Republic of Korea (ROK) for the first time in foreign direct investment (FDI) to China, dropping from the third to the fourth investor of China.

Japan's FDI to China totalled US$5.45 billion in 2004 while the ROK's FDI to China reached US$6.25 billion.

Experts contributed this slide in rank to the recovery of the Japanese domestic economy.

According to calculations from the Organization for Economic Co-operation and Development (OECD), the Japanese economy is enjoying its best growth era since the 1990's.

Japan's domestic economic development kept investment from flowing into China last year, said Zhang Shuying, a research fellow with the Chinese Academy of Social Sciences.

"More Japanese enterprises poured their money in their homeland last year because people prefer a familiar market to invest in, when other conditions are the same," she said.

Insiders agree that China would remain one of the magnets to most Japanese investors particularly over the long run.

China will top the investment destinations of 91 per cent of Japanese enterprises in the coming three to 10 years, a survey conducted by the Japan Bank for International Co-operation said.

Prospects for 2005

Bilateral trade is also predicted to climb higher in 2005, as the two economies are complementary.

"Chinese companies are competitive in their processing capacity, and Japanese enterprises have the intellectual property rights (IPR) and know-how," Zhang said.

However, the growth pace of bilateral trade may not be as fast as the past two decades, as the current fundamental figure was high and Japan was confined by its geographic conditions, population and natural resources.

IPR trade, particularly patent trade, is expected to take a large share in Sino-Japanese trade.

Experts warn that Chinese enterprises should improve the quality and added-value of their exports to Japan.

However, experts also remind people to be cautious about issues beyond the encouraging figures.

The trade growth rate between China and Japan was lower than that between China and its other trade partners, such as the EU, the United States and the Association of Southeast Asian Nations, said Xu Changwen, a scholar with the Chinese Academy of International Trade and Economic Co-operation under the Ministry of Commerce.

Xu said China's trade with Japan rose around 20 per cent annually while the country's trade with other major trade partners increased over 30 per cent each year.

Free trade agreements

Both China and Japan are active participants in negotiations for free trade agreements (FTA) with surrounding countries.

However, China ranks low among Japan's candidate countries for FTA talks.

"The Japanese Government should move forward to improve FTA talks with China," Zhang said. "Because the trade between China and Japan contributes a great deal to Japan's economic growth."

Xu echoed Zhang by saying that Japan should have a long term view to establish a FTA with China to keep the growth of bilateral trade to benefit both sides.

(China Daily March 7, 2005)