When China hates Japan

Japan-China row is escalating year after year. Notwithstanding Japanese Prime Minister Shinzo Abe’s remorseful statement on the 70th Anniversary of World War in August, 2015 , warming of Japan and China relation is a far cry. Tokyo might have given a thumping applause to Prime Minister Shinzo Abe’s statement. But the statement of remorse was viewed with skepticism in China. Alongside, Japan’s new security legislation for collective self defence added fuel to the Japan and China row. 

Paradoxically, Japan-China row is likely to unleash opportunity to India to attract foreign investment – crucial for Make in India. The opportunity will stem from Japan looking for alternative destination for overseas investment and China’s inching for betterment of economic relation with India after Narendra Modi became the Prime Minister.

Japan-China conflict impaired the economic relation between the two countries. Japanese investment in China – the second biggest overseas destination – slipped to almost half over the period of three years. Close on the heels, trade between the two countries fell drastically. Japan’s export to China slipped by over 10 percent and import from China fell by 3 percent during the three years period. 

The scope for enlarging investment from Japan can be derived from the diversion of Japanese investment in China. Stirred by the row, Japanese investment diverted from China to other Asian countries. Japanese investment perked up in Singapore and Hong Kong. Over the period of three years, while Japanese investment in China plunged from US $ 13, 479 million in 2012 to US$ 6,741 million in 2014, investment in Singapore zoomed from US $ 1,566 million to US $ 7,580 million and in Hong Kong increased from US$ 2,362 million to US $ 2,738 million during the same period. There was some drop in Japanese investment in India. But the tempo of Japanese investment in India remained high. India continues to be one of the important destinations for Japanese investment. Japanese intention has sparked with Prime Minister Narendra Modi’s strong vision for Make in India and ease of doing business.

In contrary, even though Chinese investment in India is small, it is forecasted to be the next bigger foreign investor in India. With the advent of Modi’s initiative, China was keen to invest in India. There was a spurt in Chinese investment in India. It increased by 300 percent during BJP Government – from US $ 123 Million in 2013-14 to US $ 494.75 million in 2014-15. Chinese penchant towards investment in India is on the line of China’s changing role in the global strategy. China turns big overseas investor than receiver of foreign investment. 

Given the downturn in the high GDP growth, owing to global export slump, China initiated a Go Out policy under the leadership of President Xi Jinping. China emerged the third biggest overseas investor in the world. From a paltry overseas investment of US $ 3 billion in 2005, Chinese overseas investment increased to US $ 50 billion in 2010 and further to US $ 90 billion in 2013. Paradoxically, USA was the biggest receiver of Chinese investment, despite talk of security threat. Chinese investment gained prominence in South East Asia including Myanmar, Malaysia and Thailand. 

Hitherto, Chinese investment in India was viewed with suspicion. India-China war in 1962 and the Chinese’s support to Pakistan botched the Chinese investment with security threat. However, the situation changed after Narendra Modi became the Prime Minister. Modi’s inclination towards China began when he was Chief Minister of Gujarat. He visited China to court Chinese investment, despite engulfed by cyber threat. Under Modi’s Prime Ministership, Indian Commerce Minister Nirmala Sitharaman signed MOUs with Chinese government for setting up four industrial parks in India with Chinese investment. In India, Chinese investment can serve duel purpose. One, it can act as antidote to the widening trade deficit between Indian and China. Second, it can gear up manufacturing facilities in India and make India the manufacturing hub for the world. With the gushing flow of Chinese cheap goods and project capitals in Indian market, trade deficit increased an alarming high. At present, more than one-third of India’s total trade deficit is accounted by Chinese exports to India. According to the economic doctrine of foreign investment, FDI brings capital, build-up strong platform for manufacturing and helps in reducing imports, thereby pruning trade deficit. 

Japanese vie for Modi’s heart began with Japanese looking for alternative destinations for investment, after China turned sore. Japanese Prime Minster Shinzo Abe’s ambitious target for doubling Japanese investment within 5 years and his commitment for US $ 35 billion aid for different infrastructure projects for 5 years, will enrich India with a manufacturing hub in the world. China+1 strategy gained momentum in the Japanese investment diversion from China. Owing to protracted political conflict and China loosing sheen as low manufacturing hub in the world, China +1 strategy emerged an insulation for the Japanese investment in China.

India can cut a pie in the China+1 strategy of Japanese investment. India stands for a gainful diversification to hedge Japanese investment in China. In 2014-15, FDI increased by 27 percent. The growth perked up foreign investors’ confidence in the country. The factors, which bolstered FDI confidence, were strong economic fundamentals, such as high GDP growth, climb down in the inflation, a growth steering consumption, liberal and forward looking of the new government towards foreign investment. India’s growing tie with Africa can be a new attraction for Japanese investors in India. So far , Japan failed to make a dent in Africa’s automobile market. The Japanese foray in Indian automobile industry made a breakthrough in exports of India-made Japanese cars in South Africa. Japanese automobile companies in India are making beeline to export to Africa. 

In summing up, the Japan-China row is likely to prove boon to India. Japanese investment diversion and India’s reinvention of China as potential investor are expected to impart a positive impact on Make in India programme.