China’s President Xi Jinping recently attended the G-20 meetings. In San Francisco, Mr. Xi dined with American business leaders, wooing investments into China. At least on the surface, Mr, Xi has come to understand the importance of foreign direct investments to the economy of China. There is, however, a more than reasonable chance that Mr. Xi is simply paying lip service to American executives, and they are skeptical if they are really welcome in China. It is hard to believe that the Chinese President has made a near 180 degrees turn from all the hostilities that he displayed to the private sector in China, causing monumental damages both in terms of wealth destruction and hammering down entrepreneurs’ animal spirits. On top of brutalizing the stock market in the name of ‘common prosperity’, the Chinese Communist Party keeps alienating foreign businesses with ever-shifting regulations toward greater control by the government. If that’s not enough, risks of sudden detention due to tightened security laws keep foreign executives in China up at night.’
Old habits die hard. ‘Damn foreign capital’ may be what really lies in the mind of Mr. Xi. He may think that foreign multi-national corporations have to kowtow to the CCP for the privilege of doing business in China, which is the world’s second largest economy and still grows faster than most others. To Mr. Xi, we are the Middle Kingdom and have the right to decide who is allowed to do business on our soil.
Japan has been notoriously anti-foreign capital, or ‘gaishi’, fending off intrusion of big ‘bad’ multi-national corporations into the country. In its boom after the war, the country rebuilt the economy with little assistance from gaishi, meticulously allocating scarce little domestic capital into areas that the government found promising, often at the expense of well-being of the household sector. The sectors the government designated was export-oriented to earn foreign exchange, beginning with textiles, later expanded into light electronics products.
Japan had an immense luck of having been assisted by geopolitical situations in the mid-20th century. The Korean War had erupted in 1950, massively boosting demand for a wide variety of products to be purchased by the U.S. armed forces. In Europe, the Cold War intensified, giving rise to rearmament of West Germany and the birth of the North Atlantic Treaty Organization (NATO). In the Far East, a security pact was signed between the U.S. and Japan. Reconstruction of the Japanese economy was a U.S. foreign policy priority after China had turned red and the Korean War broke out. That meant that the U.S. didn’t say much about Japan’s economic policy, allowing Japan to hold onto a fixed exchange rate of the yen at an undervalued rate of 360 to the dollar, tolerating bilateral trade deficits for much of the period of Japan’s supernormal growth in the 1950s and the 1960s. Only in the late 1960s, the U.S. began to raise its voice against its ballooning bilateral trade deficits and the exchange rate. Japan was fortunate.
In contrast to Japan’s path to the second largest economy, China redeveloped its economy with substantial inflows of foreign capital, after Vice Premier Deng Xiaoping rose to the helm in the late 1970s. Vast amount of western capital was eager to enter a huge economy whose potential looked almost limitless. Though foreign capital was required to enter China in a joint venture with local partners, China strategy has been a top priority for western multi-national corporations in general until relatively recently. This trend has accelerated in the early years of the 21st century with China’s entry into the World Trade Organization (WTO). Almost everyone wanted to grab opportunities in China. It is no wonder that such developments made President Xi Jinping think that the prerogative to choose who is conferred a privilege of doing business in China is in his hands. He probably is not fully aware that China faces a different world 20 years after China’s WTO entry. In October, China’s basic balance has turned slightly negative, after decades of receiving a wave of foreign capital into the country. MNCs are much less interested in China than before and are slowly shifting their capital to elsewhere in their realigned global supply chains. Private equity investments into China have also slowed down considerably after Xi Jinping’s tech crackdown. In addition, there is no shortage of wealthy Chinese people who are eyeing every opportunity to get their money out of the country. Days of China’s capital abundance are going.
On the other hand, Japan didn’t suffer foreign capital’s departure upon the bust of the historic bubble. There was not much to lose, to begin with, since gaishi had been denied its entry into Japan for a long time, often by non-tariff barriers such as business practices and regulations that were harder to conquer than straightforward tariffs. Never mind that Corporate Japan went on a buying spree of overseas assets during its economic boom. Sony’s 1989 purchase of Columbia Pictures caused some anger in the U.S., but transactions the other way around by foreign capital into Japan still weren’t welcome. In recent years Japan has finally woken up to a world it lives in the 21st century. Politicians and bureaucrats have at last realized that their country is not capable of doing everything on their own. Japan led the world in semiconductor manufacturing until the end of the 1980s, especially in DRAMs. Japanese makers then got totally behind South Korean and Taiwanese competitors. In order not to become further behind in the 2020s chip war, the Japanese government has rolled the red carpet and wooed TSMC to produce chips on the Japanese soil. There is less concern of being taken over by gaishi than before in the face of widely held understanding about where Japan stands. The U.S. is doing this on a grander scale, too. So why not? In addition, Japanese consumers have been embracing products and services offered by American tech giants without hesitations. While there are local competitors that try to capture a slice in market, they are no match for Apple, Amazon, Google, Microsoft, etc. People drive to shop at Costco stores though they still drive predominantly Japanese cars. Japan’s allergy to ‘invasion’ of foreign capital is receding at last though the Japanese public still remains sensitive to foreign capital’s attempt to take over established Japanese companies.
About the author: Mr. Suzuki is a retired investment banker based in Tokyo, Japan.