Can China deliver on Asian economy?

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Financial markets are focusing on China's moderating economic growth and on its ability to manage compositional changes of its aggregate demand and alleged excesses in some sectors that may have benefited from administered credit flows.

Beijing's assurances that these problems are being addressed are registered, but markets continue to doubt positive policy outcomes, despite indicators showing that policies are moving activity and structural changes in the right direction. These doubts persist even after a 60 percent increase of Chinese equity prices in the course of last year.

Broader market trends in Asia are also missed because this fastest growing segment of the world economy – and by far the world's largest capital exporter – is incorrectly seen as being entirely dominated by external economic and financial events.

All this, in my view, stems from improper attention being paid to intra-Asian economic relations, where China, Japan, India and South Korea give the region an increasing influence in shaping the global business cycle and international capital flows.

Ready to make up and do business

China and Japan – the second- and the third-largest economies in the world – could soon turn the page and enter a more constructive relationship. Their slowly thawing tensions are Asia's most important political and economic development to watch in the months ahead.

The stakes for Japan could hardly be higher. The recessionary relapse of the Japanese economy indicates that the monetary avalanche cannot move out of the way Japan's deeply entrenched structural obstacles to growth and provide a shortcut to a banzai economy. Japan may have to pay more attention to its tried and tested competitive strengths.

In that context, a restoration of Japan's strong trade and investment ties with China may well be the missing piece that could help to set the economy on a steady and sustainable growth path. A resumption of growth would help Tokyo to consolidate its public finances and to conduct vitally needed reforms without undue political and social strains.

Stronger exports to China, for example, would raise capacity utilization rates in Japan's manufacturing sector, which represents one-fifth of the economy. That would trigger capital outlays, employment growth, rising incomes and stronger household spending, generating a typical Japanese export-led recovery.

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Sadly, not much of that is happening at the moment. In the first 11 months of last year, Japanese exports to China fell 1.3 percent from the year earlier. With exports to China accounting for about 20 percent of Japan's total sales abroad, it is not surprising that the growth of Japanese business investments virtually ground to a halt during the first three quarters of last year.

Equally worrying are Japan's dwindling direct investments in China. In the first nine months of last year, Japanese companies invested $4.5 billion in their Chinese production facilities. That is less than half of what they invested in China during 2013, and only one-third of their investments in China in 2012.

The time profile of these Japanese trade and investment transactions with China closely coincides with the sharp deterioration of the two countries' political relations.

This year may hold a promise of better ties. Both countries have made steps in that direction. China has accepted Japan's overtures last November with regard to competing territorial claims in the East China Sea, and it now seems that events are moving toward some sort of compromise. Last month's resounding election victory of Japan's governing Liberal Democratic Party (LDP) gives it a strong mandate to pursue a more constructive dialog with Beijing.

China also seems ready to reciprocate. China's President Xi Jinping told the 10,000 people gathered at the ceremony of the 77th anniversary of the Nanjing Massacre (atrocities committed by Japan's occupying forces in 1937) last December that China should not "bear hatred against an entire nation just because a small minority of militarists launched aggressive wars."

Japan knows the conditions of a rapprochement with its crucially important trade partner. China also knows that improved relations with Japan and a compromise on territorial claims would calm down similar disputes with its other Asian neighbors.

Hostile inter-Korean relations are another obstacle on the way to a stronger economic development in Northeast Asia. China and Japan could help with contacts between Seoul and Pyongyang. China, in particular, could use its strong trade and investment ties with Seoul and its "special" relationship with Pyongyang to reduce tensions between estranged Korean cousins.

That will be tough, though. But it does seem that Koreans want to talk about a broad range of economic, social and security matters.

Reviving 'Chindia'

Snarled up by overlapping territorial claims along their 3,500-kilometer frontier, the Chinese-Indian relations also looked hostile and crisis-prone until both countries agreed to move on. Who would have thought, for example, that instead of trading bullets and military incursions into contested areas, the Chinese and Indian border guards would be holding together a New Year party last week?

That unexpected bonhomie is an interesting sequel to the Chinese President Xi Jinping's visit to India last September. Sporting an impeccably tailored white kurta, Mr. Xi celebrated Indian Prime Minister Modi's 64th birthday in Ahmadabad, the capital city of the state of Gujarat, where his host earlier served as chief minister.

The key points of a Sino-Indian deal involve a settlement of border problems and China's large infrastructure investments – about $20 billion only in Indian railways. These investments would partly compensate for China's trade surplus with India, which amounted to $36.2 billion in India's fiscal year 2013-14.

Both issues are under active consideration. China's Foreign Minister Wang Yi announced during his visit to Delhi in early June of last year that Beijing was ready to settle border issues – a signal that China was eager to open up big investment and trade flows with India.

Investment thoughts

China's broadening economic transactions with the rest of Asia form a strong regional investment platform.

Political and security problems in Southeast Asia and on the Korean Peninsula are serious obstacles to a faster economic development, but there are important moves currently under way in both areas that should be watched.

Asian economy is part of China's development strategy. That is an objective where China won't fail to deliver.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.