Japanese Investment in China Falls Sharply

Japanese investment in China recorded a steep drop in October, amid friction between Asia's two largest economies over a chain of islets in the East China Sea.

Japanese Investment in China Falls Sharply
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According to data from Beijing's Ministry of Commerce, direct investment by Japanese companies totaled $460 million last month, down almost a third from last year's levels. The sharp fall knocked Japan's overall direct investment in China to an annual growth rate of 11 percent, from 17 percent in the first nine months.

Monthly figures are an imprecise indicator, as investments tend to have long lead-times. But analysts say that the recent escalation of a long-simmering dispute over the Senkaku islands, which China calls the Diaoyu, has given executives cause to rethink the risk of investment in China.

Companies are in a "wait-and-see mode", said a senior official at a government-linked institution in Tokyo. "Their basic investment strategies will not change, but they are looking for a political solution. Many are waiting for signs that their investments in China are safe, and welcome."

Japanese businesses were stunned by widespread damage to their operations in China during riots in September. Some companies say sales have also been badly hit by disruption to Chinese imports from Japan and unofficial Chinese boycotts of Japanese products.

On Tuesday Japan protested against the entry of four Chinese state vessels into territorial waters around the disputed islands, the latest in a series of such challenges to Japanese control of the area since the dispute flared anew.

(Read More: Japan Economy to Contract as China Dispute Bites: JPMorgan)

Meanwhile, big Japanese companies with investments in China are experiencing hold-ups in gaining regulatory approvals for deals. Steelmaker JFE Holdings and heavy machinery manufacturer IHI Corp have had to delay a merger of shipbuilding units three times, while Marubeni, the trading house, is still awaiting the go-ahead to buy Gavilon of the US – a deal it had said would be cleared by September.

Under a Chinese antimonopoly law in force since 2008, M&A deals must be cleared with authorities if they would lead to combined sales in China of more than Rmb2 billopn ($321 million), or over Rmb10 billion worldwide.

According to one M&A banker in Tokyo, seeking antitrust approval has become a "painful" process since bilateral relations deteriorated. "Given the environment now, [clearance] is a huge risk. Checking used to be an easy decision. Now deals could be held up indefinitely."