The Exchange

Sino-Japanese Tensions Are Here to Stay

The Exchange

By Michal Meidan

As China's leaders solemnly convened in the Great Hall of the People Thursday morning for the 18th Party Congress, the formal beginning of the decadal power transition, Hu Jintao addressed the congress with his final report. Journalists and China watchers scurried to interpret opaque statements about political reforms, economic policies and the fate of key political figures. One statement though, left no room for speculation. Hu announced unequivocally that China should "resolutely safeguard China's maritime rights and interests, and build China into a maritime power."

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In a central policy document vetted by all the various political factions in China, coming only weeks after tensions with Japan over the Diaoyu/Senkaku islands flared up, Hu's pledge bodes ill for any conciliatory gesture from Beijing on maritime disputes. On the contrary, in recent weeks, China has stepped up the ante: It has increased its presence in the East China Sea and announced a territorial baseline — a line drawn to map the territorial waters off a coast — in a bid to give its claim a legal basis and legitimize its enforcement.

What is more, a fraught political transition and the rising power of the military in China will make it difficult for Beijing to scale back tensions. There are a growing number of actors that have a stake in maritime disputes, including China's fishery authority, oil and gas companies, navy and civil maritime authorities, all of which are likely to engage in acts of sovereignty in order to assert their claims. And the new leadership, preoccupied with consolidating its power, will have a hard time reining them in. Hu's pledge to defend China's maritime rights and explore resources does, in fact, just the opposite: It gives these different stakeholders political cover to pursue their parochial interests.

Japan Not Backing Down

Domestic political pressure in Japan and the changing geopolitical context in Asia will not help matters either. In Japan, Liberal Democratic Party president and prominent nationalist Shinzo Abe — who will likely become the next prime minister — maintains a tough stance on disputes involving territorial claims and interpretations of history. Japanese stakeholders are also engaging in acts of sovereignty to assert their territorial rights. As more patrol boats, fishing vessels and commercial ships enter these disputed waters, the risk of an accident increases significantly.

Efforts by the U.S. to alleviate tensions may only backfire. While Washington's renewed strategic and economic engagement in the region is welcomed by a Japanese leadership growing increasingly concerned about China's assertive foreign policy, hawks in Beijing are now empowered as they argue that Japan is a pawn in the Washington's bid to encircle China.

Widespread Economic Repercussions

This state of heightened tensions will have a negative impact on Sino-Japanese economic ties. Social pressures to boycott Japanese goods will rise periodically in China, forcing Japanese and foreign manufacturers to rebrand or replace these goods. The anti-Japanese demonstrations that occurred in August and September led to extensive damage to Japanese manufacturing facilities and retail outlets. Given the size of China's consumer market, Japanese retail firms will seek to ride out the storm and get back to normal business as quickly as possible but supply chains could continue to face disruptions. In the longer-term, Japanese investors will face increasing political risk in the China market in the form of punitive export, investment, or trade restrictions.

Financial relations have also suffered with Chinese banking officials withdrawing their participation from global banking summits in Japan. But both sides will likely try to minimize the potential fallout: Japan's finance minister vowed to pursue financial cooperation, and the risk of seizures of Japanese capital investments in China, or a dumping of Japanese government debt is low.

A Boon for Emerging Markets?

Many Japanese firms will now seek to hedge against these risks and will accelerate plans to shift some operations and investments away from China, often to emerging markets in Southeast Asia. And anti-Chinese sentiments will likely increase the odds of Japan joining negotiations for the Trans-Pacific Partnership (TPP) trade agreement. Even though progress on TPP is likely to take years, such trade discussions will support efforts to increase trade and economic integration in Asia. The outlook for manufacturing in Asia will therefore shift for investors across the board.

Next week, when Hu Jintao steps down leaving behind him a vision of China as a maritime power, his successors will have to navigate a more tense Sino-Japanese relationship and a rapidly changing Asia.

Michal Meidan is a China analyst at Eurasia Group.

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