An opinion article entitled "China's Future Depends on Japan," written by leading economist and intelligence expert Keitaro Hasegawa, appeared in the May issue of the Japanese magazine Yobigoe. Hasegawa argues that China's future is in the hands of Japan and the US. It will become increasingly dependent upon products, technology and investment from Japan, thus strengthening the latter's control over it. He warns that only if China is docile toward the island nation will it advance economically.
Two facts are offered to support the argument: China's dependence on Japan for many of the high-quality products it needs, and Japan's comparative technological advantage.
Japan invests heavily in research and development to maintain that technological edge. Its ratio of R&D to GDP is 3.1 percent, while that of the US is 2.7 percent and China's is less than 1 percent.
Hasegawa offers suggestions as to how Japan can make use of these advantages. He recommends not decreasing the prices of products and technologies exported to China, while maintaining the technological gap.
If China persists in its current practice of large-scale copying of Japanese products, infringing on Japanese companies' intellectual property rights, says Hasegawa, Japan can refuse to grant patent rights to China. He asserts that this puts China under Japan's control.
Many Chinese were offended by Hasegawa's remarks. Jin Baisong, of the Ministry of Commerce Research Institute, says that Hasegawa -- while a sensitive economic observer -- is known for his disdain for other Asian countries. In the 1990s, the right-wing Hasegawa wrote a book predicting that civil war would break out in China, which would split into many small countries, just like the former Soviet Union.
The economist wrote the current article against the background of a Japanese economy that has been sluggish for more than a decade, eroding business and consumer confidence. In recent years, hopes for economic recovery have depended, in large measure, on exports to China. Hasegawa's approach may, at least in part, stem from a desire to spur confidence in the economy.
Although the judgment of the article is extreme and the conclusion highly debatable, the facts they are based on are true. These facts provide us food for thought.
China is an emerging manufacturing power. Its importance in industry is often compared with that of Britain in the 19th century and Japan and the US in the 20th century. Is this accurate representation of China's economic power?
First, as Hasegawa notes, construction sites are seen everywhere in China, but most construction machinery is made in Japan; China rolls out a huge number of automobiles, but the machine tools for manufacturing auto parts are made in Japan; China produces over 200 million tons of crude steel annually, but specialty steels, H-steel used in construction and even a proportion of that used in auto and cellular phone production are imported. The Ministry of Science and Technology reports that two-thirds of equipment investment go to imports.
If we divide the manufacturing sector into two subsectors -- products and equipment -- we can calculate the ratio of equipment manufacturing to the manufacturing sector in various countries. The ratios for the US, Japan, and Germany are 42, 44, and 46 percent, respectively, while the ratio for China is below 30 percent.
Second, China's ratio of service industry products to GDP is only about 40 percent, far lower than that of the US and Japan and even below India's 55 percent. If we only calculate higher-end services like finance and software, the situation is even more grim: China shows a ratio of only 1 percent compared with India's 17.
Third, the enormous size of the manufacturing sector translates into huge consumption of raw materials and energy. A country whose GDP contributes only 4 percent of the world's total, voracious China accounts for 30 percent of the world's oil and steel consumption and 40 percent of its cement.
Thus, China wins its name as a manufacturing power at a high cost: huge consumption of raw materials and energy, massive use of primary labor, substantial importation of intellectual property rights from developed countries, and massive environmental damage.
Three main factors lead to these unhealthy manufacturing and industrial structures.
In the 26 years since China's reform and opening began, individuals and businesses, released from the chains of the centrally controlled economic system, have found themselves running free in the wide-open spaces of the market economy. However, the impact of their shortsighted and self-centered approach to economic development has been aggravated by government dysfunction in adjusting the economy. Personal gains may be large, but public benefits have often been nothing more than an afterthought.
Moreover, rationality has been lacking in China's approach to development. Fantastic figures in production, investment, exports, foreign exchange and GDP are emphasized, but to what end, and at what cost?
Finally, the government, long used to the centrally controlled economy, is still feeling its way in terms of making adjustments in a market economic environment. There are cases where the government intervenes in things that should be let alone or where it ignores areas in which intervention is needed.
Then how should we deal with these unhealthy structures? The policy of opening and reform should continue, but efforts should be made to reduce dependence on developed countries for advanced technology.
The government plays a vital role in macroeconomic adjustment, and thus it must formulate appropriate industry policies. It has two main tasks in this regard.
It needs to create a favorable external environment for the economy through education, training, and importation of talent, especially from low-income countries like India, Russia and Eastern Europe. It should deepen system reforms to reduce the presence of the government in enterprises and banks and to reduce, in large measure, the scope and extent of its resource allocation.
The government should also intervene through policies and laws in the "external economy." This applies, for example, to controlling environmental damage by individuals, businesses, or government agencies; or adjusting the price of gasoline in some circumstances.
In short, a set of reasonable industrial policies in addition to the continued reform of the market economy will lead to healthy industrial structures. China's future relies on the Chinese people, Chinese businesses and the Chinese government, not on any other country.
(China.org.cn by Ni Xiaoqiang, July 5, 2004)
