Crisis on Diaoyu Islands 'will hit Japan trade'

Islands issue to have damaging consequences, ministry says

Japan's "purchase" of the Diaoyu Islands will definitely affect trade and Japanese investment in China, the Ministry of Commerce said on Wednesday.

Foreign direct investment in China fell in August, the ninth drop in 10 months, the ministry said.

"Economic cooperation between China and Japan benefits both, but Japan's unlawful 'purchase' of China's Diaoyu Islands will definitely affect and damage trade, which we do not want to see. But Japan should take full responsibility," ministry spokesman Shen Danyang said at a news conference.

"We are still discussing a trilateral free trade agreement between China, Japan and South Korea, but this will surely be affected by Japan's unlawful 'purchase' of the islands."

Talks on the proposed FTA were expected to be launched in November.

"The dispute will have severe, or even a decisive, impact on the FTA talks," said Yao Haitian, a researcher from the Institute of Japanese Studies at the Chinese Academy of Social Sciences.

Huo Jianguo, president of the Chinese Academy of International Trade and Economic Cooperation with the Ministry of Commerce, agreed and said that the dispute will have a significant impact on trade and Japanese investment in China.

Trade between the two countries declined by 1.4 percent from a year earlier to $218.7 billion in the first eight months, according to data from the General Administration of Customs.

"Bilateral trade will see a further decline in September and October and Japanese investment in China will continuously slow down as investors are concerned about investment safety."

China was the largest market for Japanese exports in 2011, while Japan was the fourth-largest market for Chinese exports. Bilateral trade in 2011 increased by 14.3 percent year-on-year to a record $344.9 billion, according to the Japan External Trade Organization.

Japanese investment could target other countries, Yao said.

"It will speed up Japanese investment in China moving to other emerging economies, including Vietnam and Thailand."

Japanese investment in China increased by 16.2 percent, from a year earlier, in the first eight months, a much slower pace compared with the 50 percent growth in 2011 from the previous year. Chinese investment in Japan dropped by 11.1 percent in the first eight months, according to the ministry.

Japanese automobile joint ventures in China, including Dongfeng Honda and Dongfeng Nissan, kept their production facilities closed on Wednesday, but many other Japanese businesses resumed operations.

Japanese-invested businesses, including garment retailer Uniqlo, 7-Eleven convenience stores and Canon closed amid safety fears but reopened on Wednesday.

Yang Song, deputy sales director with the Guangdong-based Dongfeng Nissan, and Li Peng, deputy sales director of the Hubei-based Dongfeng Honda, said on Wednesday that their plants remained closed.

"We will monitor the development of the situation to see whether to resume production after Wednesday or later," they said.

Nissan's plants in Zhengzhou, central Henan province, and Guangzhou, which operate in partnership with Dongfeng Motor Corp, remained closed on Wednesday.

Dongfeng Nissan is the largest Japanese car producer in China.

Li said Dongfeng Honda closed 104 outlets across the country and the company also received 2,120 canceled orders.

He said the company's inventory has soared to 13,838 units, getting close to the level where production will have to be curbed.

"Workers may be given extended leave from now to the end of China's National Day holiday on Oct 7," Li said.

Japanese convenience store 7-Eleven reopened its outlets in two Chinese cities on Wednesday.

All 180 7-Eleven outlets in Beijing and Chengdu, capital of Southwest China's Sichuan province, reopened after Tuesday's closure, said Liu Yue, a deputy manager with the company's Beijing office.

"We are convenience stores that cater for the needs of ordinary people, and we will provide service as usual," Liu said.

He said 7-Eleven stores in other cities in China did not shut down, and none of the shops suffered any damage on Tuesday, the 81st anniversary of the Japanese invasion of Northeast China.

FDI flowing into China in the first eight months declined 1.43 percent in August from a year earlier to $8.33 billion, which is the ninth fall in the past 10 months. May saw a slight gain of 0.05 percent.

The first eight months of the year saw FDI in China drop by 3.4 percent to $74.99 billion, according to the ministry.

"Foreign investors held back investments amid China's extended slowdown. Over-capacity of China's industries is also responsible for the FDI drop," said Xiang Songzuo, chief economist of the Agriculture Bank of China.

In contrast, China's outbound direct investment surged by 39.4 percent from a year earlier to $47.68 billion in the first eight months, according to the ministry.

Foreign trade

Xiang said that the country's foreign trade "will grow by less than 7 percent in 2012 because trade with the EU dropped by 1.9 percent year-on-year in the first eight months.

Data from the General Administration of Customs showed that China's exports rose by 2.7 percent year-on-year in August, up from 1 percent in the previous month but still below market expectations of 3 percent.