VZCZCXRO9026
RR RUEHCN RUEHFK RUEHKSO RUEHNAG RUEHNH
DE RUEHKO #0831/01 0470407
ZNR UUUUU ZZH
R 160407Z FEB 06
FM AMEMBASSY TOKYO
TO RUEHC/SECSTATE WASHDC 8707
INFO RUCPDOC/USDOC WASHDC
RUEATRS/TREASURY DEPT WASHDC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUEHBJ/AMEMBASSY BEIJING 0637
RUEHIN/AIT TAIPEI 5903
RUEHBK/AMEMBASSY BANGKOK 3435
RUEHHI/AMEMBASSY HANOI 0865
RUEHML/AMEMBASSY MANILA 0595
RUEHUL/AMEMBASSY SEOUL 6830
RUEHHK/AMCONSUL HONG KONG 5892
RUEHOK/AMCONSUL OSAKA KOBE 7733
RUEHNAG/AMCONSUL NAGOYA 4724
RUEHFK/AMCONSUL FUKUOKA 4650
RUEHKSO/AMCONSUL SAPPORO 5851
RUEHNH/AMCONSUL NAHA 7295
RUEHCN/AMCONSUL CHENGDU 0035
RUEHGZ/AMCONSUL GUANGZHOU 1184
RUESLE/AMCONSUL SHANGHAI 1983
RUEHSH/AMCONSUL SHENYANG 0281

UNCLAS SECTION 01 OF 07 TOKYO 000831 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPT PASS USTR FOR AUSTRS CUTLER AND STRATFORD 
 
TREASURY FOR EAST ASIAN NATIONS - DOHNER/KOEPKE 
 
TREASURY ALSO FOR INTERNATIONAL - LOEVINGER AND SOBEL 
 
TREASURY ALSO FOR IMB - SUSAN BANKER 
 
COMMERCE FOR ITA/OFFICE OF JAPAN-NMELCHER/DAS LEVINE 
 
AGRICULTURE FOR ITP - SHEIKH AND HENKE 
 
E.O. 12958:  N/A 
TAGS: ECON ETRD EINV EAGR EFIN PREL CH
SUBJECT: Japan-China Economic Ties Remain Strong 
Despite Political Tensions 
 
REF:  Tokyo 822 
 
¶1.  (SBU)  Summary:  The economic relationship between 
Japan and China has continued to expand in spite of 
political frictions, according to Japanese Government 
trade and investment statistics.  Japan's total trade 
with China (with the inclusion of trade with Hong Kong) 
again exceeded that between Japan and the United States 
in 2005.  Japanese exports to China increased over 
eight percent while imports rose 17 percent.  The 
pattern of trade continued to show strong 
complementarities between the two economies, with 
intermediate goods dominating Japan's exports to China 
and finished consumer goods and food items forming the 
most significant portion of Chinese exports to Japan. 
Japanese direct investment in China also continued to 
show strong growth, rising close to 50 percent year-on- 
year.  End summary. 
 
--------------------------------------------- ---- 
China (plus HK) Again Japan's Top Trading Partner 
--------------------------------------------- ---- 
 
¶2.  (U)  On a straight bilateral basis, the United 
States was Japan's top trading partner in 2005, 
according to statistics from the Japanese Ministry of 
Finance.  Total trade (exports plus imports) with the 
United States equaled JPY 21.9 trillion (approximately 
USD 190 billion at an exchange rate of JPY 115:USD 1). 
Exports to the United States rose nearly eight percent 
while imports increased over four percent.  China came 
a close second in total trade, with the combined value 
of exports and imports between the two countries 
reaching JPY 20.8 trillion (approximately USD 181 
billion).  (Table 1)  Total Japanese exports to China 
rose by close to 11 percent, but imports from China 
grew substantially faster, exceeding 17 percent year-on- 
year.  (Table 3) 
 
¶3.  (U)  If total trade with China's Hong Kong Special 
Administrative Region -- a substantial portion of 
which, perhaps as much as 95 percent, could have the 
Chinese mainland as its final destination -- is added 
to the China figure, however, the "Greater China" total 
accounts for slightly over 20 percent of Japan's global 
trade as opposed to about 18 percent in the case of the 
United States.  Export growth to China and Hong Kong 
combined slowed by about half in 2005, declining to 
about eight percent from a rate of just over 17 percent 
a year earlier.  Imports, however, continued to show 
strong growth, rising 17 percent year-on-year in 2005, 
slightly faster than the 16.7 percent rate recorded in 
¶2004.  (Interestingly, trade with Hong Kong as compared 
to mainland China was relatively sluggish with Japanese 
exports growing only 3.6 percent and imports actually 
falling 1.4 percent year-on-year.) 
 
¶4.  (U)  More important, however, is the difference in 
 
TOKYO 00000831  002 OF 007 
 
 
the trade balance between Japan's two main commercial 
relationships.  Although Japanese figures for trade 
with China alone show a substantial trade deficit of 
JPY 3.1 trillion (about USD 27 billion), the inclusion 
of Hong Kong and its deficit with Japan of nearly JPY 
3.8 trillion indicates that Japan enjoyed a small 
overall trade surplus with "Greater China" of JPY 668 
billion (USD 5.8 billion).  This surplus is, in fact, 
about half of what it was in 2004 and 2003.  In 
contrast, Japan's trade surplus with the United States 
in 2005 was nearly USD 83 billion, according to U.S. 
Commerce Department data. 
 
--------------------------------------------- --- 
Trade Patterns Highlight Complementary Economies 
--------------------------------------------- --- 
 
¶5.  (U)  The structure of China-Japan trade is also, 
not surprisingly, different from China-U.S. trade. 
General machinery, electronics, and transportation 
equipment (including automobiles) account for about 65 
percent of Japan's global exports.  (These three 
categories make up about 75 percent of exports to both 
the United States and the European Union.)  In the case 
of China, although the proportions of Japanese 
machinery and electronics exports (21.2 percent and 
25.9 percent respectively) are consistent with the 
global totals (20.3 percent and 22.2 percent, 
respectively), transportation equipment only accounted 
for a mere five percent of Japan's exports to China and 
motor vehicles only about two percent.  (Table 4) 
Transportation equipment, however, composed nearly 37 
percent of Japan's exports to the United States, with 
automobiles alone accounting for close to 27 percent. 
 
¶6.  (U)  Chinese customs figures for 2005 list Japan, 
at 15 percent of all imports, as China's leading import 
supplier.  Japanese data indicate that much of this 
trade consisted of processed goods and materials, much 
of which was likely reprocessed into Chinese exports. 
In particular, China (including Hong Kong) absorbed 
nearly one-third (31 percent) of Japan's exports of 
electronics parts (switches, fuses), parts for audio- 
visual equipment, and semiconductors and over a quarter 
(26 percent) of all electronics exports.  In addition, 
Japanese exports to China of manufactured goods 
(excluding machinery, electronics, and transportation 
equipment) made up over a quarter of Japan's exports in 
this category.  Steel, in particular, figured 
prominently in this category, comprising seven percent 
of Japan's total exports to China, according to 
Japanese figures. 
 
¶7.  (U)  On the Japanese side of the equation, goods 
from China, while constituting only about 21 percent of 
all of Japan's imports, dominated a few categories. 
(Table 5)  Most notably, over four-fifths (81.2 
percent) of Japan's imported clothing and accessories 
 
TOKYO 00000831  003 OF 007 
 
 
came from China in 2005.  Furthermore, China produced 
over half of all computers (55 percent) and of audio- 
visual devices (52 percent) imported into Japan last 
year.  Fifteen percent of Japan's imported food 
(particularly seafood) also originated in China. 
 
--------------------------------------------- ----- 
Japanese Investment Growth in China Remains Strong 
--------------------------------------------- ----- 
 
¶8.  (U)  Japanese direct investment into China in 2005 
totaled JPY 726 billion, making China the second 
largest recipient of Japanese investment after the 
United States, which received over JPY 1.3 trillion 
last year.  Japanese investment in China increased 
almost 48 percent over 2004, an acceleration of 10 
percentage points but still not as great a rise as the 
65 percent gain recorded in 2003. 
 
¶9.  (U)  Time series data on Japanese exports also 
appear to indicate a rapid expansion of Japanese 
investment outside the Pearl River Delta region of 
Guangdong Province next to Hong Kong.  Although this 
area still seems to account for about 40-50 percent of 
consumption of such Japanese-produced intermediate 
goods like switches and semiconductors, the share of 
exports to Hong Kong as a proportion of overall exports 
to China and Hong Kong combined has fallen from nearly 
50 percent in 2000 to only 30 percent in 2005. 
 
¶10.  (U)  Nevertheless, Japanese foreign investment in 
China remains highly concentrated in a few areas and 
industries.  Data for Japanese companies operating in 
Japan collected by Japan's Ministry of Economy, Trade, 
and Industry shows that in 2003, half of all Japanese 
firms operating in China were located in the East China 
region (Shanghai Municipality, Jiangsu Province, and 
Zhejiang Province).  (Table 7)  Data for the January- 
September period of 2005 also shows that manufacturing 
accounted for 77 percent of Japanese investment in 
China by value.  Three industries combined -- transport 
equipment (16 percent), electrical equipment (13 
percent), and chemicals and pharmaceuticals (10 
percent) -- accounted for nearly 40 percent of all 
Japanese investment in China through the third quarter 
of 2005.  (It is worth noting, however, that investment 
in the transport equipment industry accounted for close 
to 37 percent of all Japanese direct investment in 
China in 2004.)  Outside manufacturing, wholesale and 
retail trade and finance and insurance were the two 
dominant areas of investment, each accounting for about 
JPY 38 billion and 7-8 percent of total investment, 
respectively. 
 
------- 
Comment 
------- 
 
 
TOKYO 00000831  004 OF 007 
 
 
¶11.  (SBU)  Although the available statistics cannot 
fully capture the depth and complexity of the economic 
relationship between Japan and China, the latest data 
do support the conclusion that the trade and investment 
ties between the two countries continue to grow in 
spite of the frosty state of their diplomatic 
relations.  (REFTEL)  Notably, the Anti-Japanese 
demonstrations in China of April 2005 did not lead to a 
slowing of investment (although it is difficult to 
determine whether the increase in investment might have 
been greater had the demonstrations not taken place). 
Trade between the two largest Asian economies also 
continues to be highly complementary, with Japan 
largely supplying inputs to Chinese industry and China 
producing consumer goods for export to Japan and 
elsewhere.  That said, China appears to be the more 
vulnerable partner in the relationship, as its imports 
from Japan are both more important to maintaining other 
industries and less readily available from other 
suppliers.  One shared characteristic, however, is that 
Japan and China both have their largest trade surplus 
with the United States, suggesting that both have an 
interest in maintaining the health of the U.S. economy 
and Americans' capacity to consume. 
 
¶12.  (U)  Tables: 
 
Table 1 
 
Japan's Top Trading Partners (2005) 
(Unit:  JPY Billion) 
 
Country/    Total Trade   Exports   Imports   Balance 
Region 
-------     ----------    -------   -------   ------- 
U.S.            21,878     14,807     7,071     7,736 
China (ex HK)   20,806      8,839    11,967    -3,128 
(Hong Kong       4,142      3,969       173     3,795) 
ASEAN           16,346      8,342     8,004       338 
EU              16,119      9,653     6,467     3,186 
South Korea      7,840      5,143     2,696     2,447 
Taiwan           7,628      4,810     1,991     2,818 
 
Source:  Japanese Ministry of Finance 
 
Table 2 
 
Top Trading Partners' Share of Japan's Global Trade 
(2005) 
(Unit:  Percent) 
                 Exports            Imports 
                 -------            ------- 
United States       22.5               12.4 
China (plus HK)     19.5               21.3 
EU                  14.7               11.4 
ASEAN               12.7               14.1 
Middle East          2.8               17.0 
 
 
TOKYO 00000831  005 OF 007 
 
 
Source:  Japanese Ministry of Finance 
 
Table 3 
 
Japanese Trade with China and Hong Kong 2000-2005 
(Unit:  JPY Billion.  Number in parentheses is percent 
change from previous year.) 
 
             Exports        Imports          Balance 
 
2000 
China          3,274 (23.2)   5,941  (21.9)  -2,667 
Hong Kong      2,930 (16.9)     180 (-11.3)   2,750 
Total          6,204 (20.1)   6,121  (20.5)      83 
2001 
China          3,764 (15.0)   7,027 (18.3)   -3,263 
Hong Kong      2,826 (-3.5)     177 (-1.7)    2,649 
Total          6,590  (6.2)   7,204 (17.7)     -614 
2002 
China          4,980 (32.3)   7,728 (10.0)   -2,748 
Hong Kong      3,176  (8.4)     178  (0.6)    2,998 
Total          8,156 (23.8)   7,906  (9.7)      250 
2003 
China          6,635 (33.2)   8,731 (13.0)   -2,096 
Hong Kong      3,455  (8.9)     156 (-12.4)   3,299 
Total         10,090 (23.7)   8,887 (12.4)    1,203 
2004 
China          7,994 (20.5)  10,199 (16.8)   -2,205 
Hong Kong      3,831 (10.9)     176 (12.8)    3,655 
Total         11,825 (17.2)  10,375 (16.7)    1,450 
2005 
China          8,839 (10.6)  11,967 (17.3)   -3,128 
Hong Kong      3,969  (3.6)     173 (-1.7)    3,796 
Total         12,808  (8.3)  12,140 (17.0)      668 
 
Table 4 
 
Japanese Exports to China and Hong Kong (2005) 
(Unit:  JPY Billion) 
 
Commodity       World   China    HK    China plus HK/ 
                                           World (%) 
---------       ------  ------  -----  -------------- 
All Goods       65,662   8,839  3,969     19.5 
 
Food               319      39     49     27.6 
Raw Materials      743     298     18     42.5 
Mineral Fuels      475     135     28     34.3 
Chemicals        5,849   1,150    346     25.6 
Manufactures     7,397   1,454    395     25.0 
--Steel          3,037     618     94     23.4 
Machinery       13,324   1,874    460     17.5 
Elec. Machinery 14,561   2,287  1,534     26.2 
--Semiconductors 4,402     716    718     32.6 
--Electrical 
  Apparatus      1,686     361    190     32.7 
--Audio-Visual 
  Parts          1,302     311    195     38.9 
 
TOKYO 00000831  006 OF 007 
 
 
Trans. Equip.   15,198     446    201      4.3 
--Motor vehicles 9,929     142     64      2.1 
 
Source:  Japanese Ministry of Finance 
 
Table 5 
 
Japanese Imports from China and Hong Kong (2005) 
(Unit:  JPY Billion) 
 
Commodity       World   China    HK   China plus HK/ 
                                         World (%) 
---------       ------  ------  -----  ------------- 
All Goods       56,881  11,967    173     21.3 
 
Food             5,557     868      3     15.7 
Raw Materials    3,469     185      1      5.3 
Mineral Fuels   14,552     361      0      2.5 
Chemicals        4,321     471      1     10.9 
Manufactures     5,415   1,446     23     27.1 
Machinery        5,634   2,027     20     36.3 
--Computers      2,053   1,110     12     54.7 
Elec. Machinery  7,414   2,300     29     31.4 
--Audio-visual 
  Equipment      1,598     825      6     52.0 
Trans. Equip.    2,062     173      2      8.4 
Clothing and 
Accessories      2,469   1,999      6     81.2 
 
Source:  Japanese Ministry of Finance 
 
Table 6 
 
Japanese Direct Investment in China 2000-2004 
(Units:  Projects; JPY Billion; percent change from 
previous year in parentheses) 
 
                                    Share of Japan 
      Projects        Value         Outward FDI (pct.) 
      --------        -----         ------------------ 
2000       106 (34.2)  111.4 (29.8)        2.0 
 
2001       189 (78.3)  181.9 (63.3)        4.5 
 
2002       263 (39.2)  215.2 (18.3)        4.8 
 
2003       332 (26.2)  355.3 (65.1)        8.7 
 
2004       361  (8.7)  490.9 (38.2)       12.8 
 
2005       N/A  (N/A)  725.8 (47.9)       14.4 
 
Source:  Japanese Ministry of Finance 
 
Table 7 
 
Japanese Companies Operating in China (2003) 
(Unit:  Enterprises.  Numbers in parentheses are 
 
TOKYO 00000831  007 OF 007 
 
 
percent of "All China" total.) 
 
      All China   East  South  North  NE   Cent. West 
      ---------  ------ ------ ----- ----- ----- ----- 
Total   4,864     2,451    688   971   471   107   176 
        (100)      (50)   (14)  (20)  (10)   (2)   (4) 
 
of which: 
 
Food      302        82     36   119    43     7    15 
          (6)      (27)   (12)  (39)  (14)   (2)   (5) 
 
Textiles  629       405     40   106    51    16    11 
         (13)      (64)    (6)  (17)   (8)   (3)   (2) 
 
Chemicals 481       234     95    80    41      8   23 
         (10)      (49)   (20)  (17)   (9)    (2)  (5) 
 
Machinery 378      194       57    66    39    12   10 
          (8)     (51)     (15)  (17)  (10)   (3)  (3) 
 
Electrical 
Equipment 640      275      163   121   58     10   13 
         (13)     (43)     (25)  (19)   (9)    (2) (2) 
 
Transport 
Equipment 224        77       43    42    9    15   38 
          (5)      (34)     (19)  (19)  (4)   (7) (17) 
 
Wholesale 
Industry  483       361       35    50   33     2    2 
         (10)      (75)      (7)  (10)  (7)   (0)  (0) 
 
Services  309       140       29    85   32     6   17 
          (6)      (45)      (9)  (28) (10)   (2)  (6) 
 
Source:  Japanese Ministry of Economy, Trade, and 
Industry, "White Paper on International Economy and 
Trade 2005" 
 
SCHIEFFER