ENVIRONMENTAL AWARENESS: Chinese President Hu Jintao poses with Takao Abe, Mayor of Kawasaki, Japan, during a visit to one of JFE Engineering Corp.'s recycling plants in the city on May 9  (CNSPHOTO)

China remains Japan's biggest trading partner, while Japan is now China's third biggest trading partner after the European Union and the United States.

Trade

Trade between China and Japan amounted to more than $236 billion in 2007, according to the statistics of China Customs.

The two countries' strong economic ties have paved the way for the stable development of their bilateral relations. On closer examination, it emerges that their common economic interests lie mainly in the following four areas.

China-Japan trade has maintained good momentum over the decades with trade volume increasing considerably year on year. Two-way trade was $1.04 billion in 1972 when they established diplomatic relations. It exceeded $100 billion in 2002. In 2006, it breached the benchmark of $200 billion to reach $207.36 billion, some 200 times more than that in 1972.

The proportion of bilateral trade to Japan's total foreign trade is also on the rise. Japan's trade dependence on China is deepening (see graphs).

China-Japan trade has improved in quality. In the first few years after the two countries established diplomatic relations, China mainly exported primary products, such as crude oil, coal and agricultural products, to Japan in exchange for machinery, cars, home appliances and steel. This trade mix has changed over the years. Today, China's major exports to Japan are machinery, electrical appliances and audio-visual equipment. Statistics from Japan External Trade Organization (JETRO) show the proportion of processed goods to China's total exports to Japan was 34.8 percent in 1986, 77.3 percent in 1995 and 89.3 percent in 2006. China is reaping increasing profits from its trade with Japan, as it exports more products with high added value. The development of China-Japan trade relations has brought about mutual benefits to both nations.

Japan's increasing exports to China in recent years have powered the country's economy. Japan registered an economic growth rate of 2.3 percent in 2004, mainly because of its growing exports to China. From 2000 to 2003, Japan's foreign trade volume grew 7 percent, while China-Japan trade volume soared 50 percent. Japan's trade surplus with China was $14.7 billion in 2003 and $20.86 billion in 2004. In 2005, it dropped to $16.46 billion. It climbed to $24.08 billion in 2006 and further to $31.88 billion in 2007, up 32.6 percent from the previous year. There is no denying that the Chinese market is highly significant for Japan's economic recovery and stable development in recent years.

Direct investment and assistance

Japan is China's second biggest foreign investor only next to the United States. Statistics from JETRO show that Japan's annual direct investment in China was more than $6 billion from 2005 to 2007. By the end of 2006, its direct investment in China had amounted to $30.316 billion. Japan's investment has promoted China's economic development. Most Japanese-invested enterprises have succeeded in China because of China's competent labor force, low costs and good infrastructure and social and cultural environments. In this sense, Japan's investment in China has compensated for the stagnation of its domestic capital markets. In fact, some Japanese companies have been able to survive precisely because of their flourishing investment in China.

People-to-people exchanges between China and Japan also have expanded rapidly. Only some 1,000 people traveled between the two countries every year in the 1970s. In 2006, more than 4.8 million trips were made. China and Japan are each other's big tourist destinations. They also have 233 pairs of sister cities.

During former Japanese Prime Minister Masayoshi Ohira's visit to China in December 1979, Japan announced that it would extend low-interest governmental loans to China. To date, Japan has provided China with more than $30 billion in economic assistance including low-interest loans, technical assistance and free grants. Japan's official development assistance has not only contributed to China's economic development but also prompted Japanese companies to increase their exports to and investment in China, thus cashing in on the thriving Chinese market.

Finance

China and Japan share extensive common interests in the financial field. Both countries have huge foreign exchange reserves. By the end of February, Japan's foreign exchange reserves had reached $1 trillion, making it the second country with more than $1 billion in foreign exchange reserves after China. China's foreign exchange reserves had totaled about $1.68 trillion by March 2008. Both countries spend their foreign exchanges on purchasing U.S. government bonds and financial products and investing in U.S. securities. As a result, they face common financial risks.

Under the pressure of the U.S. dollar and the euro, the Japanese yen is no longer as influential as it used to be. Renminbi, the Chinese currency, has yet to become freely convertible. The two countries' currencies will hardly play a leading role worldwide in the foreseeable future. It is high time for them to join hands to establish a common Asian currency to get rid of the financial dominance of the United States and Europe.

Economic cooperation

While China is the most populous developing country with rising international influence, Japan is a developed country with the world's second largest economy. Their gross domestic products (GDP) combined account for more than 80 percent of the total GDP in East Asia. Improving ties between the two powerful states are poised to have positive implications for East Asia and the world at large. The two countries can help promote East Asian economic cooperation together with other countries in the region. For instance, they can work on sub-regional development in East Asia. They can help strengthen East Asian financial cooperation in the spirit of forging a common Asian currency. They can pursue a free trade area in East Asia featuring free trade and investment. They can also help create cooperative mechanisms in health, disaster reduction, energy saving, environmental protection, poverty alleviation and resource recycling in East Asia and extend them to cover the rest of Asia and the world.

In conclusion, strengthening economic ties between China and Japan serves as a stabilizer of their bilateral relations and is a testament to the two countries' interdependence. In light of their economic interests, they will not allow major degradations in their political relations.

Trade between China and Japan counts much for both nations. China needs Japan's investment, sophisticated technology and managerial expertise. Its experience in resource recycling, energy saving and environmental protection is of particular interest to China. Japan, for its part, needs China's market to sustain its economic growth.