Harmony and Turmoil
By Sherwood Zhang
October 5, 2012
Since Japanâ€™s recent purchase of the disputed Diaoyu/Senkaku Islands a few weeks ago, anti-Japan protests erupted in various Chinese cities, with some turning violent and targeting Japanese shops, cars and factories.
Over the past several decades, diplomatic relations between China and Japan have seen repeated clashes over historical and territorial disputes. This fresh wave of anti-Japan sentiment may seem alarming to international investors as many Japanese companies are deeply invested in Chinaâ€™s vast market. But Japanese products have long been loved by Chinese consumers for their quality and innovative design. The success of Japanese brands in China began with the home appliance market in the early 1980s after China began to open its economy for trade. Japanese cars have also more recently won over Chinese consumers. And in 2011, China was the second-largest tourist source for Japan after Korea, according to the Japan National Tourism Organization.
Itâ€™s no wonder some pundits began calculating the potential economic impact that strained China-Japan relations may have on Japanese firms. But during my recent week-long visit in Shanghai, my on-the-ground observations following the protests left me feeling as if the concerns might be overstated. An executive of a Japanese restaurant chain operator told me that physical damage to the firmâ€™s stores during the protest was actually quite limited compared to the impact that followed anti-Japan protests in 2005, which were sparked by controversies surrounding a shrine for Japanâ€™s war dead. I also visited a popular Japanese retail store where customers were picking through the seasonâ€™s new arrivals with no obvious concern for politics. In this globalized economy, boycotting Japanese business interests is no small feat as so many firms are intertwined. One Taiwanese leasing company I met with, which provides much-needed funding for small businesses in China, actually counts a Japanese financial institution as a strategic shareholder. These types of partnerships and joint ventures exist in nearly every sector in China, spanning food and beverage to auto manufacturing.
At the end of my trip, I noticed one last bit of encouragementâ€”a wedding ceremony held at my Shanghai hotel. Seeing the photograph of a happy union between a Japanese bride and her Chinese groom on a television monitor in the hotel lobby gave me some hope for greater harmony between the people of China and Japan.
Sherwood Zhang, CFA
Matthews International Capital Management, LLC
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