China and Japan reset strained relationship with new deals

Shinzo Abe hails agreements as ‘historic turning point’ on rare official visit to Beijing

Beijing and Tokyo reset their troubled bilateral relationship on Friday as Shinzo Abe concluded a range of agreements on his first official visit to the Chinese capital since becoming Japanese prime minister for a second time in 2012.

The agreements – ranging from a three-year, $30 billion credit swap agreement between the two countries’ central banks to co-operation on overseas development projects – are the most substantive reached between the world’s second- and third-largest economies since 2011.

Mr Abe hailed the agreements as the start of a "historic turning point". Li Keqiang, who in May made his first visit to Japan since becoming premier in 2013, said China was willing to "return to a normal track" with Japan. He also urged Mr Abe to help Beijing "safeguard" global trade and economic growth and said China would not devalue its currency to boost exports.

The renminbi is threatening to fall through 7 to the dollar, which would be its lowest level in a decade. But Chinese officials and most analysts say that Beijing has been working to support the currency, not weaken it, in order to reduce trade frictions with the US and guard against capital flight.

Bilateral relations between Japan and China were effectively frozen in 2012-13 after the Japanese government purchased the Senkaku Islands, known in China as the Diaoyutai and claimed by Beijing, from their private owner to head off a counterbid by the then-nationalist governor of Tokyo.

Large-scale protests across China intimidated many Japanese companies, which scaled back their investment plans. “The situation in 2012 influenced Japanese investment decisions,” a Japanese diplomat said on the eve of Mr Abe’s three-day visit, which began on Thursday. “[But] we are neighbours and our two economies are interdependent.”

Repairing relations

The two governments began to re-engage in late 2014, when Mr Abe held a brief meeting with Chinese president Xi Jinping on the sidelines of the Asia-Pacific Economic Co-operation leaders' summit in Beijing. But it was only over the past two years, as Chinese economic growth began to slow and US president Donald Trump launched a trade war against Beijing, that Mr Xi accelerated efforts to repair relations.

"Strategic confrontation still exists between Japan and China but it is under better control compared to 2014," said Shi Yinhong, professor of international relations at Renmin University in Beijing.

In addition to Mr Abe’s meetings with Mr Xi and Mr Li, this week’s flurry of diplomatic activity included a “third country co-operation forum”, bringing together hundreds of Japanese and Chinese corporate executives.

The forum is aimed at finding areas in which Japanese and Chinese companies can co-operate with each other, rather than compete, for example on rail projects in southeast Asia. Japanese officials see such co-operation as one way of blunting the impact of Mr Xi’s Belt and Road Initiative, which has encouraged large overseas infrastructure investments by Chinese state-owned enterprises.

But they have stopped short of formally endorsing the BRI programme or joining the Asian Infrastructure Investment Bank, China’s flagship development bank.

“We have emphasised the importance of respecting international standards,” said the Japanese diplomat. “We do not want to see recipient [countries] accumulate massive debts or their economies suffer.”

Mr Abe’s visit was timed to coincide with the 40th anniversary of Deng Xiaoping’s first and only visit to Japan as paramount leader in October 1978, shortly before he officially launched his economic “reform and opening” programme. – Copyright The Financial Times Limited 2018