Japanese businessmen with yen for big Chinese trade disappointed

Japanese businessmen who had descended in droves on China expecting a bonanza have had their economic dreams rudely shattered. Expectations of a massive Chinese market have proved completely premature.

Recent reports by the CIA and Japanese trade houses also reveal that China has been unable to fully utilize the giant industrial plants and machinery already imported. It can't absorb as much foreign technology and capital as it wanted and everyone thought it needed.

Typical of the problems created by lack of capital is China's drastic cutback on its imports of Japanese steel this year. The Japanese steel industry had hoped the Chinese market would compensate for poor business in the United States and Europe.

Saying it didn't have enough oil for export, China has just cut back on shipments of its most important export commodity under a long-term trade agreement with Japan.

Last year, China froze all contracts with Japan for the import of large-scale industrial plants and machinery while reviewing the cost of its ambitious modernization program. As a result, some of the contracts were canceled and others considerably scaled down.

These developments, say experts here, are indicative of the Sino-Japanese trade relationship in the next few years.

For a start, they say, Japanese businessmen (Americans and Europeans please note) must discard the "illusion" that China is a vast market of unlimited profit opportunities.

Lured by the image of 1 billion consumers, many Japanese fingers have already been burnt by over-optimism. Hence, a review now under way in business circles here to produce a more realistic long-range assessment of the Chinese connection.

The problems have been partly obscured now by the obvious rapid growth in dollar terms of two-way trade. In the first half of 1980 it reached an all-time high of nearly $4 billion, up 19.6 percent over a year ago.

With a number of contracts for large plants and machinery due for execution in the second half of the year, the final figure is likely to be around $8 billion (against last year's previous record of $6.6 billion).

But trading circles now believe the boom days are gone. The figures may be padded out by inflation, but in real terms there will be little or no growth.

Originally, many Japanese thought the $10 billion level could be achieved next year. Now 1985 is considered more realistic.

The problem, say knowledgeable trading sources, is that the Chinese tried to run before they could walk. The Japanese openly encouraged their attempt.

With traditional export markets sluggish, many Japanese companies looked to China to take up the slack. Hordes of salesmen descended on Peking to claim a major share in the Chinese "four modernizations" program.

But after signing the contracts, China discovered it did not have the cash to pay for them.

Despite increasing government-backed loans from Tokyo, it became obvious last year that the Chinese had overreached themselves.

In an effort to balance trade and keep some of the big deals alive, the Japanese side reluctantly agreed to the annual import of some 10 million tons of Chinese oil.

It was oil Japan didn't particularly want -- the heavy polluting sulfur type. But it was vital to the long-term trade agreement concluded in 1978. Just how much is illustrated by the way the price of Chinese crude shot up -- the price jumped 110 percent in the first half of 1980 and accounted for 42 percent of China's total exports to Japan.

Now the Chinese are unable to keep up production levels and will have to cut back to about 8.2 million tons in the next two years.

Thus China will have even less money to spare to pay for Japanese industrial imports.

Still, it's not all pessimism. The Chinese National People's Conference recently decided to put more emphasis on agriculture and light industry and to give more autonomy to enterprises -- so there is some hope for smaller projects, even though giant schemes like the Japanese-built (white elephant) Baoshan Steelworks is no longer realistic.

There are already signs of more Japanese restraint.Despite changes in Chinese law to encourage international joint ventures, most Japanese companies are reported to be approaching the idea with considerable caution -- believing that differences in trade practices and profit-taking, for example, are among the serious handicaps to be faced.

The Japanese are encouraged to a degree by China's new practical realism, along with reaffirmation of the goals of the "four modernizations," displayed by the new Chinese premier, Zhao Ziyang.