Xi and Abe Must Learn to Live Together

By Rowan Callick

Tony Abbott is next month visiting China and Japan. Both are north Asian countries with broadly Confucian cultures and strong Buddhist influence, whose histories have constantly intersected.

Today they both have ebullient newish leaders, Xi Jinping and Shinzo Abe, who are the most powerful in 20 years or so in each country, come from political families and are reforming their economies and building their militaries.

But from there, the differences lengthen and the commonalities start to shrink. Much gets lost in translation crossing the 870km of the East China Sea between China and Japan.

For instance, the Chinese characters for hand and paper are about the same as the relevant Japanese kanji characters, but they are pronounced quite differently, and when combined mean envelope in Japanese but toilet paper in Chinese.

How are these two, the world's second and third-biggest economies, and Australia's first and second-biggest trading partners -- by a country mile -- getting along?

We know that at the levels of public rhetoric and of strategic debate, the countries have again become adversaries, with their unlikely semi-ritualistic battleground the uninhabited islands in the East China Sea known as Senkaku in Japan, by which they are administered, and Diaoyu in China, which claims them.

The countries' economic enmeshment has, however, become substantial. Trade between them reached $360 billion in 2013, about three times trade between Australia and China. But volumes were down 5.1 per cent on 2012.

Japan probably remains the foreign investor with the biggest assets in China, if one does not categorise Taiwan and Hong Kong as "foreign".

But their economic engagement is softening, underlining concerns about the outcome of tensions between the two Asian giants. Fresh Japanese investment in China sank to $10bn in 2013, two-thirds of the 2012 total, while Japan invested $25bn in the larger Southeast Asian countries last year.

As Abenomics drove the yen down, Xi's reforms -- letting the market dictate more of the yuan's value -- saw Beijing's currency rise, adding to the cost of investing in China, despite its recent fall as the government seeks to squeeze out speculators. Abe wants his banks to lend more, Xi wants to restrict credit access.

The 2012 Chinese demonstrations triggered by the Senkaku/Diaoyu islands dispute caused about $100 million in damage, and many Japanese companies began to look elsewhere for growth targets that carried less risk.

That does not mean shunning the region's biggest country. The "China plus one" strategy has been revived -- which should also be a formulation that Australian corporations might do well to consider, with the "one" almost invariably being also in Asia.

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