South China Disputes

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Nagraj Baggon's picture

South China Disputes

Any dispute between major economic and political states has significant ramifications on peace and stability. The South China sea disputes involve two of the most powerful economies of the globe i.e. China and Japan. Japan, with its own demographic challenges within the country and stagnant growth in North America and peripheral Europe is getting increasingly dependent on emerging markets like China, India and Brazil. In fact, one of the bell weathers of the consumption economy i.e. the automobile industry is seeing a huge spurt of growth in Japan. Big names like Toyota, Nissan, JLR are finding upto 25% of business coming in from China alone.

China has a population of over 1 billion with roughly 350 odd million people in the middle income segments that form the fuel for economic growth. Whilst there is a lot of bad blood between Japan and China due to historical reasons, both countries need to recollect the fact that past cannot be undone. It is time to look into the future. Japan is desperate to shore up the economy and the only recourse it is left with is debt monetization. China is a major driver to lap up treasuries, be it from US, UK, Japan or Germany. Any escalation of tension between these two super-powers will see significant downturns in liquidity flows both inside and outside the countries hampering the growth of global economy overall.

First and foremost, Japan needs to make more commitments to China by setting up more factories in China and help China bolster its leadership in mass production. The fact that Japan is creating jobs in China and helping grow the economy has 3 major positives;

It ensures that Chinese get more employment opportunities; it helps Japanese revive their own economies by remittances from China. It helps establish credibility for asset managers in China who park funds in Japan when Japan auctions yen denominated treasury securities. As the economic ties strengthen, the next major development that logically follows is that there is migration of people on both sides of the border. Chinese will go to Japan to understand cultural sensitivities and corporate policies from the principal’s perspective whilst Japanese will be able to understand the changing consumer dynamics better in China. As cultural barriers drop down and economic progress increases, there will be automatic acceleration of peace process and dialogs and de-escalation of political tensions in borders.

It is extremely critical to remember for both sides that escalation of political tensions is in reality a lose-lose situation both in terms of humanitarian damage and economic damage. Border tensions, retaliations are in fact a severe drain on economic resources that could be better utilized in domains like education, healthcare and nutrition management just to name some domains. China is having challenges to cope with absorption of rising youth factions into the workforce. On the other hand, Japan due to its demographic challenges is facing a severe shortfall in the workforce and succession planning is a huge challenge for many business houses.

From a cultural and religious perspective, there are more similarities between Japan and China than differences. Rather than look at the ugly history of the previous century, people should be encouraged to look at the ancient history of the 2 countries. The Buddhist monks of the likes of Lao Tzu were welcomed into Japan and the philosophy that constituted ‘Tan’ in China blossomed into ‘Zen’ in Japan. Now in the pursuit of economic progress, both China and Japan are seeing drastic drops in number of people pursuing the ancient meditation options.

It is very critical for both the governments to make the ‘Zen’ and ‘Tan’ forms of meditation a part of the curriculum for students in their formative years. Also both China and Japan need to take rapid strides in upgrading their linguistic proficiency in English. The major changes needed for peace and stability should lie in economic progress as well as education sectors. This will help the youth prepare themselves for the global commerce challenges and also bring about a deep understanding of the ways of the modern world.

The banking sectors in both China and Japan need some overhauls. Currently, Japan’s banking system is excessively leveraged due to the zero interest rate policy whilst China has challenges in leverage and areas where hot money is flowing. Compared to GDP per capita, Chinese real estate markets are excessively hot and valuations are unrealistic. This is a major challenge as most of the bank funding has been for the real estate sector and ghost towns are slowly becoming a reality in some of the tier-2 cities in China. Banks need to be more involved in business credit and keep tighter credits on consumer credit. Banks must recognize the fact that the major wave of positive economic changes in emerging economies like China, India, Brazil has come on the basis of the savings made by the people. Whilst there is a lot of temptation to boost consumer spending, this can have negative effects for people as well as banks. As long as business credit is moving smoothly, there will be more jobs and asset values will not be artificial bubbles. Asset bubble bursts have a very strong correlation with political tensions and wars. The banking system also has a major role to play in keeping economic progress and ensuring that the focus is on development rather than wars.