China vs. Japan

China's 12th Five-Year Plan for 2011-2015 aims to transform the economy from export-led growth to consumer-led growth. The problem is that China’s exports have been hard hit by the slowdown in the global economy. As a result, China’s leaders are in a panic as they realize that they have much less time for making the transition from export-led growth to consumer-led growth than they expected. Their immediate response has been to raise minimum wages, which is worsening the weakness in exports by raising labor costs.

Tokyo's recent decision to buy contested islets in the East China Sea infuriated Beijing, prompting widespread demonstrations in China and a boycott of car and other brands made in, or by, Japan. Nationalists in both countries are inflaming the tensions between the two nations. Over the past 12 months through August, China exported $153.1 billion of goods to Japan and imported $186.7 billion.

Those trade flows are already getting hit by the dispute as Japanese auto sales are plummeting in China. Last month, a Chinese driver of a Japanese car was left partially paralyzed after being beaten by an anti-Japanese mob. People have been debating over social media the risks of purchasing a car from Japan. Toyota said it sold 44,100 vehicles in China in September, down 49% y/y. Nissan said its sales in China fell to 76,066 vehicles last month, down 35%. Honda reported a 41% drop to 33,931 vehicles.

This is also depressing the production of Japanese companies that assemble cars in China. As a result of the political tensions, the three biggest Japanese car makers temporarily closed their factories in China during September. Production remains below pre-crisis levels, with Nissan saying it is operating plants "flexibly" to respond to changes in demand.

Today's Morning Briefing: Panel Discussion. (1) Gabriel on Washington and Hardy on China. (2) Assessing the Fiscal Cliff in the US and China’s soft landing. (3) China declares war on Japan. (4) Senator Schumer is either killing a deal or making one. (5) Washington: Let the games begin. (6) Future shock for China’s plan. (7) Bad news for Japan’s auto makers and their Chinese employees. (8) Hardy sees another round of big spending in China. (More for subscribers.)