China's 'Line in the Air' Won't Stop Japanese Business

TAIPEI (TheStreet) -- China's offshore air defense zone covering islets disputed by Japan hardly eases historic turbulence between the two economic giants that depend on each other for business. But the zone announced by China in late November won't bring down Japanese business as it did last year and in 2005 following other political disputes.

China says Japan, like anyone else, should notify it before flying through its air identification defense zone, or ADIZ, that covers the Diaoyu (Japan calls them Senkaku) islands claimed by both countries. Japan has flown anyway without a heads-up to Beijing, as has the United States. China didn't send as much as a mosquito to chase the planes off.

I suspect the air defense zone was sent up as a trial balloon, a common yet widely misunderstood tool of Beijing policy making. Consequences of violating its zone were never spelled out, nor were some of the basic rules -- for example, what happens to civilian aircraft that use the space. Keeping things vague lets China do anything from attack to sit quiet and say it has followed policy as it uses the experiment to gauge world opinion, which has gone against it.

China probably won't cancel its zone, but it's unlikely to kick others out or even bluster on as if it might. Worst-case scenario, Chinese planes will use the zone to track Japanese or American counterparts up close. Provocative, perhaps, but not a precursor to war.

As the trial balloon is losing altitude, the authoritarian government has few grounds to create an anti-Japan furor at home through the state-run mass media. Its official Xinhua News Agency quotes the foreign ministry on Nov. 27 as saying the air zone is for defensive only, causing no need for panic among other countries.

"Obviously Beijing's decision to throw out this ADIZ is to demonstrate its claims to Japan of the Diaoyu islands and reinforce Beijing's position because Japan refuses to acknowledge it," says Andrew Yang, a professor who follows China at National Sun Yat-sen University in Taiwan. "But I don't think any economic sanctions or embargoes will be imposed to antagonize each other. National leaders have to be rational."

"Rational" means support for the high-stakes, inextricably interdependent business relations between Asia's first and second largest economies. China is Japan's top trading partner. The number of Japanese subsidiaries there has grown at least eight times since the 1990s, and they sold 11.4 trillion yen ($111 billion) worth of goods to China in the 2011 fiscal year, London-based Capital Economics has estimated.

In 2005, after a series of actions in Japan that China felt didn't atone for wartime aggression, the Beijing government let tens of thousands of citizens hold anti-Japan demonstrations, some of which led to vandalism of Japanese businesses. Protesters called for a boycott against Japanese products until China ordered them stopped -- Chinese workers make a lot of that stuff, an example of economic interdependence. Chinese suppliers also sell to Japanese factories and Chinese retailers inventory the finished products.

Last year, Japan made the first move again by nationalizing some of the disputed islets in the East China Sea. That move set off waves of occasionally violent street protests in China plus more boycotts against made-in-Japan products such as cars and electronics.

The 2012 protests went on to suspend the China operations of Japanese businesses such as Panasonic, global camera maker Canon (CAJ), Toyota Motor (TM), Honda (HMC) and Nissan. Share prices of major Japanese firms fell 3% to 9% at that time.

But Sino-Japanese trade has rebounded since then and shows no signs of falling out of the sky.

At the time of publication the author had no position in any of the stocks mentioned. Ralph Jennings is on LinkedIn.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Ralph Jennings lived in Beijing for seven years as a writer, editor, student, teacher and consumer. Originally from Portland, Oregon, Jennings has covered financial markets in Asia since 2008. His news reports often examine markets from a macro-policy angle on behalf of individual traders as well as institutional investors. In his view, China is a volatile country that can be understood only by watching it closely week in, week out, followed by analysis mixed with hands-on perspectives. He currently lives in Taipei, where he covers general and financial news in East Asia and studies for a master's degree. He also watches China from the unique perspective of Taiwan's traditional Chinese society with its unique economic and political experience.