China’s economic crisis has lately been exacerbated further by sluggish exports, excessive production capacity, mounting bad debts accumulated in both private and public financial institutions, and massive outflows of capital.

As Beijing tightens its grip on capital transactions, Japanese firms are being adversely impacted. Their Chinese subsidiaries are facing difficulties in their export and import operations. It also has become increasingly hard for them to pay loans, dividends and compensation for services to their parent companies.

Several major automotive parts makers that are affiliated with Toyota and Honda and have plants in Guangdong Province have since last fall been denied permission by the Chinese authorities to repay debts amounting to billions of yen to their Japanese parent firms. Pleas and protests made through Japanese banks’ branches in China and the Japanese consulate have made no headway.

This trouble, which surfaced at more than 50 Japanese firms in Guangdong, Dongguan and Shenzhen last fall, has now spread to hundreds of other Japanese firms in areas like Shanghai, Dalian and Jiangsu Province. Facing similar problems are U.S. and South Korean subsidiaries in China. They have appealed to the Commerce Ministry and the Finance Ministry as well as to the People’s Bank of China but to no avail.

If money cannot be sent to parent companies in Japan, they may face bankruptcy if they do not have sources of profits in Japan — especially small and medium-size manufacturers that have moved production bases to China.

Another problem has cropped up. A major Japanese trading firm planned to export optical equipment components to China in February. But the importer in China could not get a local bank to issue a letter of credit because China’s foreign exchange control authorities did not approve the transaction.

The letters of credit problem became serious after Chinese President Xi Jinping criticized shopping sprees abroad by Chinese tourists and called for increased domestic purchases in October. A trading company employee said that if Chinese authorities determine that substitute products made in China are available, they reject or delay issuance of letters of credit.

Because China, as the world’s largest trading country, is the biggest beneficiary of transactions based on letters of credit, it has greater responsibility than any other country to abide by and protect that trading system. Should Beijing continue to block issuing of import letters of credit, that will shake up the very basis of global trading.

Although China is called the manufacturing center of the world, it still has to rely on imports for such high-tech items as liquid crystal panels, image sensors and high-tensile steel plates. If the import of these items is suspended due to the denial of issuing of import letters of credit, it will adversely affect not only Chinese manufacturers but also Japanese capital-affiliated firms in China that are buying components and intermediate products locally.

Growing outflows of capital from China are the biggest factor behind these problems. The drain on capital from that country, which totaled $134.3 billion in 2014, shot up to over $1 trillion in 2015. The trend continues as China’s foreign exchange reserves plummeted by $99.5 billion in January alone.

The devaluation of the yuan in August resulted in spreading a view in the foreign exchange market that the Chinese currency’s value will drop more. Since such a decline would accelerate capital outflows, Beijing has stepped up purchase of the yuan in the foreign exchange market and at the same time started tightening regulations to prevent its conversion into foreign currencies.

As part of such efforts, a ceiling of 100,000-yuan per year was set in January for Chinese tourists who use China UnionPay credit cards to buy things abroad. It is said that 90 percent of such travelers possess the credit cards.

China’s move to restrict remittance of money from China is logical because cases of sending foreign currencies overseas by disguising the money as payments by Chinese firms for imports from abroad are rapidly increasing.

Some wealthy Chinese want to send their funds overseas before the yuan’s value further declines. They convert their assets into other currencies and invest in properties abroad, including in Tokyo. Although the government sets a $50,000- per-year quota per person on conversions, those wealthy people purchase the quotas allocated to other compatriots.

A sharp decline in investment opportunities in China is another reason why it is becoming difficult for Japanese firms to recover funds from their subsidiaries in China. Until about 2010, they used to reinvest profits that were earned in China to establish and expand production, research and development and distribution centers in the country.

But increasing wage levels and the rise of the yuan’s value weakened the export competitiveness of subsidiaries in China. Given excessive production capacity in the steel, chemical, shipbuilding, heavy machinery and home electric appliance sectors in China, it is not sensible either for Japanese firms to increase their production capacity.

Just as Japanese parent firms started trying to use profits accumulated in their Chinese subsidiaries to invest in ASEAN countries and India, they were hit by China’s new exchange restrictions.

At a Feb. 26-27 meeting in Shanghai of the finance ministers and central bank governors of the Group of 20 industrial nations, Japan’s Finance Minister Taro Aso proposed drafting a guideline to curb capital outflows from newly emerging economies. This was welcomed by China as a move that tacitly approves what the Beijing has been doing. Aso’s proposal made it clear how little the Finance Ministry and the Bank of Japan know about the plight of Japanese firms operating in China and how little they can be of help to these firms.

After Beijing started restricting capital movements last summer, the real estate industry in China bottomed out and price increases have been noted in certain real estate markets because funds that fled the slumping stock market found their way into land and buildings.

Indeed, since the beginning of this year, real estate prices have risen in central areas of major cities like Shanghai, Beijing and Shenzhen. In February the price index of newly built residences shot up 25.1 percent in Shanghai and 57.8 percent in Shenzhen. A real estate industry insider in Shanghai has attributed these phenomena to a buying binge of high-priced properties among wealthy individuals and certain foreign capital-affiliated firms that have been cut off from remitting money overseas.

With overseas remittance of capital under increasingly tight restrictions, some Chinese are turning to the bitcoin digital currency as a means to send money abroad despite the risks. Chinese account for more than 70 percent of global bitcoin transactions and the bitcoin’s value shot up after the Chinese New Year in February.

In January, the government announced that the central bank is considering issuing a digital currency. Although the ostensible purpose is to reduce the cost of printing bills and to increase the convenience of economic transactions, the real intent was to prevent capital outflows via bitcoin.

The cumulative total of Japanese investments in China since the 1980s has reached $101.8 billion (about ¥11.5 trillion), according to the Chinese Commerce Ministry. But Japanese firms cannot remit returns from the huge investments because of the restrictions on capital movement. They are uttering a silent scream for help.

This is an abridged translation of an article from the April issue of Sentaku, a monthly magazine covering political, social and economic scenes.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.