View from Japan: Consider national security in doing business with China

Editor’s note: this analysis was originally published by the Japan Institute for National Fundamentals and is reposted here with its permission.

As the U.S.-China conflict escalates, Japanese business sector’s consciousness of national security is a matter of concern. Business opportunities in the huge Chinese market naturally cannot be ignored. But at the same time, unless Japanese businesses retain national security risks in mind, they could tread on the American tiger tail.

In August 2018, the United States excluded Huawei and four other Chinese companies from its government procurement market for national security concern under the Fiscal 2019 Defense Authorization Act. An astonishing event happened in the autumn of 2018: Japan’s business delegation to China visited video surveillance equipment maker Hikvision, one of the five Chinese companies. The delegation was too careless, even though Japanese media reports focused on Huawei.

Risky financial support for Chinese businesses

The U.S. is about to expand its China sanctions to cover financial institutions. A China sanctions bill presented in response to China’s implementation of the Hong Kong national security law targets not only Chinese officials but banks having business with these officials. The U.S. could also impose financial sanctions on 20 Chinese companies that have been identified by the Pentagon as owned or controlled by the Chinese People’s Liberation Army. Under such circumstances, the national security awareness of Japanese financial community is also worrisome.

To demonstrate its open-door posture, China has come up with a plan to ease regulations on foreign investment in the financial sector. In this context, Japanese megabanks have launched projects to support start-ups in China. The projects might help start-ups to establish links with major Japanese companies.

However, it is doubtful how far the megabanks recognize national security risks behind the projects. Are they addressing the risk of financing Chinese companies of national security concern, after having been lured by China’s financial open-door policy?

Necessary caution to military-civilian fusion

The U.S. has cautioned that the military-civilian fusion in China has blurred the distinction between civilian and military products. Japanese companies must take care not to support or contribute to China’s military-civilian fusion by investing in Chinese companies concluded as producing civilian goods through perfunctory survey.

Additionally, the Tokyo Stock Exchange is trying to attract Chinese firms as moves are growing to exclude Chinese companies from the U.S. capital market.

How does the exchange think about the risk of being viewed as taking advantage of such U.S. moves?

At least, the Japanese business sector should be prepared to explain that some mechanism is ready to keep alert eyes on China’s military-civilian fusion.

Business leaders are required to raise awareness about national security.

Masahiko Hosokawa is a special professor at Chubu University and a former director-general of the Trade Control Department at Japan’s Ministry of Economy, Trade and Industry. He is also a Planning Committee member at the Japan Institute for National Fundamentals.