Martin Wolf: Why China Could Fail Like Japan

The Financial Times’ economics editor Martin Wolf takes up the theme treated at some length by China-based economist MIchael Pettis: that Chinas’ economy has moved into unknown and dangerous terrain. No sizeable economy has had investment and exports combined constitute nearly 50% of GDP, and that model is not sustainable. As we have indicted, there is evidence that investment is becoming less and less productive. China is taking $7 of debt to generate $1 of GDP, when the US at the tail end of the bubble needed a mere $4 to $5 of debt for each incremental $1 of growth.

We’ve often recapped Pettis here and are glad to see Wolf take up his analysis.

Wolf does recite the optimist case on China, with the biggest factor being that China has a long way to go in improving the incomes of its citizens, and that alone can give it a very long lasting growth trajectory.

On the risks, Wolf sets aside commodities scarcity and environmental issues to focus solely on the economics case. One is that of a so-called “middle income trap” in which countries find it hard to manage the transition to more sophisticated production. Only Taiwan, South Korea, Japan and Singapore have crossed this barrier since 1950.

This is the guts of Wolf’s summary of Pettis:

Professor Pettis argues that suppression of wages, huge expansions of cheap credit and a repressed exchange rate were all ways of transferring incomes from households to business and so from consumption to investment. Dwight Perkins of Harvard argued at the China Development Forum that the “incremental capital output ratio” – the amount of capital needed for an extra unit of GDP – rose from 3.7 to one in the 1990s to 4.25 to one in the 2000s. This also suggests that returns have been falling at the margin.

If this pattern of growth is to reverse, as the government wishes, the growth of investment must fall well below that of GDP. This is what happened in Japan in the 1990s, with dire results. The thesis advanced by Prof Pettis is that a forced investment strategy will normally end with such a bump. The question is when. In China, it might be earlier in the growth process than in Japan because investment is so high. Much of the investment now undertaken would be unprofitable without the artificial support provided, he argues. One indicator, he suggests, is rapid growth of credit. George Magnus of UBS also noted in the FT of May 3 2011 that the credit-intensity of Chinese growth has increased sharply. This, too, is reminiscent of Japan as late as the 1980s, when the attempt to sustain growth in investment-led domestic demand led to a ruinous credit expansion.

As growth slows, the demand for investment is sure to shrink. At growth of 7 per cent, the needed rate of investment could fall by up to 15 per cent of GDP. But the attempt to shift income to households could force a yet bigger decline. From being an growth engine, investment could become a source of stagnation.

What may not seem obvious is increasing consumption is not trivial. The interview we featured by Ha-Joon Chang discusses that you need infrastructure to consume, such accessible retail outlets with appealing goods and relatively easy and affordable means to get the purchase transported. And you also need space. Having spent a fair bit of time in Japan in the bubble years, one constraint on consumption was the famously small size of Japanese homes. A $5 million apartment in Tokyo in 1987 was a mere 900 square feet, and most apartments were smaller than that. Another was that the Japanese seemed to have internalized their history of having the most elaborate and sumptuary laws every recorded, with spying and snitching a major part of the enforcement mechanism. There seemed to be a cultural code as to what forms of conspicuous consumption were considered chic and too much (whatever “too much” was) would have been seen as trying to lord it over others (this isn’t quite the right cultural vibe but close enough for working purposes; the Japanese have a finely tuned sense of protocol on a number of social axes); overdoing it would have been tacky (while in the US, there seems to be no limit to excess).

As we often say, it is better if we were proven wrong, but the precedents suggest that China is going to have a tough time restructuring its economy as radically as it needs to.

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  1. nickj

    a like for like comparison might be with the uk’s industrial revolution rather than japan’s industrial plateau?

    1. Toby

      From the NYT article (thanks for the link Crocodile Chuck):

      One of them was 3-year-old Han Tiantian, who lived just across the road from the plant. Her father, Han Zongyuan, a factory worker, said he learned in March that she had absorbed enough lead to irreversibly diminish her intellectual capacity and harm her nervous system.

      “At the moment I heard the doctor say that, my heart was shattered,” Mr. Han said in an interview last week. “We wanted this child to have everything. That’s why we worked this hard. That’s why we poisoned ourselves at this factory. Now it turns out the child is poisoned too. I have no words to describe how I feel.”

      Maybe I’m just emotional, but to me, this is totally unacceptable. Why perpetual growth? What’s it for? For us, or despite us? By definition Capitalism puts capital before humanity, ‘growth’ before those who are supposed to benefit from it. The Invisible Hand, the ‘free’ market, is supposed to know what to do, to sort it all out, deliver the best of all possible worlds. It doesn’t know, and it can’t deliver.

      We are at the mercy of a machine run wild, and sociopaths are at the wheel. Economics, that malicious and materialistic religion, works only to condone and glorify the destruction.

      1. Redgerrymander

        The rot runs a lot deeper than Capitalism. It is at the core of our (mis)understanding of life and humanity’s place in the world.

        According to Charles Einstein, many of our problems stem from our collective disconnect from the rest of nature. We believe ourselves to be separate (and superior) to our environment.

        In this worldview, Nature is something to conquer and control. Life is brutish, nasty and cheap. Amorality is encouraged because it promotes the survival of the fittest – but this couldn’t be further from how nature and our environment work, as much of contemporary physics, math and biology are teaching us.

        If you have some time, check out:

        Einstein presents a very comprehensive and coherent alternative to the mass psychosis that drives modern society and provides the justification for much of the cruelty that is at the heart of contemporary society.

        It’s well worth the time and has left me optimistic about the future for the first time in over a decade.

        1. Toby

          Wow, now that is a coincidence. Not only have I read the book twice (and obviously rate it highly), I almost never miss an opportunity to promote and recommend it).

          Today I guess I missed that opportunity, but there you were to step up to the plate. Thanks!

          I would say though that I think the demurrage currency Eisenstein still seems to stand fully behind might not be as workable, sufficient or appropriate as the performance-backed, multi-accounting circuit, interest free money-type promoted by economics professor Franz Hoermann. Sadly, Hoermann only writes in German, but I am translating great tracts of his work at my blog. My name is a link to it. If you’re interested, a lot is there already, and more is coming.

          Good to hear Eisenstein brought back your optimism. Hopelessness is a bad place to be.

          1. Redgerrymander

            You’re very welcome. I’ll definitely check out your site, and I might even be able to help you with the German.

            As for demurrage, I’d be interested to learn more about how it operated in the few instances where it was allowed before making any judgment one way or the other on it’s effectiveness – although it’s interesting to note that it seems to have been vigorously stamped out by banking interests wherever it’s been tried.

          2. Toby

            Thanks for the offer! Hoermann’s Austrian accent is quite difficult at times, and the accountancy jargon mostly mysterious. You can track down my email via my blog if you want to get in touch.

            And yes, I’m awaiting Eisenstein’s “Sacred Economics”. I’ll keep my mind as open as possible on all alternative money systems until it’s clear which one–or combination of many–makes most sense, is most humane.

          3. Redgerrymander

            I lived in good old Wien for almost 10 years, so I may be able to help you with some of the more difficult bits. I had more problems with the audio quality than anything else in the original. Fantastic stuff though. His ideas need to be brought to a wider audience as they do a great job of articulating what’s wrong with our current system.

            I find that the pieces of the puzzle that’s been perplexing me since 9/11 are starting to fit together.

        2. Daniel Pennell

          Might be time to start involving our religeous leaders in out economic conversations.

          1. A Real Black Person

            Am I the only person here who thinks Charles Eisenstein doesn’t present any insight that is genuinely new? I wonder if he devotes any time in that book of his to how humans tend to form cults of personalities around people who say things they want to hear. Sounds to me, this guy is setting himself up to be a high priest of whatever is coming after industrial civilization.

            People don’t become less demanding and appreciative of their environment because they CHOOSE to, they do when they must, for their own survival. Values, like physical traits like dark skin are responses to the environment/reality.

          2. Toby

            @A Real Black Person:

            Maybe you should read the book. From my reading of his work and personal email exchanges with him, your guessed assessment of the man could not be further from the truth. In fact, your position on environment as prime determiner of behaviour puts you right in his camp. You might be surprised to find how much you agree with him.

            Besides, is any intellectual effort ever “genuinely new”? Eisenstein would say not, and I, and you I suspect, would agree with him.

        1. Toby

          Out of habit and fear we’re blindly driving forward the system which is driving us over the cliff, so as to perpetuate it at all and any costs. “There is no other way!”

          We are brainwashed slaves of the Mumfordian Machine.

          We are lost in the illusion of free will and personal agency, refusing to see how robotic we have become, how colourless and bland, how banally evil. Individualism, consumerism, and capitalism have become our teats, our sources of quick comfort, but their milk is addictive, vanishingly nourishing, and increasingly poisonous. The coming forced cold turkey is going to be intense, to say the least.

  2. Middle Seaman

    I have heard the same prediction almost 10 years ago. The person relating that opinion teaches at one of our top business schools. He emphasized China’s similarity to Japan the same way the post does.

    1. Altoid

      I for one just laugh at all these comment. This is about as goofy as US making judgement about how corruption in china will bring down the system while at the same time letting bankers-lobbyist nexus utterly destroy the country.

      China has been running imperial economy for 4 millenia. I think they know import export and the flow of money better than all keynesians professors combined. For people who just lost 10% of stimulus gdp with no result, somebody really need to shut up and stop giving advice.

      as for Japan, in large scheme of history, Japan is an imperial fringe. An island. They never was an imperial power (this imply consumption, understanding of wealth and power in large picture.)

      Do you really think, the chinese doesn’t get it that the wallst type is trying to knee cap by giving concern troll advice?

  3. ambrit

    There’s an elephant in the room and no one is noticing it. Firstly; China is not Japan, and never will be. Japan is a reasonably cohesive and culturally integrated nation. Where else could anyone say with pride that over 95% of all Japaneese still live in the Home Islands? (Try saying that about any European country.) China, on the other hand, is a vast and diverse empire. Six or seven major dialects? Hordes of Uzbeks, Mongols, Uighirs, and who knows whom else roaming the Great Plains of Central Aisia? Cities with populations greater than all Scandanavia? The wonder of it all is that the Party has been able to keep it all together so far.
    This leads me to the real point of the question here. The central authorities main problem, overt and covert, is social cohesion. Look at Chinas’ history. The Warring Kingdoms Period. The So snd So Dynasty Period. The Time of Emperor Mao. China has always been a fluid state, breaking apart and coalescing in new combinations. Why should today be any different? Economics has just become the new locus of power in the eternal struggle for the soul of China. No matter what we round eyes say, or even do, the Chineese will always do what they percieve as being in their own best interests. Why should we be surprised at that? What we might be surprised at is what they see as being in their best interests. Pity the poor Chineese. They are living in interesting times.

    1. MyLessThanPrimeBeef

      Don’t forget the Romans. Their descedents today live in a place in NW China.

      And the Koreans in Manchuria and Vietnamese in Southern China.

      Lastly, I believe there are Americatowns popping up all over big cities in China, where American immigrants keep to themselves, speaking an unintelligible language, eating strange food, refusing to integrate.

      1. thumbtack

        “speaking an unintelligible language, eating strange food, refusing to integrate.”

        yes, just like the Germans, Irish, Cajuns, Mexicans, Poles, Russians, Somalis, Hmong, Vietnamese, Koreans, Swedes and Italians and Jews.

        1. MyLessThanPrimeBeef

          It goes to show that we might be different, but we all act the same.

          No one is better than others.

  4. Cameron Hoppe

    I’m inclined to agree with Ambrit to some extent in his implication that the limit here is a function of culture. Chinese culture today is comparable to Russian culture during the Cold War. What I mean to say is that cultures with long traditions of powerful authority and submission to it are not very well suited to capitalist economics. There has been a ton of growth in China just as there was in the USSR for 40 years after the Bolsheviks took over. The command economy worked very well at taking a highly unindustrial economy and industrializing it.

    At some point one runs up against the inability of central authority to process economic information. It’s actually a problem we in the US are running up against–highly unequal income distribution creating plutocracy and oligarchy is, in economic terms, not much different than rule from the Kremlin proved to be. A small number of people, no matter how intelligent, simply cannot process all the information needed or perceive enough opportunities to serve a large society’s social needs.

    I believe this is the cause of many global problems, and will be a tremendous problem in China. Much of the culture there emphasizes submission rather than intellectual rebellion; precise conformity over creativity; obedience over “kicking against the pricks”. If the situation referred to in Crocodile Chucks article occurred in the US, there would be a descent of media, lawyers, politicians, protesters, and maybe even guns, on the company grounds the likes of which the executives never imagined.

    The biggest impediment to Chinese growth in the next 50 years will be the thing the Chinese power structure fears the most. Popular creativity.

  5. Peterpaul

    The lead poisoining is no joke. My in-laws live at the southwest corner of Tai-Hu, the large lake in the industrial belt west of Shanghai. In the early 2000s a battery factory was built a town over to make batteries for electic mopeds. A couple of years later many of the children in the village had serious lead poisoning.

    The people petitioned the government to close the factory – they refused. Why should they, certain bureaucrats were part owners. Eventually, the folks in the town rose up, went to the factory, and burned it down.

    It’s going to take a lot more people action to get China’s powers that be to really listen to what the people want.

    1. Ming

      Your post makes me feel proud. In general, the Chinese are a peaceful people…. But when we get mad we do not surrender.

      The American people living on the gulf coast, with all their guns and machismo, should consider this….

      1. MyLessThanPrimeBeef

        You would agree that there are visisble yan manifestations of violence/aggression and less visible yin manifestations.

        The former would be chopping people’s heads off.

        The latter might include taking jobs away from others.

  6. Ming

    The problem for China is not that they have too much Investment, the problem is that China has too much wasteful or feckless investment… These investments may look good on paper but they produce no longterm benefit to that nation. China’s massive building boom, would be considered a wasteful investment, as much if what is produced is far too expensive for even the middleclass or upper-middleclass of China to purchase; the rich of china have invested in them, but most of the buildings will remain unnoccupied. China should invest in developing the goods and services that it will need for the future…. Healthcare for the population, sustainable agriculture, sustainable energy and as per Crocidile Chuck’s NYTimes article, pollution control and remediation technology and services. These would produce immediate and longterm benefits for the nation ( and the world) and would be opportunity to maintian high employment for the population, which provides stability for the nation and legitamacy for the communist party… A win / win situation for all.

  7. MyLessThanPrimeBeef

    No sizeable economy has had investment and exports combined constitute nearly 50% of GDP, and that model is not sustainable

    I wonder if building the new Great Wall and exporting tea, silk and chinaware made up 50% of the Ming Dynasty GDP.

    1. Ming

      Cut down Exports, especially useless exports… Focus on investments and export products that bring a longterm benefits for the endusers. Environmental protection/ remediation equipment and pollution capture equipment would be a good start. Focusing 50% of GDP on medium to longterm opportunites is a wonderful thing to behold. Would you rather that China become a consummer culture like the USA? I.e. A 2500 sqft condominium, a TV in every bedroom, and two Big SUV’s ?

      1. MyLessThanPrimeBeef

        The Confusians have always believed in self-sufficiency of the Middle Kingdom.

        When the Muslim eunuch’s seventh voyage was over, they closed the door. It worked so well for the Ming ruling class, the Tokugawa shogunate decided to do the same a couple hundred years later.

        1. Mark P.

          Couple of points about the impossibility of “Middle Kingdom self-sufficiency”:

          [1] In the 21st century, the Chinese need resources not available in China to survive.

          This includes food and arable land — China, with its much larger population, starts out having approximately only a quarter of the arable territory the U.S. has. As weather patterns grow more extreme, Himalayan ice melts, etc., harvests will only grow dodgier. That’s why the Chinese have, for example, been buying up farm lands in Africa.

          [2] Presumably, you know that the historical results of the Ming ruling class and the Tokugawa shogunate “closing the doors” in their respective countries were disastrous?

          Both nations ended up getting badly shoved around by Western barbarians with superior military technologies.

  8. Hugh

    I agree with ambrit. You want to understand China, read its history. The imperial system has always been both incredibly costly and incredibly unstable. I mean the An-Shi rebellion (755-763 AD), possibly the most traumatic event in Chinese history (up to 36 million dead out of a population of 200 million), took place at the very height of the Tang dynasty. Chinese may be nationalistic as a people, but I am not sure this has ever translated into allegiance to Chinese political institutions. Fundamental instability not only can happen in China, as Chinese history teaches us. But as the Chinese Revolution and the Cultural Revolution show, it’s happened there not that long ago.

    1. MyLessThanPrimeBeef

      China is nothing if not flexible and adapting.

      It’s still China when foreigners ruled.

      The Tang rulers might have some Persian blood. One king from the earlier Five Dynasty period was said to have red hair. General Sun Quan of the Three Kingdom period was desribed as having blue eyes. The last rulers, the Manchus, were barbarians. In fact, you might suspect every Northern Chinese to have some barbarian blood. The national language, the Mandarian, is a barbarian dialect, sounding nothing at all to the Chinese spoken by Confucius.

  9. Peter T

    If there are not enough business opportunities to invest in, there is always the military to “invest” in. Couple it with nationalistic propaganda to divert inner unrest to outer aggression. How likely it is that a bankrupt US defends a distant island against a re-armored China that has nuclear missiles and wants to bring Taiwan “home”?

    1. MyLessThanPrimeBeef

      The interesting thing is that there are people in Taiwan who want to bring China ‘home.’

    2. ambrit

      I wouldn’t be at all surprised if some near future Administration tried to work out a Hong Kong style rapproachment between the ‘Two Chinas.’

  10. molisa

    They are an inalienable part of China’s territory according to historical facts and international law;

    Situated in the East China Sea, due east of Fujian province and northeast of Taiwan, the Diaoyu Islands are the farthest eastern islands of China. They are about 190 nautical miles from the Dongshan Island of Fujian province, 90 nautical miles to the northeast of Keelung city of Taiwan, and 78 nautical miles from the Yunaguni Island of the Ryukyu Islands. The Diaoyu Islands refer to a group of islands that include the main one, Diaoyu Island, and some smaller islands and reefs like Huangwei Island, Chiwei Island, Beixiao Island, Nanxiao Island and three other islets. They are scattered in a sea area at 123 degrees 20 minutes ~ 124 degrees 45 minutes east longitude and 25 degrees 44 minutes ~ 26 degrees north latitude, covering a total land area of 6.5 square kilometers. The surrounding waters of the islands have rich fishing resources and have long been an important fishing ground for people in Fujian and Taiwan of China since ancient times. The well-known Emery Report pointed to the existence of abundant oil and natural gas resources on the continental shelf of the East China Sea.

    (1) The Diaoyu Islands are an inalienable part of China’s territory.

    China was the first country that discovered and explored the Diaoyu Islands and obtained sovereignty by occupation. Since ancient times, the Chinese have fished, collected medicinal herbs and sought shelters on these islands and in their surrounding waters. No later than the Ming Dynasty (1368-1644), the islands had been discovered, explored and named by the Chinese. Ancient Chinese books, such as the Book on Voyage Routes and the Voyage with a Tail Wind, kept a complete record of the navigation routes used by Chinese fishermen in this sea area. Due to the natural conditions at sea and the possession of technology such as ship-building at that time, only the Chinese military and civilians could reach the islands during the monsoon season. They navigated through the islands and sought haven there in stormy weather. They carried out economic activities such as fishing, collecting herbs and picking fruits. For about five centuries until 1895, China had never been interfered in its exercise of these rights.

    One cannot speak of the Diaoyu Islands without mentioning Ryukyu Kingdom. Ryukyu Kingdom was a vassal state of the Ming and Qing dynasties to which it paid tributes, while the latter sent envoys to grant honorific titles to the kings in Ryukyu in recognition of their rule. The Diaoyu Islands were on the navigation route from China’s mainland to Ryukyu Kingdom. Chinese officials on mission to Ryukyu all referred to these islands as their navigation marks. They put down in the official documents such as the Record of the Mission to Ryukyu with detailed descriptions of their voyages through the Diaoyu Island, Huangwei Island and Chiwei Island and repeatedly confirmed the boundary between China and Ryukyu. Historical facts tell us that the Diaoyu Islands do not fall into the domain of Ryukyu. China’s historical records and official documents all show that it was the Chinese people who first discovered, developed and utilized the Diaoyu Islands. According to the international law of that time, discovery means occupation and occupation means obtainment of territorial sovereignty. Therefore, China obtained sovereignty over the Diaoyu Islands by occupation.

    The Chinese government exercised effective rule and administration, and strengthened its sovereignty over the Diaoyu Islands. Successive Chinese governments all included the Diaoyu Islands into the confines of China’s territory and exercised sovereignty and effective rule by taking measures to develop, utilize and administer the islands. In 1171, General Wang Dayou guarding Fujian established military camps on Penghu Islands and sent officers to station in the islands. Taiwan and its affiliated islands including the Diaoyu Islands were under the military command of Penghu and, in terms of administration, they were under Jinjiang of Quanzhou, Fujian province. Both the Ming and Qing dynasties incorporated the Diaoyu Island and its affiliated islands into their territory and designated them as part of the maritime defense areas. The Book on Managing the Sea (1562, Ming Dynasty) and Imperial Map of Chinese and Foreign Lands (1863, Qing Dynasty) made clear descriptions about the area. Historical facts show that the Chinese government has administered the Diaoyu Islands in various ways and effectively exercised and strengthened its sovereignty over the Islands.

    (2) Japan’s arguments about its claim of sovereignty over the Diaoyu Islands are untenable.

    There are mainly two legal arguments that Japan has evoked to justify its occupation of the Diaoyu Islands: First, occupation of so-called terra nullius, second, acquisition by prescription (prescriptio acquisitive). Both arguments are untenable.

    By international law, the object of occupation shall be limited to terra nullius. Terra nullius refers to land which has never been subject to the sovereignty of any state or over which any prior sovereign state has expressly or implicitly relinquished sovereignty. The fact is that Diaoyu Island and its affiliated islands have been subject to the sovereignty of the Chinese government as its sea defense area since the Ming Dynasty. They are an inalienable part of China’s territory. Due to the inhospitable natural environment, these islands are not permanently inhabited and fishermen only take up abode on these islands for seasonal activities. But having no permanent residents does not make these islands terra nullius. The Diaoyu Islands are not terra nullius. They are China’s territory. The Japanese government and society are well aware of this fact. The official archives of the Japanese government and documents and correspondence of Japanese officials all record and give evidence to this. For example, in the letter to Home Minister Aritomo Yamagata, then Japanese Foreign Minister Kaoru Inoue wrote in explicit terms that these islands had already been given Chinese names by the Qing government and that the Japanese government had been admonished by the Qing government for coveting these islands. Since the Diaoyu Islands are not terra nullius, Japan’s so-called occupation is non-existent. Ex injuria jus non oritur (A legal right or entitlement cannot arise from an unlawful act or omission) is a fundamental principle of international law. Japan’s so-called occupation is mala fide, illegal and unjustifiable; it therefore does not have the legal effect as what may arise from occupation recognized by international law.

    The other argument that Japan presents is “long and continuous effective administration”, that is, to obtain sovereignty over the Diaoyu Islands based on acquisition by prescription (prescriptio acquisitive).

    “Acquisition by prescription” of territory has been all along an extremely disputable issue in international law. Those against it totally deny the legitimacy of prescription as a way to obtain territory. They are of the view that this is “merely a legal argument serving expansionist countries for occupying others’ territories”. Those for it see prescription as a way to obtain territory, it is defined as “the acquisition of sovereignty over a territory through continuous and undisturbed exercise of sovereignty over it, and during such a period as is necessary to create under the influence of historical development the general conviction that the present condition of things is in conformity with international order.” International judicial practice has never clearly confirmed the status of “prescription” as an independent way to acquire territory. As for the exact time span of the “period as is necessary”, international law has no final verdict to make it 50 years or 100 years.

    If we put aside the legitimacy of “acquisition by prescription” and merely examine the key factors, it is clear that both the Chinese central government and the Taiwan local authority have been firm, explicit and consistent on issues concerning China’s sovereignty over the Diaoyu Islands and in opposing Japan’s attempt to steal them. They have launched protests, especially diplomatic protests, against official and government-supported civilian activities, including setting up a lighthouse on the Diaoyu Island by Japanese right-wingers, “nationalizing” the lighthouse by the Japanese government, paying the “rent” for land on the Diaoyu Islands to those so-called non-governmental owners, and submitting a chart specifying the so-called baselines of the territorial sea of the Diaoyu Islands to the United Nations by the Japanese government. Japan can never gain legitimate rights over the Diaoyu Islands through occupation no matter how long it may last.

    (3) Agreements between Japan and the United States cannot grant Japan sovereignty over the Diaoyu Islands.

    In the wake of World War II, the Cairo Declaration and the Potsdam Proclamation, the outcome of the Anti-fascist victory clearly defined the territory of Japan. According to the Cairo Declaration issued by China, the US and the UK in December 1943, their purpose is that “Japan shall be stripped of all the islands in the Pacific which she has seized or occupied since the beginning of World War I in 1914, and that all the territories Japan has stolen from the Chinese” shall be restored to China. “Japan will also be expelled from all other territories which she has taken by violence and greed”.

    The Potsdam Proclamation issued in 1945 reaffirmed that “the terms of the Cairo Declaration shall be carried out and Japanese sovereignty shall be limited to the islands of Honshu, Hokkaido, Kyushu, Shikoku and such minor islands as we determine”. On Jan 29, 1946, the Supreme Commander for the Allied Powers Instruction No 667 explicitly stipulated the range of the Japanese territory, which included the four major islands of Japan (Honshu, Hokkaido, Kyushu, Shikoku) and the approximately 1,000 smaller adjacent islands, including the Tsushima Islands and the Ryukyu Islands north of 30 degrees north latitude. The delimitation of the Japanese territory by the Cairo Declaration and the Potsdam Proclamation is clear-cut. The Diaoyu Islands are not included in the Japanese territory in any way.

    On Sept 8, 1951, Japan and the US concluded the San Francisco Peace Treaty in the absence of China and the Soviet Union, two victorious countries in the war against Japan, putting Nansei Shoto south of 29 degrees north latitude (including the Ryukyu Islands and the Daito Islands) under the US trusteeship. The Diaoyu Islands were not mentioned in the treaty, nor by the Japanese government’s later explanations thereof. On Dec 25, 1953, the United States Civil Administration of the Ryukyu Islands issued the Civil Administration Proclamation No 27 on the geographical boundaries of the Ryukyu Islands and defined the areas administered by the US government and the Ryukyu Civil Administration as the islands, islets, atolls, rocks and territorial waters along 24 degrees north latitude and 122 degrees east longitude. This proclamation included the Diaoyu Islands, China’s territory, into their areas of administration. These islands were also included in the areas to be returned to Japan under the Japan-US Okinawa Reversion Agreement signed on June 17, 1971. The Japanese government takes the above-mentioned agreement as the legal ground for its claim of territorial sovereignty over the Diaoyu Islands.

    On Dec 30, 1971, the Chinese Foreign Ministry pointed out in its statement that “the incorporation by the United States and Japan of China’s Diaoyu and other islands into the area of reversion under the Okinawa Reversion Agreement is totally illegal. It does not in any way change the territorial sovereignty of the People’s Republic of China over the Diaoyu and other islands”. The US government also stated that returning the administrative authority over these islands gained from Japan to Japan does not in any way undermine relevant sovereign claim. The United States cannot increase the legal right Japan had prior to its handover of the administrative authority over these islands to China, nor can it undermine the right of other claimants because of the return of the administrative authority to Japan. All the conflicting claims over these islands are issues that should be resolved by the parties concerned among themselves. On Sept 11, 1996, US State Department spokesperson Nicholas Burns said further that the US neither recognizes nor supports any country’s sovereign claim over the Diaoyu Islands.

    On Sept 1951, the Chinese government issued a statement regarding the San Francisco Peace Treaty signed by the US and Japan without the involvement of the Chinese people and the lawful government of China. It pointed out the illegal nature of the treaty. The “trusteeship” and “reversion” deriving from the treaty included the Diaoyu Islands, thus violating China’s territorial sovereignty and becoming the source of the territorial dispute between China and Japan. The San Francisco Peace Treaty and other relevant documents have no right to cover or determine the ownership of the Chinese territory, and cannot have any legal judgment that extends the sovereignty of Diaoyu Islands to Japan.

    The Diaoyu Islands are an inalienable part of China’s territory. The so-called administrative authority the US “got from” and “returned to” Japan is unjustified. Japan’s claim over the sovereignty of the Diaoyu Islands on that basis has no legal ground in international law.


    Japan has never given up its attempt to gain sovereignty over the Diaoyu Islands. It first destroyed China’s markings on the islands, then renamed the islands, and built a heliport and other facilities. In recent years, Japan went even further. It abetted what it called “civilian actions” to create a fait accompli of “actual control” of the Diaoyu Islands, followed by government renting and “takeover” actions. All this aim to pave the legal grounds for its occupation of the Diaoyu Islands and gradually win recognition from the international community. However, Japan’s claim to sovereignty over the Diaoyu Islands and its encroachment are illegal in the first place. Therefore, its carefully designed “government actions” have no legal ground and do not constitute the execution of state power. They never had, and will never have, any legal effect.

    Article II of the Law of the People’s Republic of China on the Territorial Sea and the Contiguous Zone promulgated in 1992 makes clear that the Diaoyu Islands and other islands are Chinese territory, and reaffirms the legality of China’s ownership of them. In 2009, a Chinese marine surveillance and law enforcement ship was sent to the Diaoyu Islands in repudiation of Japan’s “acquisition by prescription”. This was also a concrete action of China’s exercise of sovereignty over the Diaoyu Islands.

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