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Japan Is Paying Firms to Make Things at Home. But China’s Pull Is Still Strong.

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TOKYO — Until July, the Japanese household goods company Iris Ohyama had always made its line of masks at its two factories in China.

But early this year, as the coronavirus was spreading around the world, the Japanese authorities approached the company with an urgent problem. In China, the government had locked down factories that produce most of the planet’s masks and commandeered supplies. With global demand soaring, stocks in Japan were dangerously low.

Could Iris Ohyama start production at home?

Nearly $23 million in government subsidies later, the company is at the leading edge of a push to encourage Japan’s manufacturers to diversify their supply chains out of China.

The pandemic — and Beijing’s increasingly combative behavior during it — has driven home the risks of overreliance on China for the production of a broad range of goods. Japanese policymakers, long wary of Beijing’s economic overreach, are powering up incentives for firms to expand manufacturing at home and in other countries after years of stop-and-go efforts.

Manufacturers are lining up for the subsidies, which are intended to protect important industries and to ensure access to crucial supplies during crises. But the government’s challenge is vast: It is as though Japan is tossing pennies to hold back economic tides.

The allure of China remains hard to resist for companies dependent on its enormous market, cheap but well-trained labor and efficient infrastructure. When the Trump administration tried to overcome these advantages by raising tariffs on Chinese products, few if any American companies moved production home.

ImageWorkers at an Iris Ohyama factory in northeastern Japan prepare to make face masks. The company had never considered producing them in Japan.
Credit…Kyodo/Reuters

It’s not just the United States. Japan’s own growth has been fueled by a booming China. Chinese factories have scooped up Japanese machine tools, high-tech components and know-how. And Chinese tourists eager to spend their newfound prosperity have flooded Japanese stores, hotels and restaurants, adding to Japan’s wealth.

While the United States has responded to its own concerns about China with an increasingly hard-line policy, the idea of an economic “decoupling” is a nonstarter for Japanese policymakers and companies alike.

For Tokyo, “it’s more about how you manage the risk of that relationship than whether you can orchestrate an economic divorce of sorts,” said Mireya Solís, co-director of the Center for East Asia Policy Studies at the Brookings Institution in Washington.

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Japan, the world’s third-largest economy after the United States and China, is seeking to manage that risk not just by paying companies to move production, but also through diplomatic channels, including recent discussions with India and Australia about improving the resilience of regional supply chains as a hedge against China’s dominance.

The efforts have steered clear of the grandstanding and finger-pointing coming out of Washington. Instead, Japanese policymakers have sought to placate Beijing by insisting that their efforts are not aimed at any particular country.

Still, that facade has become increasingly difficult to maintain amid growing concerns about Chinese government-sponsored corporate espionage, the use of Chinese components in key infrastructure, China’s crackdown in Hong Kong and the increasing tensions between Washington and Beijing, including a trade war that has battered Japanese exports.

China’s more belligerent regional military presence has not helped matters, either. Increased patrols by Chinese forces near Taiwan and around islands contested by Tokyo and Beijing have drawn rebukes from the United States and have made it harder to keep economic and geopolitical concerns separate.

“In one sense, the Japanese government tried to expand the room for business cooperation with China, but as the most important ally of the U.S. in the Asia-Pacific, Japan must follow American strategic trends,” said Masayuki Masuda, a senior fellow at Japan’s National Institute for Defense Studies.

Credit…Noriko Hayashi for The New York Times

That means “trying to keep a balance between China and the U.S.,” he said. “If we restrict normal business activities with China, the damage would be very big. So, where is the red line?”

Even Japanese businesses seem more willing than ever to push that line. According to a July survey of 3,000 businesspeople by the economic newspaper Nikkei Shimbun and the Japan Center for Economic Research, more than 46 percent of respondents said that Japanese companies should do less business with China. About 18 percent said the opposite.

“Public and political sentiment in Japan has been turning against China for years, and I think that’s an entirely organic process,” said Kristin Vekasi, an assistant professor of political science at the University of Maine who has studied how Japan has managed economic risk toward China.

Japan has rolled out a number of measures, to mixed success, in an effort to blunt Beijing’s reach.

The country has put strict limits on foreign participation in government procurement projects, throttled foreign investment in publicly traded domestic companies and set up a cabinet-level division tasked with monitoring threats to the country’s economic security.

Japan also tightened rules requiring foreign entities to seek government permission before investing in publicly listed companies that touch on national security, lowering the threshold to 1 percent from 10 percent of a company’s shares.

Conservative Japanese politicians in the governing party believe the measures aimed at China have not gone nearly far enough. Legislative study groups in Japan’s Parliament are considering restrictions on foreign investment in real estate and on Chinese apps like TikTok.

Still, even some of the most vocal advocates are cautious about calling out Beijing by name.

In a recent interview, Akira Amari, a member of Parliament and former trade minister who leads a legislative group on economic security, said that the measures under consideration were not aimed at any one nation, but were intended to reduce economic security risks across the board.

Credit…Noriko Hayashi for The New York Times

Even so, Mr. Amari allowed that concerns about China had been a major factor in shaping the policies, citing actions in the United States, Britain and India as informing Japan’s thinking. Those countries have expressed security fears over issues like TikTok and Chinese companies’ role in building out 5G networks.

Japan tried having a more open economic relationship with China, and it didn’t work, Mr. Amari said. If China “had the same values as Japan,” he added, “we would have taken a completely different response.”

The repercussions may be less than feared — at least for now. With Washington and Beijing locked in a great-powers struggle, China may need Japan as much as Japan needs it.

“China and the U.S. have been involved in a hegemonic war, so China needs a friend,” said Shujiro Urata, a professor of economics at Waseda University in Tokyo.

“Japan cannot be that friendly to China, the Chinese know that, but they don’t want to jeopardize their relationship with Japan,” he added.

For Japanese businesses, the feeling is mutual. Despite growing concerns about doing business in China, the economic incentives to stay remain too great.

In an interview at Iris Ohyama’s headquarters in Miyagi Prefecture, the company’s president, Akihiro Ohyama, was up front about the fact that opening new domestic production lines wouldn’t have made economic sense without the government’s help.

The company, which sells more than 25,000 products including televisions and microwaveable rice, had already begun opening factories outside China years ago, seeking to reduce shipping costs and to appeal to consumers who wanted domestically manufactured goods. But it had never considered making masks in Japan.

“The government subsidies were a major factor,” Mr. Ohyama said.

Since Iris Ohyama became the first company to accept Japan’s new subsidy offer, more than 1,600 companies have applied for the $2.3 billion that the government earmarked for the program. The vast majority is set aside for increasing domestic production. So far, 56 other firms have received funds for increasing production at home, and an additional 30 have received subsidies for factories in Southeast Asian countries such as Vietnam, the Philippines and Thailand.

Credit…Noriko Hayashi for The New York Times

On a recent visit to a former snack factory that Iris Ohyama converted to make masks, employees in white scrubs and blue caps quietly tended to rows of machines as they assembled and packaged the goods.

Mr. Ohyama said he had been worried about how the Chinese government would react to a scene like this.

He needn’t have been concerned. The officials weren’t angry; they were nervous that the company planned to leave. In reality, Iris Ohyama plans to deepen its presence in China, where its sales have been growing by more than 30 percent a year.

“We’re expanding in China,” Mr. Ohyama said. But “we’re going to be manufacturing in other countries, too.”

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The Trump campaign celebrated a growth record that Democrats downplayed.

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The White House celebrated economic growth numbers for the third quarter released on Thursday, even as Joseph R. Biden Jr.’s presidential campaign sought to throw cold water on the report — the last major data release leading up to the Nov. 3 election — and warned that the economic recovery was losing steam.

The economy grew at a record pace last quarter, but the upswing was a partial bounce-back after an enormous decline and left the economy smaller than it was before the pandemic. The White House took no notice of those glum caveats.

“This record economic growth is absolute validation of President Trump’s policies, which create jobs and opportunities for Americans in every corner of the country,” Mr. Trump’s re-election campaign said in a statement, highlighting a rebound of 33.1 percent at an annualized rate. Mr. Trump heralded the data on Twitter, posting that he was “so glad” that the number had come out before Election Day.

The annualized rate that the White House emphasized extrapolates growth numbers as if the current pace held up for a year, and risks overstating big swings. Because the economy’s growth has been so volatile amid the pandemic, economists have urged focusing on quarterly numbers.

Those showed a 7.4 percent gain in the third quarter. That rebound, by far the biggest since reliable statistics began after World War II, still leaves the economy short of its pre-pandemic levels. The pace of recovery has also slowed, and now coronavirus cases are rising again across much of the United States, raising the prospect of further pullback.

“The recovery is stalling out, thanks to Trump’s refusal to have a serious plan to deal with Covid or to pass a new economic relief plan for workers, small businesses and communities,” Mr. Biden’s campaign said in a release ahead of Thursday’s report. The rebound was widely expected, and the campaign characterized it as “a partial return from a catastrophic hit.”

Economists have warned that the recovery could face serious roadblocks ahead. Temporary measures meant to shore up households and businesses — including unemployment insurance supplements and forgivable loans — have run dry. Swaths of the service sector remain shut down as the virus continues to spread, and job losses that were temporary are increasingly turning permanent.

“With coronavirus infections hitting a record high in recent days and any additional fiscal stimulus unlikely to arrive until, at the earliest, the start of next year, further progress will be much slower,” Paul Ashworth, chief United States economist at Capital Economics, wrote in a note following the report.

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Black and Hispanic workers, especially women, lag in the U.S. economic recovery.

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The surge in economic output in the third quarter set a record, but the recovery isn’t reaching everyone.

Economists have long warned that aggregate statistics like gross domestic product can obscure important differences beneath the surface. In the aftermath of the last recession, for example, G.D.P. returned to its previous level in early 2011, even as poverty rates remained high and the unemployment rate for Black Americans was above 15 percent.

Aggregate statistics could be even more misleading during the current crisis. The job losses in the initial months of the pandemic disproportionately struck low-wage service workers, many of them Black and Hispanic women. Service-sector jobs have been slow to return, while school closings are keeping many parents, especially mothers, from returning to work. Nearly half a million Hispanic women have left the labor force over the last three months.

“If we’re thinking that the economy is recovering completely and uniformly, that is simply not the case,” said Michelle Holder, an economist at John Jay College in New York. “This rebound is unevenly distributed along racial and gender lines.”

The G.D.P. report released Thursday doesn’t break down the data by race, sex or income. But other sources make the disparities clear. A pair of studies by researchers at the Urban Institute released this week found that Black and Hispanic adults were more likely to have lost jobs or income since March, and were twice as likely as white adults to experience food insecurity in September.

The financial impact of the pandemic hit many of the families that were least able to afford it, even as white-collar workers were largely spared, said Michael Karpman, an Urban Institute researcher and one of the studies’ authors.

“A lot of people who were already in a precarious position before the pandemic are now in worse shape, whereas people who were better off have generally been faring better financially,” he said.

Federal relief programs, such as expanded unemployment benefits, helped offset the damage for many families in the first months of the pandemic. But those programs have mostly ended, and talks to revive them have stalled in Washington. With virus cases surging in much of the country, Mr. Karpman warned, the economic toll could increase.

“There could be a lot more hardship coming up this winter if there’s not more relief from Congress, with the impact falling disproportionately on Black and Hispanic workers and their families,” he said.

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Ant Challenged Beijing and Prospered. Now It Toes the Line.

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As Jack Ma of Alibaba helped turn China into the world’s biggest e-commerce market over the past two decades, he was also vowing to pull off a more audacious transformation.

“If the banks don’t change, we’ll change the banks,” he said in 2008, decrying how hard it was for small businesses in China to borrow from government-run lenders.

“The financial industry needs disrupters,” he told People’s Daily, the official Communist Party newspaper, a few years later. His goal, he said, was to make banks and other state-owned enterprises “feel unwell.”

The scope of Mr. Ma’s success is becoming clearer. The vehicle for his financial-technology ambitions, an Alibaba spinoff called Ant Group, is preparing for the largest initial public offering on record. Ant is set to raise $34 billion by selling its shares to the public in Hong Kong and Shanghai, according to stock exchange documents released on Monday. After the listing, Ant would be worth around $310 billion, much more than many global banks.

The company is going public not as a scrappy upstart, but as a leviathan deeply dependent on the good will of the government Mr. Ma once relished prodding.

More than 730 million people use Ant’s Alipay app every month to pay for lunch, invest their savings and shop on credit. Yet Alipay’s size and importance have made it an inevitable target for China’s regulators, which have already brought its business to heel in certain areas.

These days, Ant talks mostly about creating partnerships with big banks, not disrupting or supplanting them. Several government-owned funds and institutions are Ant shareholders and stand to profit handsomely from the public offering.

The question now is how much higher Ant can fly without provoking the Chinese authorities into clipping its wings further.

Excitable investors see Ant as a buzzy internet innovator. The risk is that it becomes more like a heavily regulated “financial digital utility,” said Fraser Howie, the co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.”

“Utility stocks, as far as I remember, were not the ones to be seen as the most exciting,” Mr. Howie said.

Ant declined to comment, citing the quiet period demanded by regulators before its share sale.

The company has played give-and-take with Beijing for years. As smartphone payments became ubiquitous in China, Ant found itself managing huge piles of money in Alipay users’ virtual wallets. The central bank made it park those funds in special accounts where they would earn minimal interest.

After people piled into an easy-to-use investment fund inside Alipay, the government forced the fund to shed risk and lower returns. Regulators curbed a plan to use Alipay data as the basis for a credit-scoring system akin to Americans’ FICO scores.

China’s Supreme Court this summer capped interest rates for consumer loans, though it was unclear how the ceiling would apply to Ant. The central bank is preparing a new virtual currency that could compete against Alipay and another digital wallet, the messaging app WeChat, as an everyday payment tool.

Ant has learned ways of keeping the authorities on its side. Mr. Ma once boasted at the World Economic Forum in Davos, Switzerland, about never taking money from the Chinese government. Today, funds associated with China’s social security system, its sovereign wealth fund, a state-owned life insurance company and the national postal carrier hold stakes in Ant. The I.P.O. is likely to increase the value of their holdings considerably.

“That’s how the state gets its payoff,” Mr. Howie said. With Ant, he said, “the line between state-owned enterprise and private enterprise is highly, highly blurred.”

China, in less than two generations, went from having a state-planned financial system to being at the global vanguard of internet finance, with trillions of dollars in transactions being made on mobile devices each year. Alipay had a lot to do with it.

Alibaba created the service in the early 2000s to hold payments for online purchases in escrow. Its broader usefulness quickly became clear in a country that mostly missed out on the credit card era. Features were added and users piled in. It became impossible for regulators and banks not to see the app as a threat.

ImageAnt Group’s headquarters in Hangzhou, China.
Credit…Alex Plavevski/EPA, via Shutterstock

A big test came when Ant began making an offer to Alipay users: Park your money in a section of the app called Yu’ebao, which means “leftover treasure,” and we will pay you more than the low rates fixed by the government at banks.

People could invest as much or as little as they wanted, making them feel like they were putting their pocket change to use. Yu’ebao was a hit, becoming one of the world’s largest money market funds.

The banks were terrified. One commentator for a state broadcaster called the fund a “vampire” and a “parasite.”

Still, “all the main regulators remained unanimous in saying that this was a positive thing for the Chinese financial system,” said Martin Chorzempa, a research fellow at the Peterson Institute for International Economics in Washington.

“If you can’t actually reform the banks,” Mr. Chorzempa said, “you can inject more competition.”

But then came worries about shadowy, unregulated corners of finance and the dangers they posed to the wider economy. Today, Chinese regulators are tightening supervision of financial holding companies, Ant included. Beijing has kept close watch on the financial instruments that small lenders create out of their consumer loans and sell to investors. Such securities help Ant fund some of its lending. But they also amplify the blowup if too many of those loans aren’t repaid.

“Those kinds of derivative products are something the government is really concerned about,” said Tian X. Hou, founder of the research firm TH Data Capital. Given Ant’s size, she said, “the government should be concerned.”

The broader worry for China is about growing levels of household debt. Beijing wants to cultivate a consumer economy, but excessive borrowing could eventually weigh on people’s spending power. The names of two of Alipay’s popular credit functions, Huabei and Jiebei, are jaunty invitations to spend and borrow.

Huang Ling, 22, started using Huabei when she was in high school. At the time, she didn’t qualify for a credit card. With Huabei’s help, she bought a drone, a scooter, a laptop and more.

The credit line made her feel rich. It also made her realize that if she actually wanted to be rich, she had to get busy.

“Living beyond my means forced me to work harder,” Ms. Huang said.

First, she opened a clothing shop in her hometown, Nanchang, in southeastern China. Then she started an advertising company in the inland metropolis of Chongqing. When the business needed cash, she borrowed from Jiebei.

Online shopping became a way to soothe daily anxieties, and Ms. Huang sometimes racked up thousands of dollars in Huabei bills, which only made her even more anxious. When the pandemic slammed her business, she started falling behind on her payments. That cast her into a deep depression.

Finally, early this month, with her parents’ help, she paid off her debts and closed her Huabei and Jiebei accounts. She felt “elated,” she said.

China’s recent troubles with freewheeling online loan platforms have put the government under pressure to protect ordinary borrowers.

Ant is helped by the fact that its business lines up with many of the Chinese leadership’s priorities: encouraging entrepreneurship and financial inclusion, and expanding the middle class. This year, the company helped the eastern city of Hangzhou, where it is based, set up an early version of the government’s app-based system for dictating coronavirus quarantines.

Such coziness is bound to raise hackles overseas. In Washington, Chinese tech companies that are seen as close to the government are radioactive.

In January 2017, Eric Jing, then Ant’s chief executive, said the company aimed to be serving two billion users worldwide within a decade. Shortly after, Ant announced that it was acquiring the money transfer company MoneyGram to increase its U.S. footprint. By the following January, the deal was dead, thwarted by data security concerns.

More recently, top officials in the Trump administration have discussed whether to place Ant Group on the so-called entity list, which prohibits foreign companies from purchasing American products. Officials from the State Department have suggested that an interagency committee, which also includes officials from the departments of defense, commerce and energy, review Ant for the potential entity listing, according to three people familiar with the matter.

Ant does not talk much anymore about expanding in the United States.

Ana Swanson contributed reporting.

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