As a recovering United States passed the Dodd-Frank Act of 2010 to protect consumers in the aftermath of the 2007-2008 financial crisis, the People’s Republic of China was already setting in motion a massive campaign to accelerate its goal to become the leading global economic superpower. The first step required overtaking Japan, the world’s second most powerful economy at that point, which it did, outpacing Japan’s GDP in 2010. The second step? Penetrate Japan’s portfolio of top publicly held industrial and financial titans.
The targeted companies were the darlings of Japan industry. In 2010, Japan had approximately 2,292 publicly traded companies. The Chinese Communist Party (CCP) acquired equity stakes in about 7.5 percent, around 170 of these entities. This was the tip of the spear that pierced Japan’s industrial and corporate armor. It was China’s Trojan Horse.
These corporations were all global, heavily entrenched in the United States. They included energy companies, global IT services, cybersecurity firms, telecommunications corporations, pharmaceutical manufacturers, diversified financial services, and more.
China was careful not to trigger any alarms. Equity purchases of more than 5 percent attracted regulatory scrutiny, and China needed to stay under the radar.
The CCP used a financial instrument called the SSBT OD05 Omnibus–Treaty Client, a fund registered in Sydney under the Australian State Street Bank and Trust. Interestingly, so-called omnibus funds refer to monies from multiple underlying pooled assets. Pooling these assets obscures the exact identities of the ultimate investors or beneficial owners of the assets. “Treaty” in this case refers to a strategy of channeling these large-scale investments through Australia, allowing China to exploit an Australia–Japan tax treaty that allows non-resident investors to reduce any withholding taxes for Japan investments.
These were substantial investments by China. Investment funds directed into Japan in 2012, for example, amounted to approximately $45 billion. In today’s dollars, that would amount to $65 billion.
The China Investment Corporation (CIC) is believed to be an investor in SSBT funds, and so is the State Administration of Foreign Exchange (SAFE). These sovereign wealth funds are powerful financial entities. Both CIC and SAFE are linked directly to China’s military and intelligence establishments: both operate under the direction of the CCP. Both serve the strategic interests and financial goals of the CCP. Many in the U.S. intelligence community believe the funds are linked to the People’s Liberation Army and the Ministry of State Security, the intelligence organization, and possibly other Chinese government entities.
If true, this should have raised concerns by boards of directors over corporate governance. It would be a violation of Japan’s national security laws for foreign military and intelligence organizations to hold financial positions in a Japanese public company. But China stayed ahead of the problem.
The combined value of CIC and SAFE today is approximately $5 trillion, about the nominal GDP of Russia and Brazil combined, making it a powerful economic partner—and adversary.
As early as 2003, Japan’s Minister of Economy, Trade, and Industry Shoichi Nakagawa was concerned about China’s intentions in Japan. A vocal hawk on Beijing, Nakagawa emphasized national security and sovereignty over economic gain.
China’s strategy was brilliant. The execution deliberate. The objective: to acquire Japan’s compelling technology and industrial secrets to pave the way to that coveted number one GDP—the most powerful economy in the world. It was China versus the United States, with the unwitting assistance of Japan. Starting in the early 2000s, like a deer in the headlights, Japan got hit before it knew what was happening.
China’s so-called long game may also be called “strategic patience,” a geopolitical and economic doctrine that focuses on positional accumulation—acquiring assets that improve market position. That’s what China was doing in Japan: carefully creating access to Japan’s industrial magic. Forget about the history of past clashes. Get inside Japan and milk it for the long-term.
An element of China’s strategy was to penetrate Japan’s juggernaut industrial force. Building a world-class economic power requires the best technologies to stay ahead of the industrial power curve. China knew exactly where to go. Its goal was to target the best of what Japan offered.
The CCP witnessed the post-world War II industrialization of Japan, and saw how quickly and decisively Japan recovered from defeat and rose to become a superpower within a few decades. What caught the CCP’s attention was not only the success of Japan, but the manner in which it was able to overcome the many obstacles that come with losing a world war. Nevertheless, Japan did overcome. One of the crucial factors of becoming a post-war industrial power was innovation. The ability to innovate was what China lacked, and this inability to innovate would undoubtedly hold back China’s rise to global prominence.
The ”key fields” refer to Project 863, the CCP’s blueprint of twenty vital technologies that China would need on its journey to sustainable economic performance against the United States. China knew what it needed, but there were internal inadequacies that could be resolved only through the acquisition of intellectual property and the processes of building a twentieth century empire. China must get deeply inside of Japan.
The premier’s admission that China must acquire what it cannot innovate was as unprecedented as it was revealing. Simply, it meant that China must use alternative means to fully develop the technologies it needed. Project 863 was unveiled in March of 1986. It was the blueprint of the technologies needed to overtake US GDP.
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- Mergers and acquisitions
- Targeted equity investment
- International joint ventures
- Direct foreign investment
- Active cyber espionage
- Passive cyber espionage
- Human capital espionage
- Socio-economic exploitation
- Diplomatic exchanges
- Academic research
In 2010, there were approximately 408,000 Chinese nationals working in Japanese companies. The Japanese government estimates that by 2030 that number will rise to about one and a half million. Chinese nationals are now embedded in companies throughout Japan, in roles that range from lower level positions to professional engineering and management ranks.
China knew that Japan was going to face a future labor shortage based on the decline of Japanese births. China also knew that Japan’s industrial base of companies held the secrets of new technologies, which matched China’s Project 863. It also knew that Japan’s financial powerhouses would help expand Japan’s influence around the world.
Of course, the world now knows that China has a voracious taste for engaging in corporate and industrial espionage, as well as the acquisition of companies around the world. But Japan found itself between a rock and a hard place, as the saying goes. A low birth rate would eventually cripple its economic infrastructure. China simply took advantage of that condition. It filled a prospective labor vacuum.
Japan learned the hard way that it must do more to protect its treasures from foreign acquisition, and it has been upgrading its laws to better defend against the loss of the technologies and markets that helped define its post-war emergence.
