By Xia Ri, Industry Researcher at ANBOUND
1979 was a critical year for the economic, political, and diplomatic development between China and Japan. During his visit to China, then-Japanese Prime Minister Masayoshi Ōhira explicitly stated that Japan would support China’s reform and opening-up efforts. Subsequently, Japan formally began providing government development loans to China, primarily in yen. In December 2007, China and Japan signed the yen loan agreement, and 28 years later, the Japanese government officially announced that it would cease the loans to China starting in 2008.
In its entire process, Japan provided loans to China in batches, with the initial scale rapidly increasing, peaking in 2000, then sharply decreasing. Overall, yen loans show the five characteristics of high amounts, large increases, low interest rates, long repayment periods, and high cooperation.
The first three batches of yen loans saw a significant increase in scale. The first batch (1979-1983) amounted to JPY 330.9 billion, with an interest rate of 3% and a 30-year repayment period, including a 10-year grace period. The second batch (1984-1989) was announced during Prime Minister Yasuhiro Nakasone’s visit to China in 1984, with a loan of JPY 470 billion, an interest rate ranging from 3% to 5%, and the same 30-year repayment period, including a 10-year grace period. The third batch (1990-1995), announced during Prime Minister Takeshita Noboru’s visit in 1988, involved JPY 810 billion, a 2.5% interest rate, and a 30-year repayment period, also with a 10-year grace period.
Secondly, after the fourth batch of yen loans, the scale sharply declined after reaching its peak. The fourth batch of loans was divided into two stages: JPY 580 billion for the 1996-1998 period and JPY 390 billion for the 1999-2000 period, totaling approximately JPY 970 billion. The annual interest rate ranged from 0.75% to 2.3%, with a repayment period of 30 years, including a 10-year grace period. By 2000, yen loans peaked at JPY 2.14299 trillion, which was about three times the amount of the first batch. However, after 2001, the loan amount significantly decreased, reaching its lowest point by 2007 at only JPY 46.302 billion, a reduction of about 78.4% compared to 2000.
Finally, there were also industry-specific loans. In 1988 and 1994, the Japanese government provided China with two capital recycling yen loans, amounting to JPY 100 billion and JPY 40 billion, respectively. These loans were mainly used for industries such as textiles, electromechanical, light industry production, and raw materials for export. The development of these sectors supported China’s efforts to expand exports and generate foreign exchange. In October 2000, Japan also provided China a special yen loan with a 40-year repayment term, with a 10-year grace period, and an interest rate of only 0.95%, totaling JPY 17.202 billion.
These yen loans played a significant role in China’s reform and opening-up, driving the rapid development of the Chinese economy. This impact is reflected in the following three areas:
First, they opened the door for China to introduce foreign capital and develop its economy. In June 1979, the Chinese-foreign Equity Joint Venture Law was passed, signaling China’s official abandonment of its 1960s policy of rejecting foreign investment. This marked a shift towards encouraging foreign capital. In 1978, China’s foreign exchange reserves were only USD 167 million. In 1979, China and Japan signed the first loan agreement, which was the earliest and largest foreign government loan received by China since the reform and opening-up began. Japan was the first country to offer government loans to China, thus opening the door for China to introduce foreign capital to develop its economy.
To facilitate this loan, the Japanese government proposed and convinced other Western countries and the Organization for Economic Cooperation and Development (OECD)’s Development Assistance Committee (DAC) to classify China as a “developing country” and include it in the list of countries eligible for assistance from developed nations. This was very helpful for China in securing funding and development aid from international financial institutions such as the World Bank, the Asian Development Bank, and the International Monetary Fund, thus accelerating China’s economic development and integration into the global economic system.
Japan was also the largest donor of government development assistance to China, with the total loan agreement amount accounting for over 60% of all foreign government loans to China. Among the 24 countries and regional financial institutions that provided government loans to China, Japan’s loans were the largest. China was the third-largest recipient of Japan’s foreign aid, following Indonesia and Vietnam. In 2006, Japan’s Ambassador to China, Keiji Ide, noted that, in terms of U.S. dollars, Japan’s aid to China amounts to USD 144.1 billion, exceeding the total aid from Germany (USD 39.6 billion), France (USD 13.4 billion), and the UK (USD 6.6 billion) combined.
Second, the loans promoted China’s infrastructure and economic development plans through valuable long-term investment funds, thereby reducing financing costs for construction. The multi-year decision approach to loans aligned with China’s five-year economic plans, effectively advancing infrastructure development in areas such as resources, energy, transportation, and communications. According to data from Japan-China Economic Cooperation, the share of yen loans in China’s fixed asset investment increased from 1.54% in 1985 to 10.41% in 1992. Through joint efforts between the two countries, a number of large-scale, long-term, technologically advanced, and capital-intensive infrastructure projects were completed across China’s provinces, autonomous regions, and municipalities. By the end of 1995, the major construction projects included the expansion of the Beijing-Qinhuangdao railway, Qinhuangdao Port expansion, Lianyungang Port expansion, Qingdao Port expansion, the Tianshengqiao hydropower project, the Datong-Qinhuangdao railway construction, Beijing subway construction, Beijing water supply improvement projects, urban gas improvement projects, export base construction projects, Hainan Island development, telephone network expansion in nine provinces and cities, Beijing Capital Airport development, the Xi’an-Ankang railway project, and numerous city infrastructure projects in railways, gas, water supply, electricity, and communications. For instance, between 1991 and 1995, the Tianshengqiao Hydroelectric Project utilized JPY 4.367 billion in loans to build a 1,200 MW dam-style hydroelectric power station, extend 984 kilometers of transmission lines, and support China’s eighth Five-Year Plan and the West-to-East Gas Pipeline Project.
Furthermore, since Japan launched the transformative economic cooperation plan for China in 2001, yen loans have supported national regional strategies such as the plans for developing the western and central parts of the country. These loans greatly facilitated development in the recipient areas in sectors such as education, healthcare, and the environment, including projects like the Heihe-Beian highway in Heilongjiang, local road development in Gansu, and afforestation plans in Inner Mongolia.
Third, it accelerated the rapid development of China-Japan economic and trade relations. After the 1980s, the two countries’ economic and trade relations evolved from simple import-export trade to comprehensive economic cooperation, which included bilateral trade, the change of Japan’s government development aid policy to China, direct investment, and intergovernmental financial cooperation. During this decade, leveraging Japan’s government-to-government financial cooperation with China, bilateral trade between the two countries grew from around USD 10 billion in 1981 to USD 20.282 billion in 1991, an increase of over 100%.
During this period, trade between the two nations experienced sustained and rapid development overall. Moreover, direct investment from both countries also saw a significant rise, leading to the first surge of private Japanese investment in China. According to data, between 1979 and 1985, the investment amounted to USD 1.23 billion; from 1986 to 1990, total investment reached USD 1.29 billion. Although these investment surges were mainly focused on China’s Special Economic Zones and were smaller in scale compared to later investments, they were crucial in opening up direct private investment between the two countries and played a significant role in developing China-Japan economic and trade relations. Later, due to political factors and the Asian financial crisis, China-Japan trade experienced several setbacks. In 1990, bilateral trade declined significantly; from 1994 to 1996, growth slowed notably compared to previous years, and negative growth occurred in 1998. However, overall, China-Japan trade continued to rise, from USD 12.927 billion in 1990 to USD 66.167 billion in 1999. In the 21st century, the development of China-Japan economic and trade relations accelerated rapidly, showing characteristics such as mutual dependence, increasing deepening, a mutually beneficial structure becoming more evident.
At the same time, Japan’s increasing dependence on China surpassed China’s dependence on Japan. This made an important contribution to China’s economic development. Meanwhile, Japanese investment in China continued to grow. In 2002, Japanese investment in China remained high, with an agreement amount of USD 5.3 billion and an actual investment of USD 4.19 billion. By the end of 2002, the total agreed investment from Japan to China had reached USD 49.53 billion, with actual investment amounting to USD 36.34 billion.
All in all, the 28 years of Japanese loans had a significant impact on China’s reform and opening-up, opening the door for it to introduce foreign capital and develop its economy, promoting infrastructure and economic development plans, and accelerating the rapid development of China-Japan economic and trade relations. Therefore, a proper understanding of these loan aids is crucial for China to effectively manage and advance its relations with Japan.
