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Japanese companies have established a major presence in mainland China, lured not by the cheap labour of the past, but by Chinese consumers of today.

China’s Communist Party granted the first business permit to a Japanese firm in 1977. By 2017, some 32,000 Japanese companies had investments in mainland China worth $117 billion, making its foreign corporate presence one of the biggest on the Chinese mainland. Last year alone, Japanese companies invested nearly $11 billion into China, up by half since 2010. Jesper Koll, a fund manager in Tokyo, estimates that 17% of big listed Japanese firms’ overseas profits come from China.

Relations between the world’s second- and third-biggest economies are warm: Last year Chinese officials met with executives at Panasonic, Canon and Toyota in Japan to entice them with new free trade zones. Japanese Prime Minister Shinzo Abe personally attended a large business forum in China, during which the two countries announced 500 deals worth more than $18 billion.

Japanese firms have made successful adaptations to China’s seismic 30-year growth spurt. Chinese labour is no longer cheap, but the Chinese consumer market is now the world’s biggest. Thus many Japanese firms, such as clothing maker UNIQLO, have moved their manufacturing to Southeast Asia, and established popular brands in the Chinese market. China’s growth has slowed, but as Takeshi Niinami, CEO of Suntory put it, Chinese consumers have gone “beyond the point of no return”.

The corporate segment of the Chinese market also draws Japanese companies. Earlier this year Toyota agreed to sell electric car technology to Singulato, a Chinese firm that makes low-emissions vehicles. It also announced partnerships to build batteries with China’s CATL, a technology company and BYD, a carmaker, The Economist reports. When Chinese e-commerce giant JD.com sought to build China’s largest hydroponics factory in 2015, it hired Mitsubishi Chemical.

Companies from Japan must cope with the same notorious barriers to entry, complex rules and burdensome tax system as any other foreigners operating in China; however Japan’s government and industry groups are more actively addressing such issues on their behalf. The Japanese embassy in Beijing and the Japan External Trade Organisation, an independent government agency, provide assistance. There are also Japanese advertisers in China to help companies market to locals.

In some ways Japan’s prosperous relationship with mainland China is a double-edged sword. Japanese businesses must tread cautiously around the two countries’ chequered political history. Current tensions between China and the U.S. require Japan to balance the interests of both of its most important markets. Further, Japan’s firms are more exposed to China, which is its biggest trading partner. Ichiro Hara of Japanese business lobby Keidanren says it would be “a nightmare” to have to choose between Japan’s biggest neighbour and its chief strategic ally.

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