Rippling fallout from Diaoyu issue imperils world trade, experts warn

The fallout from the Diaoyu Islands will have global economic consequences, experts said, as the International Monetary Fund downgraded its world outlook.

Concerns grew after four State-owned banks, including the Industrial and Commercial Bank of China, the world's largest lender by market value, confirmed that it will not attend the IMF-World Bank annual meeting that opened on Tuesday in Tokyo.

Central bank governor Zhou Xiaochuan and deputy governor Yi Gang are still on the scheduled event list on the IMF's website but the itinerary of Finance Minister Xie Xuren has not yet been decided, a ministry spokesman said.

The news was the latest indicator of strained ties between the world's second and third-largest economies as a result of the Japanese government's decision in September to "purchase" the Diaoyu Islands, which belong to China.

"Tensions between the two countries, with annual trade worth $350 billion, will definitely put pressure on the world economy," said Jiang Yuechun, director of the Department for World Economy and Development at the China Institute of International Studies.

The affected areas will spread gradually from trade, to financial cooperation before becoming global, he said.

"This will be a smaller version of the collapse of Lehman Brothers which will cause a ripple effect and harm the global economy," said Yao Haitian, a researcher from the Institute of Japanese Studies at the Chinese Academy of Social Sciences.

Hiromasa Yonekura, chairman of the Japan Business Federation, on Tuesday told Shinzo Abe, leader of Japan's opposition Liberal Democratic Party, about his concerns over the issue.

The deterioration of Japan's ties with China is "exerting influences on the economic circle", Japanese newspaper Sankei Shimbun's website quoted Yonekura as saying.

The IMF lowered the growth forecast on Tuesday for both China and Japan by 0.2 percentage points from its projections in July. The forecast for China stands at 7.8 percent, and Japan's stands at 2.2 percent.

The forecast for global economic growth in 2012 was also downgraded to 3.3 percent in the World Economic Outlook that was unveiled at the event.

"The world recovery continues, but it has weakened," said IMF chief economist Olivier Blanchard at a news conference.

"In developed countries, growth is now too low to make a substantial dent in unemployment, and in major emerging countries growth, which had been strong earlier, has also decreased."

Speaking ahead of the Tokyo meeting, Christine Lagarde, head of the IMF, warned the world could not afford to have the two countries distracted by the islands.

"Both China and Japan are key economic drivers that do not want to be distracted by territorial division," Lagarde was quoted by Kyodo News Agency as saying.

"The current status of the global economy needs both Japan and China fully engaged," she said.

The warning came as the World Bank and Asian Development Bank recently slashed their growth estimates.

Although the weak global economy was mainly a result of the sluggish recovery in the United States and the ongoing eurozone crisis, the fallout from the islands will become more obvious over the next three to six months, Jiang said.

"For example, less demand for raw materials as a result of halted cooperation programs will affect imports from a third country, such as Australia or Brazil," he said.

According to Yao, the gap between China and Japan may provide a chance for other countries, as Japan may relocate its investment to Southeast Asia and China may also issue favorable policies to foreign investment from other developed countries.

"However, the replacement of productivity cannot be completed overnight, and a reduction in production will result in a break in the global supply chain, as both China and Japan are important sources of semi-manufactured goods," Yao said.

Following anti-Japan protests in dozens of Chinese cities last month, many academic conferences and cultural exchanges were also canceled and airlines have canceled flights due to lower demand.

Major Japanese automakers, including Toyota and Nissan, are slowing production in the world's biggest car market.

Concerns have been raised that currency exchanges, and other financial dealings between the two governments, will also be suspended.

"As both sides are in a standoff, and Japan is preparing for a general election, they may not unleash any more substantial retaliatory measures," said Jin Baisong, a researcher with the Chinese Academy of International Trade and Economic Cooperation.

Contact the writers at weitian@chinadaily.com.cn and zhangyunbi@chinadaily.com.cn

Xinhua contributed to this story.