China, Japan ties strained over islands at summit

HANOI (Reuters) - Japan Prime Minister Naoto Kan and Chinese Premier Wen Jiabao will not hold a one-on-one meeting intended to mend ties at an Asian summit as Chinese anger flared over an over-lapping claim in the resource-rich East China Sea.

China lambasted Japan on Friday for raising the issue of disputed islands in the sea and a Japanese cabinet secretary later said Beijing had torpedoed a slated meeting between the two premiers at the last minute, though its pursuit of strategic and beneficial ties remained unchanged.

"I cannot say there won't be any impact (on relations)," said Japanese deputy chief cabinet secretary Tetsuro Fukuyama when asked about the setback. "But what is essential is a calm response," he told reporters.

Ties between China and Japan deteriorated last month with the detention of a Chinese fishing boat captain by the Japanese coast guard after their boats collided near the disputed isles.

The two sides had taken steps to mend ties and speculation swirled over whether Wen and Kan would hold bilateral talks on the sidelines of the Asia-Pacific summit in Hanoi.

Japan said China's decision to scrap the talks was based on a "misunderstanding" over a media report that Beijing had agreed to resume negotiations with Japan on the exploration for oil and gas fields in the East China Sea.

China, however, put a different spin on the geo-political row, saying Japan had "inflamed" the East China Sea issue and disseminated information violating China's territorial claims.

"Their actions have damaged the atmosphere," Chinese Foreign Ministry official Hu Zhengyue told reporters in Hanoi, referring to Japan's raising of the Diaoyu islands in ministerial talks at the summit. "They are responsible for everything."

Japan calls the islands the Senkakus.

Both leaders appeared stiff and avoided eye contact when they lined up for photographs with other leaders during the day.

In a sign of the diplomatic shadow-play, Japanese Foreign Minister Seiji Maehara earlier told reporters after a meeting with his Chinese counterpart, Yang Jiechi, that talks had been held in a "very good atmosphere."

The flareup over the islands is the latest in a string of rows to strain ties between the neighbors.

Both governments are extremely wary of public opinion in their countries where age-old suspicion runs deep, partly from Japan's wartime occupation of parts of China.

Anti-Japan protests broke out in several Chinese cities in recent days, while in Japan, Kyodo news agency reported that suspicious containers of red liquid were sent to the Chinese embassy and consulates.

RARE EARTHS

In Hanoi, Maehara also said he expressed Japan's concern about China's policy on rare earths, and that Yang assured him China would not use the minerals as bargaining tools.

Chinese restrictions on the export of rare earth minerals, vital for the manufacture of high-tech goods and over which China has a near-monopoly on global production, have alarmed Japan and other countries around the world.

U.S. Secretary of State Hillary Clinton, who arrived in Hanoi late on Friday and will join the summit of 16 Asian countries on Saturday, earlier called for China to ensure the rare earth trade would continue unabated.

A Japanese official quoted Wen as saying China wanted to continue providing rare earth minerals to the world, and to do so in a sustainable way that would not violate World Trade Organization rules.

"Premier Wen commented that China has seen over-development for a long time and that China wants to continue providing rare earth to the world," the official said.

The rift between China and Japan is one of several disputes casting a shadow on efforts to boost economic cooperation in a region, increasingly seen as the world's engine of growth.

China also has disputes with several neighbors over boundaries in the South China Sea, an area key for international shipping and possibly rich in oil and gas.

Global currency troubles are not officially on the agenda but the issue has come up on the sidelines with leaders of the Association of South East Asian Nations (ASEAN) wary about being caught up in a currency war between China and the United States.

A main challenge for some Asian economies is to manage robust capital inflows that have supported recovery from a short recession during the global crisis, but pose a risk by strengthening currencies and undermining export competitiveness.

"Our concern, as a small country, is when the pendulum swings the other way, what is going to happen," Philippine Finance Secretary Cesar Purisima told reporters.

(Additional reporting by Yoko Nishikawa in Tokyo, John Ruwitch and Ambika Ahuja in Hanoi; Editing by Robert Birsel)