Why do Chinese leaders, despite valuing economic ties to Japan, take actions – such as permitting anti-Japanese street demonstrations – that risk antagonizing the Japanese business community? In order to adequately explain the puzzling divergence of economic interests and political behavior, I propose a subnational approach. I argue that leaders of Chinese cities that are economically dependent on Japan are more likely to take measures to protect the local business environment, and thus are more likely to repress or contain anti-Japanese street demonstrations. I test this argument by analyzing the variation in city government responses to anti-Japanese protests in two pairs of comparative case studies featuring Dalian and Qingdao, and Shanghai and Guangzhou. A key implication of my argument is that the expectation that certain subnational actors will preserve economic relations with Japan may give rise to a moral hazard problem in which leaders at the national level engage in riskier international behavior.