Fall 2018 Texts/Topics

It’s an exciting time to study the world’s largest economy, with 1.4 billion people and a middle/upper class almost double the size of that of the US or Europe. Fortunately an excellent text has just been published to anchor our approach. In addition I’m assigning a just-published perspective on China’s financial system, one of the flashpoints for the economy.

Obviously there’s nothing yet available on the looming trade war, the dimensions of which are not yet known. Similarly, we need to use various news sources to follow the state of the economy, as policymakers seek to “rebalance” growth from “hard” construction/manufacturing to “soft” services-led consumption.

For general social background, what the economy means to individuals and families, I recommend 2 books: Alec Ash, Wish Lanterns: Young Lives in New China and Rob Schmitz, Street of Eternal Happiness: Big City Dreams Along a Shanghai Road. I’m not assigning them because, however valuable, they would be hard to use in class.

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China’s Future

Today’s powerpoint Chinas Future.

  • I left in the agriculture elasticities slide and other details that we covered earlier in the term.
  • I added details to the open economy savings-investment balance (S-I) + (T-G) = (X-M) to the end.
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Uyghurs and Hui: China’s Muslim Minorities

Two of the largest of China’s fifty-six recognized ethnic minority populations, the Hui and the Uyghur, both largely practice Islam and have both occupied their respective corners of China for centuries. This might lead one to believe that these two groups live similar lives. However, the manner in which the Chinese government treats them could not be more divergent.

The Hui are ethnically distinct from the majority Han, but are quite similar in terms of outward appearance such that it is uncommon to be able to recognize the difference between the two at first glance. Only the white religious garb of the Hui offers any way to distinguish the ethnic groups. The Hui have a large presence in their “home province” (of sorts) in Ningxia, however they also enjoy a presence spread across most of the nation, particularly in the form of concentrated populations in most major Chinese cities. Their ethnic bond with the Han, as well as their relative assimilation into Chinese culture and society, mean that the Hui are essentially allowed free reign to practice their faith. Time off for religious holidays and acceptance of women who wear the veil is widespread. Some practice of sharia law is even permitted, with civil courts stepping in only to resolve those disputes which Islamic law fails to reconcile.

Within the borders of the same country, the story of the Uyghur is very different. Descendants of a mixture of several Central Asian ethnic groups, and speakers of a Turkic language, the Uyghur have long struggled to carry favor from the government in Beijing. In the allegedly independent province of Xinjiang, Uyghur are punished or prohibited from the same practices of their faith that the Hui are encouraged to enjoy. Veils are largely outlawed, open worship is discouraged or even prohibited, and those who speak out against the status quo are quickly labeled “separatists” by provincial authorities.

The reason for this distinction is simple: the Uyghur have consistently resisted government oversight and authority, while the Hui have been largely integrated. It is true that there is a significant Uyghur separatist movement, and that many of its extreme elements have turned to violence to express their outrage. And with each new terror attack, and subsequent government crackdown on Uyghur religious expression, the resentment grows between the two factions. Chinese repression is helping to fuel a vicious cycle wherein each policy they implement in order to punish the Uyghur for the extremist elements in their society pours more fuel on the fire of separatist extremism, and Uyghur extremists do their part to further draw the ire of Beijing by continuing to slaughter innocents in the name of their cause.

While the Hui enjoy tolerant attitudes and occupy many influential positions in Chinese society, strife and violence in Xinjiang continue without cessation. The Chinese government’s strong-arm policies aimed at the Uygur have yet to bear fruition in terms of reduced violence and increased compliance from the people of Xinjiang. Perhaps it is time the government considered a new policy more in line with the treatment of the Hui.

Sources Consulted


http://tyglobalist.org/in-the-magazine/theme/rift-the-uyghurs-and-the-hui/ (Image Source)


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China’s Rapidly Expanding Air Travel Market

Chinese Air Travel Passengers Served vs Time – World Bank

As the GDP growth in China begins to decrease, the Chinese air travel market is expanding rapidly. Chinese have increased their use of air travel by over 700% since 2000, and China is predicted to overtake the U.S. as the world’s largest aviation market by 2033. Many of the aircraft manufactures are struggling to keep up with demand, as Chinese airlines begin to make up an increasingly larger proportion of the companies orders. Last year a quarter of the 500 737s Boeing manufactured went to Chinese airlines. Of the 44 aircraft Boeing delivered to customers in January 2017, 9 of those aircraft were Boeing 737s commissioned by Chinese Airlines or companies. To keep up with China’s increasing demand for aircraft and reduce transportation and, potentially, labor costs Aircraft manufacturers have begun opening and constructing plants in China. In 2009, the France-based Aircraft manufacturer, Airbus, opened up an assembly plant in Tianjin for A320s, their most popular commercial aircraft, and construction is already underway for a second plant near the first to manufacture A330s with local parts and labor.

Airbus Assembly Plant in Tianjin – Business Insider

The American based aircraft manufacturer, Boeing, has been slow to open up shop in
China. Boeing essentially has a monopoly in the U.S. Commercial aircraft market and prides itself on being strictly U.S. based. This has some investors worried as Airbus may begin to overtake Boeing in the Chinese market.  However, in late 2015 Boeing signed a cooperation document with the Commercial Aircraft Corporation of China (Comac) to open a jointly owned completion center in China where unfinished 737s destine for China would be painted and have their cabins fitted. With President Trump’s recent election and his general push for decreased outsourcing and increase domestic jobs, Boeing has taken some heat with concerns of American lost jobs. However, Boeing has assured the public that their decision to open up the completion center in China will not take away any U.S. jobs. In fact, Boeing claims that opening the completion center will create more U.S. jobs as U.S. assembly plants can allocate more of their resources towards increased production and assembly to meet the growing demand in China. Trump’s recognition of Taiwan as an official country also stirs concern in Boeing as future trade relations with China could change due to this political statement. Trepidations also arise as investors propose the possibility of Comac stealing Boeing designs and technology. Comac is currently working on a design similar to the Boeing 737 and Airbus A320, hoping to rival the foreign duopoly.


It will be interesting to observe the competitive landscape within the Chinese air travel market as more assembly plants and completion centers open in China and Chinese aircraft manufactures begin production.



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Chinese Markets React to Trump

Since President Trump’s inauguration in January of this year, the DOW Jones industrial average, the most basic metric for watching the American stock market, has increase by about 5%. Just a few weeks ago, the average broke 21,000, signaling an all-time high. While financial experts were initially worried by what a Trump presidency would do to the American economy, the earliest signs have been positive, despite a short lived downturn after the failure of the American Health Care Act.

Turning to China, the story has been very different. In the first few months of the Trump Presidency, the Chinese markets have taken a sharp downturn. The Shanghai Composite Index, a similar metric for the Chinese exchange, has fallen about 5.2% since peaking shortly after the election. While uncertainty in the Chinese manufacturing sector is partly to blame, experts in Asian markets both in the US and in China also cite Trump’s tough talk on trade as a potential cause for the downturn.  Trump has repeatedly discussed a desire to level the playing field and crack down on alleged unfair dealings by the Chinese government. Similar effects have been seen in Mexico, though not as pronounced. Manufacturers, particularly those on the unsophisticated side as described by Hessler in his travels do not totally understand the political reality of Trump’s campaign positions and perhaps overreact by predicting a greater effect. Much of this rhetoric has been incredibly vague using words like “cheaters” and “play fair.” While it’s easy to infer by the downturn that investors fear rash action on this rhetoric, what exactly can Trump do? What do Chinese manufacturers have to fear?


An all-out trade war would appear to be the worst case scenario, however even the most pessimistic Chinese investor sees this as unlikely. A more likely outcome of this tough talk is smaller actions that subtly cut into the profit margins of Chinese businesses. A previous post discussed the likelihood of tariffs on Chinese imports. During the campaign, Trump talked up the notion of a 45% tariff on imports to “level the playing field.” Though this figure itself is not totally feasible, it has terrified Chinese companies with heavy reliance on exports, injecting uncertainty into the markets.  Domestically, we know that campaign promises of this magnitude often are just talk never turned to action, however individual Chinese firms are less certain.

Lastly, and a little more far-fetched, the instability in the market could also be a function of perceived military threat from the United States. While, again, all-out war is unlikely, the Trump administration talking tough on actions on the South China sea and a relationship with North Korea that appears far too cozy, is enough to make Chinese industry squirm just enough to instill more uncertainty in the markets. Overall, it’ll be interesting to continue to watch the Chinese markets throughout the Trump Presidency.  Will they continue to react to rhetoric alone? Will this further the recent downturn?







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Chinese Marriage: A Pragmatic Venture

The institutions of marriage and family have undergone a shift in terms of their role in Chinese society. The gender-skewing impact of China’s one-child policy has left the nation with a dearth of young women relative to their male counterparts (a product of many Chinese parents’ preference that their only offspring be male). This, along with China’s growing economy and influx of new wealth, has induced both an imbalance in terms of bargaining power between men and women, as well as the advent of a more utilitarian culture around the practice of marriage.

The forces that led to this phenomenon have left a gap that is still growing between male and female, with one source estimating “…there could be 24 million Chinese men unable to find wives by the end of the decade” (NPR). The leverage this has lent to young, marriageable Chinese women is staggering. Once forgotten, or at least downplayed, traditions of lavish dowries and parental generosity have made a comeback. The “bride price” is driven up both by the aforementioned gender disparity, as well as the growing urban Chinese middle class; it is such that the current state of affairs is strikingly different from the cost of Chinese marriages even just a decade ago.

As with mere money, housing too has become a more prominent part of the modern Chinese courtship process. A groom is expected to provide an apartment to any new urban bride, often taking out loans to finance the purchase. In such a competitive market where women are largely free to refuse any advances made by a man perceived to be of insufficient resources, the parents of grooms-to-be must often help foot the bill.

There is an economic impact to this story as well, however. One Professor at Peking University asserts that “rising sex ratios contribute to two percentage points of GDP growth” (NPR). This is due to a combination of factors: in addition to the mere consumption boost of more extravagant weddings, the aggressive ambitions of many young Chinese men are being propelled by a desire to appear more marriageable to potential brides. This increased financial ambition also manifests itself in the form of foreign demand for Chinese men; among Korean women seeking foreign-born husbands, Chinese grooms are seen as the most desirable (Korea Biz Wire).

The increased focus on the financial is not only from the bride’s perspective, however. Marriage in general has taken on a more monetarily minded and pragmatic tone as more and more couples marry for convenience or advancement rather than love. In Beijing, where a stingy license plate lottery has capped the number of new cars allowed in the ever-expanding metropolis, “license plate marriages” are becoming more common. With only about a 12% chance of landing a license plate via the city’s lottery (WSJ), many individuals will seek marriage partners, even temporary ones, simply for the convenience of transferring the spouse’s plate number to themselves.

All told, the culture of marriage in China is rapidly divorcing itself from Western conceptions of romantic marriage and becoming more calculated. While some of this is cultural, much of it appears to be driven just as much, if not more, by economic or demographic factors.


Sources Consulted

http://www.npr.org/2013/04/23/176326713/for-chinese-women-marriage-depends-on-right-bride-price (Image Source)



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US-China relations: Mar-a-Lago Diplomacy


Next week, on Thursday and Friday, President Donald Trump will host Chinese President Xi Jinping at his Mar-a-Lago resort. This is not the first-time Mar-a-Lago has been at the forefront of the news cycle as President Trump often retreats to the Florida resort on the weekends to escape the capitol. One of the main conversation topics of this meeting will be the implementation of trade tariffs which the President has threatened throughout his campaign as well as into his first 100 days. The proposed 45% tariff would be an enormous increase from the existing 3% tariff levied on Chinese imports to the US, and would assuredly have a large impact on Chinese exports. China will look to dissuade President Trump from this tariff increase and they plan on doing so through President Trumps son-in-law, Jared Kushner. The Chinese government will try and take advantage of Trump’s convincibility by leveraging one his senior advisors.

When commenting on the GDP effects that this would have, Gene Ma, economist for China at the Institute of International Finance stated that the “direct impact on GDP would be sizable. The value added by export[s] is about 10 percent of China GDP, and [the] U.S. accounts for about one-fifth of China exports.” Because of the global aspect of the United States economy, these threats from President Trump would not only have an adverse effect on Chinese production but also on American production as well. Multinational companies such as Walmart outsource much of their production to China. They will have to pay more to import these goods back to the states and this tariff would cause their prices to spike. Because of this, American consumers would suffer and consumer demand would presumably decrease. According to CNBC, “China exported about $482 billion in goods to the United States in 2015, more than any other country”. The average American would be unable to shoulder the burden of this massive tariff, even if companies were to partially internalize the cost. Given the implications of the proposed tariff, many are looking to see how the markets respond leading up to, and in response to, the upcoming meeting.

In addition to the talks on trade, there are other issues that will be at the forefront of the conversation between Presidents Trump and Xi. Included will be the South China Sea, where China has claimed the territory as its own from other countries in the region, specifically the Philippines and there have been murmurs of potential military action. The South China sea is valuable for several reasons, including rich mineral deposits and favorable shipping lanes. It will be interesting to see how the meetings later this week play out, as well as how China-US relations change under the Trump administration.








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The Government’s Tobacco Monopoly

The China National Tobacco Monopoly largely holds a monopoly over tobacco sales throughout China generating about seven to ten percent of government revenue. In terms of the global market, China Tobacco is the largest tobacco company manufacturing a total of 2.5 trillion cigarettes in 2013 compared to their closest rival Phillips Morris international who only made 880 billion cigarettes. Yet, constant smokers will notice that China Tobacco’s brand of cigarettes are rarely found outside of China (Malboro is actually the most popular brand in the world) so China Tobacco relies mainly on domestic sales than international sales. Not surprising due to the size of China and, as Hessler describes, the importance of cigarettes as a social status symbol so China tobacco owns a steady and constant demand. Yet, this monopoly and immense revenue generated by China tobacco means the government will do what they can to maintain this revenue flow.

To prevent any rivals from appearing inside China, the government created laws making importation of Western cigarettes very difficult. Provisional governments set up literal “ring fences” in order to prevent cross-province tobacco sales creating a smaller local monopoly on certain cigarettes though today Chinese Tobacco has essentially merged 123 cigarette manufacturers to 30 total. These thirty factories are under control of The State Tobacco Monopoly Administration, who runs regulations and puts cigarette quotas on factories. Although “separate” entities, the administration and China Tobacco work very closely with each other even having the headquarters in the same location.

This monopoly will inevitable create conflict far past the tobacco market. Black markets appear to sell other brands regulated and difficult to obtain. Smuggling across province and country lines constantly occur. In 2015, the Chinese government arrested 41 people under the suspicion of an illegal underground cigarette market. The Wor
ld Health Organization has begun pressuring China to implement anti-smoking measures due to the amount the Chinese smoke per year; one in three cigarettes smoked is in China.

Many obvious problems could appear for China’s tobacco market. Already, we can see the monopoly having averse affects on the tobacco market itself causing an entire black market to appear. China’s tobacco also has almost no global presence whatsoever. Will it be worth it for the government to lose out on this massive source of revenue for them? In addition, what reasons do they have to cave into international pressure to curb smoking in China?






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Government Crackdown on Golf Memberships

Golf in China is really expensive, a combination of the opulence and social status associated with playing the game.  Memberships in clubs in Beijing can run as as high as $150k for initial fees, and membership to clubs are often presented as gifts among the elites.  In most countries, a multitude of world-class golf courses would be regarded as an obvious and inevitable by-product of rapid growth and soaring living standards.  However, despite the sports’ popularity, there is a public, negative connotation that playing golf is exclusive only to the country’s wealth elite.  These individuals include government officials and rich businessmen, alike.  Despite the initial 2004 ban on construction of golf courses to preserve dwindling farmland, save water, and reduce the huge number of villagers thrown of their land, golf courses have nearly tripled from 170 in 2004 to nearly 600 as of 2011.  More than 100 golf courses in the last 5 years have been shut down by the government, yet the sport still endures culturally with the wealthy elite.  Xi Jinping’s anti corruption campaign, which serves as a vehicle to promote less extravagant lifestyles, targets mainly these government officials who as public figures of the state indulge in excessive wealth.  Many in China are angered by these high living officials where sharp divisions of wealth exist, yet even the central governments’ actions shows the relative, social ineffectiveness of this crackdown.

This crackdown has largely failed because local governments have encouraged the building of clubs to boost tourism and increase development opportunities.  As long as developers are well connected they can ignore warnings from regulators, who will rarely risk their careers by “enforcing laws that could offend powerful interest groups higher up in the food chain” (Financial Times).  This is a problem that China deals with as refuted by Professor Smitka, who states that the local governments’ inefficiency in generating local, public finance gives them incentives to pursue ventures such as building golf courses.  tThe continued popularity of golf suggests the inability of the central government to force its golf course ban, perhaps a reflection of other policies they might try to implement as well.

In regards to these membership gifts mentioned earlier,  there still has been some short term damages in golf membership prices for individuals who own the rights to sell their memberships.  In short, a speculative bubble for these membership appeared from 2004 until the recent government crackdowns.  Memberships were seen as a lucrative asset, and many elite purchased these memberships as if it were stocks.  Membership fees, in that regard, have been affected from an economic standpoint (though it does not affect the entire general public).  It remains to be seen how much value can come back to these golf memberships in the next few years, as their fees are now much lower as means to attract more individuals.  And maybe it is a good thing that these prices have shimmered down.

Sources Consulted




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Environmental Issues: Sources

This is the Urban China book in the link on the right – at 550 pages it was too much to assign in class, this chapter alone is 100 pages. Most of the “green” part is on air pollution, including health aspects, but there are also sections on waste disposal and potable water. The second item is an eBook available through the library. that focuses on urban environmental issues.

World Bank, ed. 2014. “Green Urbanization.” In Urban China: Toward Efficient, Inclusive, and Sustainable Urbanization, Washington, DC: World Bank Group, Chapter 7, 447-547.

Kahn, Matthew E, and Siqi Zheng. 2016. Blue Skies over Beijing: Economic Growth and the Environment in China. Princeton University Press.

Here is a longer list:

1. Carter, Michael, and Yang Yao. 1999. Market versus Administrative Reallocation of Agricultural Land in a Period of Rapid Industrialization. The World Bank. Policy Research Working Paper Series.

2. Chang, Tom, Joshua Graff Zivin, Tal Gross, and Matthew Neidell. 2016. The Effect of Pollution on Worker Productivity: Evidence from Call-Center Workers in China. Institute for the Study of Labor (IZA). IZA Discussion Paper.

3. Eaton, Sarah, and Genia Kostka. 2012. Does Cadre Turnover Help or Hinder China’s Green Rise? Evidence from Shanxi Province. Frankfurt School of Finance and Management. Frankfurt School – Working Paper Series.

4. Hao, Han, Zongwei Liu, and Fuquan Zhao. 2017. “An Overview of Energy Efficiency Standards in China’s Transport Sector.” Renewable and Sustainable Energy Reviews 67: 246–56.

5. Hill, Sam. 2013. Reforms for a Cleaner, Healthier Environment in China. Paris: Organisation for Economic Co-operation and Development. OECD Economics Department Working Papers.

6. Kahn, Matthew E, and Siqi Zheng. 2016. Blue Skies over Beijing: Economic Growth and the Environment in China. Princeton University Press.

7. Kolk, Ans, and Stephen Tsang. 2015. “Co-Evolution in Relation to Small Cars and Sustainability in China Interactions Between Central and Local Governments, and With Business.” Business & Society: 7650315584928.

8. Li, Sheng et al. 2014a. “Fertilizer Industry Subsidies in China: Who Are the Beneficiaries?” China Agricultural Economic Review 6(3): 433–51.

9. ———. 2014b. “Fertilizer Industry Subsidies in China: Who Are the Beneficiaries?” China Agricultural Economic Review 6(3): 451–433.

10. Liu, Ying, Jikun Huang, and Precious Zikhali. 2016. “The Bittersweet Fruits of Industrialization in Rural China: The Cost of Environment and the Benefit from off-Farm Employment.” China Economic Review 38: 1–10.

11. Lv, Xinye. 2013. “Review of Mid- and Long-Term Predictions of China’s Grain Security.” China Agricultural Economic Review 5(4): 567–82.

12. Parry, Ian et al. 2016. Climate Mitigation in China: Which Policies Are Most Effective? Rochester, NY: Social Science Research Network. SSRN Scholarly Paper.

13. Sam, Aflaki, Syed Basher, and Masini Andrea. 2016. Does Economic Growth Matter? Technology-Push, Demand-Pull and Endogenous Drivers of Innovation in the Renewable Energy Industry. University Library of Munich, Germany. MPRA Paper.

14. Sun, Puyang, and Yan Yuan. 2015. “Industrial Agglomeration and Environmental Degradation: Empirical Evidence in Chinese Cities.” Pacific Economic Review 20(4): 544–68.

15. Wang, Ke, and Yingnan Liu. 2014. Can Beijing Fight with Haze? Lessons Can Be Learned from London and Los Angeles. Center for Energy and Environmental Policy Research (CEEP), Beijing Institute of Technology. CEEP-BIT Working Paper.

16. Zhang, ZhongXiang. 2014. “Energy and Environmental Issues and Policy in China.” In Routledge Handbook of the Chinese Economy, eds. Gregory C Chow and Dwight H Perkins. Hoboken: Taylor and Francis, Chapter 18, 303-323.

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China’s Real Pollution Problem: The Water

While most people concerned with China’s pollution problem are focused on the smog-ridden skies, recent studies have found that focus should be drawn on a more important pollution problem in China – that found in the country’s waterways. According to 2,103 samples taken by the Ministry of Environmental Protection, over 80% of China’s underground water is unsafe for drinking because of pollution. Not only is this water used for human consumption, but it is also important for agriculture and industry. As of recently, China’s underground water use has increased, further exacerbating the problem. Currently, one-fifth of China’s total water demand comes from underground water, and in the arid-north, this statistic increases to two-thirds. Not only is China’s underground water supply severely polluted, but 70% of the country’s rivers have also been deemed unsafe for human contact.

China has a numeric system for grading water quality. Grades one, two, and three are safe for human contact, and four and five can only be used for industry and agriculture. Water that is grade five and above has essentially lost all functionality. The Ministry has stated that it plans to implement measures to improve the majority of water that falls on the unusable spectrum (five and above) by 2030.

What possible effects does this water pollution have on the Chinese economy? China’s water supply is currently one-third of the average per capita around the globe, meaning that a deterioration of the water quality could cause a bottleneck. This supply deficit could then hurt future economic growth for the sectors that have the highest demand, such as agriculture, which currently uses 75% of the total water supply.

The water pollution problem is currently in a cycle that is difficult to break. Agriculture and industry contribute heavily to the pollution in rivers and ground water. These sectors in turn suffer from the lack of clean water. The Ministry of Environmental Protection seems to be working to stop this cycle, but only time will tell if their efforts are successful.







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Theme Park Investment

With the largest population in the world, China has attracted more than one kind of investment in the past several years. In June of 2016, Disney opened a resort in Shanghai which cost about $5.5 billion. The project represents Disney’s biggest foreign investment in history, beating out the cost of Disneylands in Tokyo, Paris, and Hong Kong. In its early stages, however, the park has failed to live up to expectations, and has brought in about 20,000 visitors per day as of October of last year. Projected B O China Vs N Am Thru Long waits, expensive food, and close alternatives have plagued the beginning of what many hope will be a fruitful long-term investment. Despite the projected return on investment shown to the left, Disney Shanghai has gotten off to a slow start, partly because of local competition.


Local businessmen have not been happy with the establishment of Shanghai Disney, and have looked to find ways to drive out the mega-company with smaller, cheaper surrounding theme parks. These parks are aimed at residents of smaller villages, however, and Disney remains optimistic that it can bring in a huge profit on the project. This may take time, as China has never seen a mega theme park which compares to the size of any in the US or Japan. Disney is optimistic that the expanding middle class of China will support the entertainment industry, and they may be onto something. Legoland, developed by a British-based company, has announced that it will build a $300 million resort in Shanghai. They hope the project will be completed by 2022 and will provide competition in the entertainment industry in Shanghai.


Legoland’s move represents the 65 major amusement parks which have begun plans to build in China following Disney’s move. The US companies’ move in the market has spurred domestic brands to step up their games. One report shows that Chinese preferences are shifting to an interest in Western brands. But to successfully bring people to the theme parks, the popular culture ideas must be transformed into a marketable product. “It’s not just dressing up in the traditional costumes,” and the parks’ Chinese administrators must figure out how to create a product which draws in Chinese customers: As everyone in this market prepares for the huge influx of American companies, safety becomes the biggest concern. American companies are trying to build the parks quickly, and this sometimes comes with sloppy design and an invitation to risk and accidents. This is especially risky in China, where the culture often says “ok, we have an accident… hide everything” (SCMP article). Moving forward, safety concerns and marketing will be two key aspects of this industry which, until now, has been unknown to the Chinese.






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Boeing’s big move into China

Boeing made news headlines last week with the announcement that they will be breaking ground on a new plane finishing facility by the end of March. The facility, which will focus on the final assembly of the 737, will be in Zhoushan. Included in the final assembly work will the be installation of seats, entertainment systems and other interior finishes. According to MarketWatch, the plant will eventually employ over 2,000 workers and finish roughly 100 planes per year.

This announcement comes at an interesting time geopolitically. US President Donald Trump has been outspoken in his views towards China in terms of trade and foreign exchange. Despite his strong opinions towards the country, he has been silent on the Boeing announcement. Given that Boeing is the nation’s largest exporter and also employs the most engineers in the US, this announcement paired with Boeing’s continued shift towards automated work hits against two of President Trump campaign points : to promote job growth and keep production domestic. In a February speech at the Boeing plant in North Charleston, SC, Trump emphasized his intent on keeping jobs at home. He claimed that he would change trade deals and tax structures to keep American jobs. Despite these promises, Boeing CEO Dennis Muilenburg announced they would break ground on the Chinese factory.

A catalyst for the creation of the plant is China’s emergence as the worlds fastest growing market for airplanes. China is expected to pass the United States in aviation demand by 2024. According to the Economic Times, “The plant is being set up amid forecast by Boeing that China will need 6,810 new aircraft in the next 20 years at an estimated cost of USD 1 trillion.” The factory will create a massive revenue source for Boeing. In addition to meeting Chinese demand, Boeing built the factory to catch up to rival Airbus, which also recently built a factory in China. This is an interested case of a massive American company, and large contributor to trade taking production oversees. It will be interesting to see if other American companies follow suit as the Chinese economy continues to grow, and their burgeoning middle class continues to increase demand for goods and services.

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China’s Desertification Issue

In the 1960’s, the Chinese landscape underwent massive deforestation as a consequence of the government’s industrial buildup. Loose soil resulting from deforestation allowed the Gobi Desert to expand and created the Taklimaka Desert. The Chinese government realized their mistake in 1978 and quickly embarked on an extensive reforestation campaign known as “The Great Green Wall”. This project set out to add 405 million hectares of new forest, raising the forest area in the world by 10%. However, a lack of proper environmental considerations in “The Great Green Wall’s” early stages actually exacerbated the issue. Only 33% of the trees planted after 1970 as part of the reforestation effort are still alive today. By planting certain pine trees and covering areas with a single species of tree, the government allowed China’s peripheral deserts to expand.

Increasing desertification has threatened nearly 400 million Chinese citizens living on the nation’s agricultural periphery. Communities of displaced “ecological migrants” have sprung up in Xinjiang, Tibet, and Inner Mongolia. These communities were set up by Beijing to house those who had to evacuate previously arable land due to expanding deserts. A substantial portion of those directly threatened by encroaching deserts are ethnic minorities, raising concerns about a possible increase in ethnic tensions in peripheral regions. The increase in migrant workers and changing economics have already created an incredibly fragile environment in rural China, as we have read about in Hessler. The additional danger of desertification only servers to exacerbate the fragility of these areas. Arable land losses and questions over water distribution are serious issues Beijing will need to combat or risk instability in its peripheral regions.

The effects of desertification are not felt solely in remote regions in the north and west. As Chinese urban areas continue to grow outward, the deserts become closer to large centers of population. Devastating desert sandstorms in Inner Mongolia have been felt as far away as Beijing. Growing deserts and urban areas are currently on a crash course; the effects of which should prove to be an interesting development as Beijing attempts to bolster their reforestation efforts.












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The Perils of Chinese Shadow Banking

While China’s banking system has changed drastically over the past 20 years, one fact has remained: Chinese banks remain under the control of the government.

Some of China’s largest state-controlled commercial banks are the Bank of China, the China Construction Bank, the Industrial and Commercial Bank of China and the Agricultural Bank of China. But one recent issue facing the Chinese banking industry pertains to shadow banking, which refers to financial intermediaries that create credit across the global financial system but are not subject to normal regulations. Shadow banks function similarly to traditional banks, except that they can evade the regulatory constraints that state-owned banks are subjected to; however, they are not privy to some of the benefits that traditional banks receive, including publicly guaranteed deposit insurance or lender of last resort facilities from central banks.

For private businesses and entrepreneurs, shadow banks provide a simpler and expedited avenue to loans. However, for the layperson looking to invest, engaging with a shadow bank often means little to no knowledge of the investment vehicle being used. Wealth management products are sold by banks to Chinese investors “with the promise of interest rates much higher than what banks offer for deposits.” However, while traditional Chinese banks sell some or few wealth management vehicles, shadow banks tend to rely on them. Additionally, shadow banking activities are practically off the books, allowing the lenders to evade regulation.

Chen Wenhui, the vice chairman of the China Insurance Regulatory Commission, said that shadow banks offer large returns at proportionally low prices, which attracts laypeople despite not knowing how their money will be invested.

Another form of shadow lending in China is entrusted loans, which are loans from one company to another. These transactions are often conducted through a third-party bank to evade Chinese regulations on companies lending directly to each other. While leaders in this space believe that the risks associated with entrusted loans are manageable, regulatory agencies are skeptical of the methods shadow banks use to raise the money they lend.

Yi Huiman, the chairman of the Industrial and Commercial Bank of China, has taken stark opposition to shadow banking, stating, “If we do not deal correctly with shadow banking, the risks could be huge.” Additionally, Yi noted that shadow banks have given way to “higher leverage, too many derivatives and too many products with no transparency.”







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