Endogeneity

This isn’t about China, but it is a particularly clear example of results that rendered nonsense by the failure to distinguish correlation from causation. In this case, it’s a likely outside factor that affects both the “independent” variables (the right-hand side) and the “dependent” variable (the left-hand side of y = a + ßX, where X is a list of variables … in math jargon, this is equation has vectors as variables).


ORGANIC FOOD CONSUMPTION AND CANCER
Jayson Lusk, a food and agriculture economist who blogs at http://jaysonlusk.com/
October 24, 2018

A couple of days ago, JAMA Internal Medicine published a paper looking at the relationship between stated levels of organic food consumption and cancer among a sample of 68,946 French consumers.

The paper, and the media coverage of it, is frustrating on many fronts, and it is symptomatic of what is wrong with so many nutritional and epidemiological studies relying on observational, self reported data without a clear strategy for identifying causal effects. As I wrote a couple years ago:

“Fortunately economics (at least applied microeconomics) has undergone a bit of credibility revolution. If you attend a research seminar in virtually any economics department these days, you’re almost certain to hear questions like, “what is your identification strategy?” or “how did you deal with endogeneity or selection?” In short, the question is: how do we know the effects you’re reporting are causal effects and not just correlations.

Its high time for a credibility revolution in nutrition and epidemiology.”

Yes, Yes, the title of the paper says “association” not “causation.” But, of course, that didn’t prevent the authors – in the abstract – from concluding, “promoting organic food consumption in the general population could be a promising preventive strategy against cancer” or CNN from running a headline that says, “You can cut your cancer risk by eating organic.”

So, first, how might this be only correlation and not causation? People who consume organic foods are likely to differ from people who do not in all sorts of ways that might also affect health outcomes. As the authors clearly show in their own study, people who say they eat a lot of organic food are higher income, are better educated, are less likely to smoke and drink, eat much less meat, and have overall healthier diets than people who say they never eat organic. The authors try to “control” for these factors in a statistical analysis, but there are two problems with this. First, the devil is in the details and the way these confounding factors are measured and interact could have significant effects. More importantly, some of these missing “controls” are things like overall health consciousness, risk aversion, social conformity, and more. This leads to a second more fundamental problem. These unobserved factors are likely to be highly correlated with both organic food consumption and cancer risk, and thus the estimated effect on organic is likely biased. There are many examples of this sort of endogeneity bias, and failure to think carefully about how to handle it can lead to effects that are under- or over-estimated and can even reverse the sign of the effect.

To illustrate, suppose an unmeasured variable like health consciousness is driving both organic purchases and cancer risk. A highly health conscious person is going to undertake all sorts of activities that might lower cancer risks – seeing the doctor regularly, taking vitamins, being careful about their diet, reading new dietary studies, exercising in certain ways, etc. And, such a person might also eat more organic food, thus the correlation. The point is that even if such a highly health conscious person weren’t eating organic, they’d still have lower cancer risk. It isn’t the organic causing the lower cancer risk. Or stated differently, if we took a highly health UNconscious person and forced them to eat a lot of organic, would we expect their cancer risk to fall? If not, this is correlation and not causation.

Ideally, we’d like to conduct a randomized controlled trial (RCT) (randomly feed one group a lot of organic and another group none and compare outcomes), but these types of studies can be very expensive and time consuming. Fortunately, economists and others have come up with creative ways to try to address the unobserved variable and endogeneity issues that gets us closer to the RCT ideal, but I see no effort on the part of these authors to take these issues seriously in their analysis.

Then, there are all sorts of worrying details in the study itself. Organic food consumption is a self-reported variable measured in a very ad-hoc way. People were asked if they consumed organic most of the time (people were given 2 points), occasionally (people were given one point), or never (no points), and this was summed across 16 different food categories ranging from fruits to meats to vegetable oils. Curiously, when the authors limit their organic food variable to only plant-based sources (presumable because this is where pesticide risks are most acute), the effects for most cancers diminishes. It is also curious that the there wasn’t always a “dose response” relationship between organic consumption scores and cancer risk. Also, when the authors limit their analysis to particular sub-groups (like men), the relationship between organic consumption and cancer disappears. Tamar Haspel, a food and agricultural writer for the Washington Post, delves into some of these issues and more in a Tweet-storm.

Finally, even if the estimated effects are “true”, how big and consequential are they? The authors studied 68,946 people, 1,340 of whom were diagnosed with cancer at some point during the approximately 6 year study. So, the baseline chance of any getting any type of cancer was (1340/68,946)*100 = 1.9%, or roughly 2 people out of 100. Now, let’s look at the case where the effects seem to be the largest and most consistent across the various specifications, non-Hodgkin lymphomas (NHL). There were 47 cases of NHL, meaning there was a (47/68,946)*100 = 0.068% overall chance of getting NHL in this population over this time period. 15 and 14 people, respectively, in the lowest first and second quartiles of organic food scores had NHL, but 16 people in the third highest quartile of organic food consumption had HCL. When we get to the highest quartile of stated organic food scale, the number of people with HCL now dropped to only 2. After making various statistical adjustments, the authors calculate a “hazard ratio” of 0.14 for people in the lowest vs. highest quartiles of organic food consumption, meaning there was a whopping 86% reduction in risk. But, what does that mean relative to the baseline? It means going from a risk of 0.068% to a risk of 0.068*0.14=0.01%, or from about 7 in 10,000 to 1 in 10,000. To put these figures in perspective, the overall likelihood of someone in the population dying from a car accident next year are about 1.25 in 10,000 and are about 97 in 10,000 over the course of a lifetime. The one-year and lifetime risk from dying from a fall on stairs and steps is 0.07 in 10,000 and 5.7 in 10,000.

In sum, I’m not arguing that eating more organic food might not be causally related to reduced cancer risk, especially given the plausible causal mechanisms. Rather, I’m arguing that this particular study doesn’t go very far in helping us answer that fundamental question. And, if we do ultimately arrive at better estimates from studies that take causal identification seriously that reverse these findings, we will have undermined consumer trust by promoting these types of studies (just ask people whether they think eggs, coffee, chocolate, or blueberry increase or reduce the odds of cancer or heart disease).

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BRI: 一带一路

Oct 18 on Bloomberg, China’s Belt and Road Ambitions: China Is Forced to Reconsider Its Route Into Eastern Europe; 16+1 members disappointed as projects fail to materialize

China’s historical geopolitics kept it focused on Central Asia. Yes, in the late Ming Dynasty (16 century) Japanese pirates repeatedly plundered coastal areas. Then there were the British and the Japanese. Now there’s Trump, threatening who knows what. (He probably doesn’t!) But these latter threats washing ashore from the Pacific date back a scant 150 years, a mere moment in the sweep of Chinese thought on international relations.

…McMahon writ large: the BRI is too much money chasing too few projects…

So Pan-Asia remains a focus, if not THE focus, with the Belt-and-Road Initiative as the current flagship. (OK, the full name is 丝绸之路经济带和21世纪海上丝绸之路.) Xi Jiping – who is also Chairman of China’s Central Foreign Affairs Commission – formally launched the BRI in 2013, in visits to Kazakhstan and Indonesia. As that hints, one focus is the old silk road routes across Central Asia that eventually connect into Europe. Rail connections – and natural gas pipelines – can tie China to key resources and to markets that in the aggregate are bigger than the US, including but not limited to the Eurozone. Of course that’s also a region that fostered independent empires (the Mongols, the Persians) that controlled trade or even conquered China. And then there’s the Bear, sitting to the north of these countries, many of which were once part of the Soviet Union. The BRI promises to catch many birds with its net.

Central Asia is not the only focus. For bulk commodities ocean transport remains more efficient than rail. Think the Persian Gulf – we in the US buy very little oil from there, it’s in the wrong place however much it influences global energy prices. As a net importer of energy China is however dependent on the region. Those are long sea lanes, and defending them can be accomplished if South and Southeast Asia are brought into China’s fold. In contrast, if they’re hostile, even a beefed-up Chinese navy can do little against surface-to-surface missiles, or even low-tech pirates in fast boats.

There’s lots of hot air revolving around the BRI. Take the above map, which I pulled from Bloomberg but which is all over Google Images. If you knew nothing of China, what city would you assume is the country’s capital? Hint: Xian hasn’t been China’s capital since 904!


from Merics.org

So what are the challenges? What are the (surely mixed) motives?

  1. financing
    • timeframe
    • loan versus grant
    • term and interest rate on loans
    • what happens if (when!) things go wrong?
  2. intl relations
    • military security / bases for the navy
    • economic security / resource access
    • political security / strengthening allies and creating client states
    • international status / contributing to the global order
    • domestic status / Making the Empire Great Again
  3. commercial opportunities
    • construction and procurement contracts
    • market access for goods trade
    • favorable terms for investment in “extractive” industries (mining, petroleum, export agriculture)
  4. opportunity for kickbacks and corruption

All of these blend together. So think about Sri Lanka, building the first port of the new sea lanes, financed by borrowing from Chinese banks. How is that likely to perform? Well, until the other ports are expanded, and shipping capacity grows [more capacity in total] and shifts, you don’t get much revenue. Furthermore, as capacity is added, then … aren’t prices going to fall? After all, that’s part of China’s justification for the new routes, that they’ll lower costs! So will Sri Lanka be able to pay off the bonds? Fat chance! Instead the Chinese are the new ownersNote 1 of a shiny, fancy new port. The new owners will also likely lose money.

…a good public transport system should lose money…

For that matter, should infrastructure projects make money? Doesn’t their value come from being used, and the more that operators try to make them generate revenue, the less value they will create? If the challenge is getting products from an inland town to a port, then high port fees undermine the project’s purpose! So I will make the claim that the BRI should not be structured to make money. These are fundamentally about generating positive externalities.

Finally, what IS the BRI?? It’s partly (mainly?) sloganeering, a catch-all phrase applied to fundamentally unrelated (sensible) projects and (nonsensical) boondoggles. We’ve seen this before.Note 2 It’s too much money chasing too few projects, McMahon write large and global. Go back to 1977 for another example: banks were awash with “petrodollars” following the first oil crisis because the OPEC countries couldn’t spend their new-found wealth fast enough. Brazil, and more generally South America, was the next big thing, a close-to-home Japanese-style growth miracle. And other than real estate, there wasn’t much in the US that appealed to banks.Note 3 Banks piled in – I know, the bank I worked for as all in. And no longer exists. Tokyo in 1988-91 is similar: with even a small piece of downtown land, you could get financing to erect a multifloor “pencil building” too small to include an elevator. Again, things did not end well. To reiterate, is the BRI in part McMahon writ on a global stage, a way to put some of China’s US$3 trillion in foreign exchange reserves to work and maybe – just maybe, how hard could it be? – earn a return higher US Treasuries?Note 4

Note 1: A 99-year lease. Cf. the British in Hong Kong, also spoils from international trade deals gone awry.

Note 2: Well, I’ve seen this before – you don’t remember the Great Recession or [for those less parochial] the Global Financial Crisis of 2008-10.

Note 3: That was when Trump launched the Grand Hyatt and Trump Tower projects. Those projects ended well, but right around 1980 was when he initiated his first foray into Atlantic City, a series of disasters that had him one loan payment away from personal bankruptcy in 1990.

Note 4: At Xi’s launch of the BRI in 2013, the yield on 10-year Treasuries was under 2%.

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Foreign Exchange

We analyzed key motives for purchasing foreign exchange. These are:

  • speculation
  • imports
  • portfolio considerations (purchasing US$ assets)
  • direct foreign investment (developing oilfields and building factories and purchasing companies to operate them, eg, not “portfolio”)
  • earn returns (eg, interest)

We focused on the latter as an empirically relevant factor in currency movements (take Econ 271 for details), while noting that speculation is huge but generally neutral (forex traders keeping busy when their phones aren’t ringing). Domestic inflation should over time make it harder to export and increase imports; a currency depreciation offsets that (“purchasing power” and “law of one price”). But lately inflation in China has been low, at least in comparison to productivity increases (which, ceteris paribus, leads to a currency appreciation.

One US policy complaint is of “closed” capital markets. Of course some US companies would like fewer strictures on buying domestic Chinese firms and selling financial services. The latter interest leads naturally to a desire to sell existing global portfolio products. Currently they can’t. And it’s not that they would receive a cold shoulder: Chinese retirement funds have no international diversification. Relaxing rules on buying US$ assets would quite reasonably lead to hundreds of billions of dollars flowing out. If that were to occur, it would lead to a substantial appreciation of the dollar, eg, from 元6.8/US$1 to 元7.0/US$1 or higher – with the “unlucky number seven” a red line in the sand. But at FTAlphaville notes, “The renminbi now sits at Rmb6.87 per dollar, having lost 6.5 per cent of its value since June. … China’s currency fluctuations have everything to do with the trade war, which entered its latest round earlier this week,” noting that a depreciation partially offsets the impact of US tariffs.

Now for a decade China ran very large trade surpluses, with the People’s Bank of China [the central bank], which poured dollars into the foreign exchange market, offsetting outflows of RMB / yuan / kuai (块) searching for foreign assets. As we will see, that surplus is now smallish, relative to GDP and to past levels of trade surpluses. So how can China hold off a depreciation? And avoid being labeled a “currency manipulator” (as detailed in US law, or at least Congressional discussions).

In addition, China is now large enough that its behavior impacts global markets. In particular, further depreciation begs parallel depreciation by other developing countries so that they can maintain parity in global markets for their own (labor intensive) exports. But while China has no foreign-currency-denominated debt, that’s not true for the rest of Asia and South America and Africa. Think Argentina this year or (not something you remember!) the July 1997 Asian Financial Crisis, when the many Thai companies that had borrowed at Baht20/$ were rendered bankrupt when the currency fell to Baht40/$ between the start and the end of business on Wednesday, July 2. Changes in the value of the RMB were a contributing factor.

Brian Setser at The Council on Foreign Relations provides an update on the how (and some on the why). The key is China’s sales of foreign reserves. Those were effectively nil in 2000 but are large today – US$3.2 trillion. But they’re no longer rising. Is that because China is no longer earning foreign exchange via its “ordinary” trade and foreign investment activities? Those certainly are down, and we will look at that periodically during the remainder of the term. In addition, the accounting is unclear. Foreign reserves of $3 trillion ought to be earning at least 2% a year, or $15 billion a quarter. Is that being sold? Absent such accounting lacunae, recent interventions appear to be small. Just 2 years ago the exchange rate was effectively constant during normal US business hours. That’s no longer true, as per the black and yellow lines.

Note that the reference rate in this chart is a currency basket. China trades with the world as a whole, not just the US, so it makes sense for them to link to a trade-weighted average of their global partners. Sorry, can we refer to China as a partner? The official US stance is that trade is war, not a mutually beneficial endeavor driven by the “invisible hand” of private parties. Since China runs a bilateral surplus they must therefore be an enemy.

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Cell Phones, Value Chains and Technology

Source: The China Story

A popular meme inside the Beltway is that China is stealing us blind. In the background is the assumption that domestic technological capabilities are minimal, and that anything and everything incorporating technology or design must be stolen or counterfeit. In the automotive industry, this turns into the claim that companies are being “forced” to hand over technology. Never mind that 11 of the top 100 global universities is now Chinese – see Bloomberg that, based on English-language publication counts, Chinese researchers now outperform Americans in important subfields (mathematics, engineering). [In economic geography, the few publications I’ve found on the auto industry are in Chinese, not English, but are of high quality.]

Products such as cell phones are assembled goods, where a firm such as Apple makes nothing itself (even assembly is contracted to Foxconn, a Taiwanese company, not a Chinese one). Gorilla glass is made by Corning, at least until recently only in the US (it’s a tricky process, and one production line turning out a sheet several feet wide turns out enough per day for a staggering number of phones). The sensors for cameras, the central processors, the radio circuitry, almost all of this is imported. Some is covered under patents, but 2-year-old components are bigger and/or more power-hungry than those used by an Apple or a Samsung. And the architecture is modular: you plug the pieces together, the interfaces are standardized, so by and large you can plug in old-generation components and have a functional phone. If you’re making an Android device, the operating system is free, too, or nearly so. Now squeezing them all into a top-line phone is hard, and you’re likely to have a year’s exclusivity for any components developed to your specs. But Apple and Samsung don’t buy the old stuff, yet the production setup can still churn out those parts. Samsung is happy to sell anyone and everyone the old-generation cell phone parts it makes on fully depreciated equipment.

Chinese entrepreneurs spotted this possibility and ran with it. Initially they turned out “shanzhai-ji” (guerrilla 山寨机) cell phones. The industry developed in Shenzhen 深圳市, a former mudhole of 80,000 peasants between Hong Kong and Guangzhou [Canton] that now has 13 million people and is one of the richest cities in the world. But it’s where Foxconn, a Taiwanese factory, located their initial megafactory for assembling iPhones. [Shenzhen is now too expensive so Foxconn is moving their operations to the interior of China and to other countries. You can still see peasants, but they’re in the distance, across a river in Hong Kong!]

They were innovative. In the era of local cell phone operators with different rate plans in different cities or provinces, the shanzhai makers created clunky phones with two SIM card slots. They made phones with a built-in buzzer for daily prayers, and a compass that would indicate the direction to Mecca. Apple was uninterested in turning out phones for niche markets. In Shenzhen, you could find programmers, electrical engineers and marketers. A 5-person company could develop a concept, find programmers and purchasing specialists, contract with a backyard assembler [or for big orders, Foxconn], locate a wholesaler willing to buy some, and be off and running. In the end Xiaomi and several other big manufacturers grew out of these customizers.

What is the iPhone market share in India, in China, in Southeast Asia? Minimal. Then there’s Africa, where the largest, if not dominant player, is Shenzhen-based Transsion, whose only factory is in Ethiopia, not China.

Was there theft along the way? Well, you could find Samsang and Goople phones. But did this hurt Apple? Or did it enhance their brand?After all, how many Chinese could afford a $200+ phone 10 years ago (the original iPhone launched in 2007)? Having one was a mark of status, and if you had one, you didn’t buy a phone case that would cover the logo – you wanted everyone to know you had the real thing. So did Apple lose sales, or gain free advertising?

Global value chains change the nature of intellectual property. Do you want to put together a modern car? Well, every global supplier (OK, every one that I’ve checked) has an engineering center in Shanghai. After all, China is the world’s biggest market!! You need ABS (antilock brakes)? Fuel injectors? Backup cameras? GPS navigation? Voice recognition? The hardware to implement Apple Play? All are commodities, and the companies that make them can help you integrate them into your vehicle. So where’s the theft? And again, in its early days Geely may have, er, borrowed liberally from the styling of foreign brands. Chinese consumers were under no illusion that they were buying the real thing. Meanwhile, GM and VW minted more money in China than in their home markets. Yes, they were required to use joint ventures, but did their bottom lines suffer? In 2017 China paid $30 billion in technology licensing fees, and untold billions more in mark-ups on imported components that VW and GM sourced from overseas. (What’s the markup you pay if you damage a body panel and have to buy it from Toyota or Honda??)

So … is China guilty of theft? If so, did they help or harm US companies? (And remember: Apple is an Irish company, not an American one. Ireland paid $75 billion in license fees in 2016…)

What do global value chains mean for the ability of the US (or China) to capture the gains from exports? How much of an iPhone’s $1,000+ price is represented by wages and profits earned inside China? the US? or anywhere else!!

Outside sources

  • Chen, Xiangming, and Taylor Lynch Ogan. “China’s Emerging Silicon Valley: How and Why Has Shenzhen Become a Global Innovation Centre.” European Financial Review (2017): 55.

  • Tang, Li, Michael Murphree, and Dan Breznitz. 2016. “Structured Uncertainty: A Pilot Study on Innovation in China’s Mobile Phone Handset Industry.” The Journal of Technology Transfer 41 (5): 1168–94. https://doi.org/10.1007/s10961-015-9432-9.

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China!

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 those of the US or Europe. If you’re a global company such as GM or VW, there’s a good chance you make more money in China than anywhere else in the world. China is a geo-economic force across Asia, rubbing up against India. Of course they’re rubbing up against Trump’s ego, but then who isn’t? Still, that provides a set of topics crying out for analysis.

Indeed, as someone who does research on the auto industry, understanding China is important enough that I have written a journal article and a book chapter on China’s industry, and have learned to read enough to be doing a project on the industry’s geography. I have not put those on the syllabus/schedule.

Your lifetimes have also witnessed a transformation of the lifestyle of the average Chinese. When you were born, the country was still predominantly rural and rather poorer. Over the last 20 years 250 million people have left the farm for the city, public health now has to address diabetes rather than undernourishment, and society has shifted from a network that likely did not extend much beyond one’s natal village to a disparate community among China’s 800 million smartphone users. We’ll read about that in a just-published book by Alec Ash.

Fortunately Barry Naughton just published an excellent text to anchor our study of the economy. Rapid growth produces distortions – investors have put up entire cities in locations that today no longer make sense. There’s a lot of bad debt out there, and it’s one of the flashpoints for the economy. Here we also have a book that’s just out by Dinny McMahon, recommended by an alumnus who runs the China Beige Book, a very successful data analytics startup. He’ll skype in to talk to us all.

Obviously there’s little available on the looming trade war, and nothing in our readings. Yet as the graphic illustrates – it’s about a ride-hailing company, an autonomous vehicle venture and an electric car battery plant – China is no longer just a manufacturer of low-tech products. Indeed, the manufacturing sector in China is shrinking, as firms find Vietnam and Ethiopia and Bangladesh better places for sewing garments and gluing shoes. China’s working-age population is shrinking, so an ongoing theme will be the efforts of policymakers to “rebalance” growth from “hard” construction/manufacturing to “soft” services-led consumption.

Texts – I ordered mine online on Aug 27th, all at a fraction of the cover price, from (variously) Abe Books, eBay but (as it happens) not Amazon or Barnes and Noble.

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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://time.com/3099950/china-muslim-hui-xinjiang-uighur-islam/

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

http://www.economist.com/news/china/21708274-choosing-assimilation-chinas-hui-have-become-one-worlds-most-successful-muslim

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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.

 

Sources:

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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?

 

Sources:

http://money.cnn.com/2017/03/31/investing/trump-rally-first-quarter-wall-street/

https://www.thestreet.com/story/13957125/1/is-the-chinese-stock-market-beginning-to-anticipate-a-trump-trade-war.html

http://www.washingtontimes.com/news/2017/jan/22/donald-trumps-45-percent-tariff-on-china/

http://blog.runnymede.com/is-there-value-in-the-chinese-stock-market-or-is-it-a-dangerous-bubble

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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)

http://koreabizwire.com/vietnamese-brides-chinese-grooms-most-favored-in-korea/78436

https://www.wsj.com/articles/forget-love-in-china-ill-marry-you-for-your-license-plate-1490001303

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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.

Sources:

http://www.sandiegouniontribune.com/military/sd-me-ship-deployments-20170331-story.html

http://www.cnbc.com/2016/12/07/trump-and-china-tariff-on-imports-would-hurt-many-us-companies.html

http://www.cnbc.com/2017/03/31/trumps-mar-a-lago-diplomacy-with-chinas-xi-may-reveal-more-than-you-think.html

https://www.bloomberg.com/politics/articles/2017-01-18/why-trump-s-tariff-threats-get-taken-so-seriously-quicktake-q-a

https://www.nytimes.com/2017/04/02/us/politics/trump-china-jared-kushner.html

http://forward.com/fast-forward/367867/is-jared-kushner-the-surest-path-to-trumps-ear-china-thinks-so/

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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?

Sources:

https://www.bloomberg.com/news/articles/2014-12-12/the-chinese-government-is-getting-rich-selling-cigarettes

http://www.scmp.com/news/china/policies-politics/article/1887465/china-police-nab-41-suspects-illegal-cigarette-racket

http://www.bbc.com/news/world-asia-34483448

http://www.tobaccoatlas.org/topic/cigarette-use-globally/

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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

https://www.ft.com/content/e514b5cc-74d7-11e0-a4b7-00144feabdc0

http://www.telegraph.co.uk/news/2017/01/23/china-driving-against-golf-closure-100-courses/

 

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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.
http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1205918

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.
http://econpapers.repec.org/paper/wbkwbrwps/2203.htm

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.
http://econpapers.repec.org/paper/izaizadps/dp10027.htm

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.
http://econpapers.repec.org/paper/zbwfsfmwp/184.htm

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.
http://www.sciencedirect.com/science/article/pii/S1364032116304750

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.
http://www.oecd-ilibrary.org/content/workingpaper/5k480c2dh6kf-en

6. Kahn, Matthew E, and Siqi Zheng. 2016. Blue Skies over Beijing: Economic Growth and the Environment in China. Princeton University Press.
http://search.ebscohost.com/login.aspx?direct=true&scope=site&db=nlebk&db=nlabk&AN=1205918

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.
http://bas.sagepub.com/content/early/2015/05/21/0007650315584928

8. Li, Sheng et al. 2014a. “Fertilizer Industry Subsidies in China: Who Are the Beneficiaries?” China Agricultural Economic Review 6(3): 433–51.
http://search.proquest.com.ezproxy.wlu.edu/docview/1634008597/abstract/F49C63A426204739PQ/5

9. ———. 2014b. “Fertilizer Industry Subsidies in China: Who Are the Beneficiaries?” China Agricultural Economic Review 6(3): 451–433.
http://search.proquest.com/docview/1634008597/abstract/A227EF509FCA47E8PQ/5

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.
http://www.sciencedirect.com/science/article/pii/S1043951X15001467

11. Lv, Xinye. 2013. “Review of Mid- and Long-Term Predictions of China’s Grain Security.” China Agricultural Economic Review 5(4): 567–82.
http://search.proquest.com/docview/1462452908/abstract/72B3EC0CD354176PQ/8

12. Parry, Ian et al. 2016. Climate Mitigation in China: Which Policies Are Most Effective? Rochester, NY: Social Science Research Network. SSRN Scholarly Paper.
https://papers.ssrn.com/abstract=2882584

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.
http://econpapers.repec.org/paper/pramprapa/69773.htm

14. Sun, Puyang, and Yan Yuan. 2015. “Industrial Agglomeration and Environmental Degradation: Empirical Evidence in Chinese Cities.” Pacific Economic Review 20(4): 544–68.
http://onlinelibrary.wiley.com/doi/10.1111/1468-0106.12101/abstract

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.
http://econpapers.repec.org/paper/biwwpaper/63.htm

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.
http://public.eblib.com/choice/publicfullrecord.aspx?p=1766914

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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.

Sources:

https://www.nytimes.com/2016/04/12/world/asia/china-underground-water-pollution.html

https://www.theguardian.com/environment/2016/apr/12/four-fifths-of-chinas-water-from-wells-unsafe-because-of-pollution

http://www.businessinsider.com/r-smog-may-be-easing-but-in-parts-of-china-water-quality-worsens-2016-11

http://www.dw.com/en/how-much-is-pollution-costing-chinas-economy/a-18323476

https://www.koshland-science-museum.org/water/html/en/Treatment/Agricultural-and-Industrial-Pollution-in-China.html

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