An article today in the People’s Daily announces that the Chinese central government has finally decided to end the travesty that was the “compete while cooperating” pact between the two Aviation Industrial Corporation of China (I and II) and merge them into the same corporation/ministry. Given  the highly risky nature of aviation manufacturing ventures, and given that the global aviation sector has been in a period of gradual consolidation, it never made much business sense for Chinese aviation factories to add a layer of  bureaucratic internal competition to the already intense international competition from Boeing, Airbus, Sukhoi etc.

While I’ve argued elsewhere in more detail (Flying without Succeeding? Assessing the future of the civil aviation manufacturing sector in the People’s Republic of China ) that this sort of consolidation is a key reform should China truly seek to produce an aviation manufacturing champion, a restructuring of management structure is not the same as improving management quality, the bete noir of Chinese aviation projects.

Is Chinese management improving? Chinese individual managers and engineers have been building safe, competitive airplanes for decades. They’ve mostly been doing it as Boeing or Airbus employees, unfortunately. AVICs internal projects have either become joint ventures (as the once-vaunted “100% Chinese-designed” ARJ-21 is slated to do, and as the jumbo jet project may well quickly become) or have failed partly, or have failed totally.

This is largely due to the fact that the AVICs have been run from the top as a messy clump of uncoordinated factories, and run by well-connected but inexperienced cadres who tended to handle quality control processes with an absurd level of security precaution. As a result, they have generally produced planes that Chinese airlines (and the airforce) doesn’t want, and they have delivered them late.

China is in a rush to produce an aircraft champion. It’s facing a swathe of entrenched competitors, including a threat from recent re-entrant Mitsubishi (erstwhile manufacturer of the “Zero” fighter series during World War II), which should be taken seriously by everybody. Ownership rationalization and consolidation is a critical part of this process. Even more important is the suggestion in the article that the new AVIC will, at last, begin to spin off its non-aviation product lines (cars, refrigerators, etc.), which once comprised 80% of the AVICs product mix.

It is, of course, far too early to predict success. There has not been a change at the top; Li Zuoming of AVIC I will retain the reins at the new integrated company. Li Lei, an aviation analyst with CITIC China Securities, told the People’s Daily that the merger will [not]necessarily result in higher competitiveness.” However, it certainly cannot hurt.

It sounds horrible to say, but in some ways the week after the earthquake was the easiest for the uninjured survivors to deal with. Everything was simple: medicine, food, shelter. The foreign community rallied alongside the Chinese to give money, pack supply kits, join rescue teams. Did we have to sleep outside? Was the office closed for days? Fine, we were among friends and we had work to do. The work was not easy but the problem to be solved was clear, as was the way to solve it.

As the days pass, however, the euphoria of voluntarism and sacrifice slowly ebbed and has been replaced by . . . what? The other day the Chengdu government sent me a text message warning of charlatans seeking to take advantage of earthquake sympathy to fraudulently solicit funds. The logistical infrastructure is overwhelmed with short-term supplies. One Chinese volunteer who came up from Kunming last week discovered that the main Chengdu government aid agencies were uninterested in the donations she had brought: they were too small-scale and besides, her medicine receipts were not in order. “I don’t understand,” the volunteer said. “I hear all these people in Sichuan appealing for help. I come up here and nobody wants it. If you don’t want this stuff, why do you ask for it? I just think it’s really weird.” And then she burst into tears.

The local business community is similarly afflicted. Confused and exhausted by the unending appeals for aid from a multitude of just-sprung-to-life aid organizations, how are they to respond? Who is legitimate and who is not? Who is competent to help and who simply means well? For businesses, aid agencies, and government organs, managing and directing the outpouring of generosity has become akin to drinking from a fire hose.

The risk, of course, is wasted effort, duplicated effort, and finally, burnout. Once the short term needs are met, how much attention will be paid to the more complicated longer term problems that the earthquake highlighted? Poorly constructed housing and schools, insufficient logistical infrastructure, economic development etc.? Pan Yue, vice-minister of environmental protection, argued that reconstruction in the disaster-hit areas should not simply mean “restoring what the quake razed.” But it is one thing to write a check for medicine, another to manage longer-term projects that demonstrably upgrade the living standards of an entire community, alleviating the effects of this earthquake and mitigating the effects of the next one.

As the recent protests against Carrefour illustrate, the corporate image has business implications, and that goes for charity too. Recently there has been a spate of complaints on several Chinese language internet sites complaining of the “miserly” response of foreign companies to the disaster, accompanies, in some cases, by boycotts. While the central government recently took steps to highlight the contributions of foreign firms and NGOs in the media, clearly it is in the moral and business interest of foreign firms located here to commit to sustainable corporate responsibility, but this is far easier said than done. How can foreign businesses located in southwest China best help the Sichuan community address its development challenges? How can we make sure our efforts and donations are used effectively? How can we negotiate the particularities of the Chinese aid infrastructure, composed of different government agencies and different local levels of controls? And finally, what is the appropriate way to make sure these efforts are understood and appreciated by the local community?

Working with the local NGOs

If there is an epicenter to the foreign community’s earthquake aid efforts, it is unquestionably at the Bookworm Café, and sitting at the epicenter of the Bookworm is its owner, Peter Goff, an even-mannered Irishman surrounded by laptops, cellphones, donated materials, and babbling volunteers. In the midst of a storm of loosely-coordinated generosity, Goff radiates calm. We begin by talking about the current state of foreign aid to earthquake victims. On the one hand, he agrees, to a certain extent, with the Chinese critics. “From here the level of foreign aid does seem miserly,” he says, “but if there was an earthquake in Botswana or Chile would the international community react any differently? I think the Chinese are just particularly sensitive.” At the same time, he is quick to point out that responses from local firms have been quick and generous. “The organizations we’ve been in contact with have been supportive almost immediately.” He also praises the efforts of Chinese firms, noting that a construction company from Wuhan was already operating food lines in Sichuan within 18 hours of the first shock. “Firms are reorienting their production schedules to produce needed items,” he says. “The Chinese are going in big-time.”

British firms have also stepped forward. Donations made by 14 firms confirmed by the British Chamber of Commerce already number in the millions, and include the provision of needed supplies such as water filtration systems, pharmaceuticals, and excavators [note: can we include sidebar listing detailed donations?]. Other foreign firms such as IKEA, Carrefour, and DHL have also been strong contributors both in cash and (in DHLs case) logistical services. IBM is currently developing an information service to help connect survivors with aid.

At present Goff is developing a longer-term project; to serve as a coordinating service and information clearing-house for those who want to continue to help Sichuan resolve both its short term relief needs and longer term structural needs. The newly created Sichuan Quake Relief (SQR) organization (www.sichuan-quake-relief.org) is, like so many foreign NGOs, unofficial, but it already has posted a list of local NGOs engaged in earthquake relief in order to help donors connect with locally-based relief efforts. Originally, says Goff, most foreign companies donated directly to large NGOs such as the Red Cross. “Now they are considering donating money more directly,” he says, “trying to identify particular projects.” This approach is not without its advantages. For one thing, while the established western NGO behemoths are adept at raising money, many of them have a negligible presence in Sichuan. They also have higher overhead, and are occasionally distracted by other projects.

“I think the best way to help is to work at a very local level,” argues Goff. “Find a small geographical area you can support. At the small scale, you get 100% transparency and results  . . . and zero administrative costs.” At the same time, he cautions against “knee jerk” reactions, however well-intended. “A report came out saying there are 4000 orphans, a construction company jumps up and says they’re going to adopt them all.” One imagines them toddling around the office in hard hats.

However, SQR does not, at present, screen or otherwise qualify NGOs. “These are people who say they are active and are going to do things,” notes Goff, “but we can’t verify all this information.” He points out that some of these NGOs are not, in fact, located in Chengdu at present. Therefore the onus remains on the donor to decide which NGOs are reliable enough to effectively use donated funds.

And herein lies the rub. Anyone familiar with the 2004 tsunami relief efforts has heard of the massive waste and counterproductive efforts of many of the NGOs who arrived to help. Thanks to what could only be termed a cash-drunk relief invasion, some stricken regions actually experienced real estate property bubbles that prevented survivors from moving back into their homes, which could be leased more profitably to well-heeled relief organizations. Granted China is different; the government exerts tight control over foreign NGO operations and has, to date, restricted access to the stricken areas in Sichuan and controlled price inflation through fiat.

However, the other issue is the famous NGO incentive problem. On paper, the goal of all charitable organizations is to drive themselves out of business; to end poverty, injustice, lack of education etc. and go home. In reality, of course, charities are run by humans who do not want to put themselves out of work. In addition, unlike a for-profit business, an NGO does not go out of business if its clients do not appreciate its services; it goes out of business if its donors stop giving it money. Therefore an NGO’s real “customers” are its donors. This puts a greater amount of responsibility on donors to require transparency, accountability, and results than many are willing to accept. They must decide for themselves whether a given relief organization is able to use donated funds to actually improve the lives of those they propose to help. For example, a double-blind study of USAID programs conducted by MIT showed that USAID recipients in developing countries were, on average, either no better off, or worse off, than those who had received no help at all.

This does not mean that businesses should refuse to donate to charitable agencies. As a rule such agencies have the experience and the contacts to get things done, where many private firms have no practical ability to execute relief projects of any kind. For example, EtonHouse, a private education company based in Singapore which recently launched a new school in Chengdu is delivering supplies and educational services to children in the affected regions. “Our biggest challenge,” says Sarah Moore, principal of Eton House in Chengdu, “is that for me personally, I have no connections up there, so we are using NGOs to get us up there. Obviously we’ll help in terms of taking teachers or any resources we can. We’re happy to help as long as people let us know how to help.”

However, legal issues must be considered; it is not legal for unregistered foreign NGOs to solicit funds in China. Intel, for example, wanted to donate to Sichuan Quake Relief but was forced to back out when they discovered the organization is not officially authorized to collect donations in China. One ingenious solution is the Virtual Foundation project (www.virtualfoundation.org) run by Ecologia, a local charity working on microfinance and sustainable development in Sichuan. Donors can make smaller-scale donations through the company’s US website (and take a tax deduction there, if applicable). The funds then “trickle down” into the organization’s Chinese operations. At present the organization is developing two projects. One delivers school supplies and entertainment to children in the affected areas, who have been without school or school supplies for nearly a month now. The other is developing a lending strategy to rebuild (or retrofit) housing in the stricken areas using more energy-efficient technology and safer designs.

Do-it-yourself

On the other hand, there are companies that have both the time and the competence to deliver aid directly without the assistance of local charities. Richard Jones of the Evolution Group has been in China for ten years. He is heading up efforts to direct the firms’ donations towards tangible long-term improvements, which he strongly believes in. “We can all put our hands in our pockets and get some instant gratification,” he says, “But we’re going to be in China for a long time, for the next ten years at least.” The Evolution Group has decided, like other companies, that school reconstruction is just such a project. “We can all build hospitals but obviously education is more important,” Jones says. “If we can build this right, hopefully this sort of thing won’t happen again.”

Jones’ approach is two pronged. The Evolution Group does plan to donate to local charities like Roots & Shoots (Chengdu’s only officially registered foreign non-profit) and Project Hope. At the same time, he plans to use a connection with an existing design company, MMoser, to design, deliver, and build a school in Sichuan. However, he faces the same obstacle that prevented these small towns from building quality schools in the first place, namely the poor quality of some local governments. “I have to go with people I trust,” he says. “If we’re going to give 50,000 pounds, we’ve got to make sure this is worthwhile. I’d rather spend the money on something worthwhile, something that’s not going to kill 700 kids.”

It is news to no one that blame for many of the school and hospital collapses could reasonably assigned to shoddy construction, and by extension to the local governments that oversaw same. In one township we visited, irate residents complained that the municipal government had rejected assistance from the Chinese government. “We can help ourselves,” municipal representatives told Wen Jiabao when he visited. In fact, the city sustained a high level of damage to its schools, hospitals, and other buildings. The hospital was so damaged it had to be dynamited. The portions of the schools housing students collapsed, taking hundreds of children with them, while the administrative portions remained upright. According to three irate schoolgirls who took us on a tour of the school buildings, the local government had misappropriated construction funds allocated by the central government for their own purposes and built substandard structures with what remained. Their apparently brave self-reliance was, in fact, an attempt to avoid an audit, according to the residents.

While it is impossible to confirm the veracity of such claims, higher levels of the Chinese government are cognizant of these concerns, and have made efforts not to let a few bad apples spoil the relief pie.  The China Daily published an editorial on the subject, and there have already been a few high-profile prosecutions. Nevertheless, firms and individuals are rationally concerned that corruption and/or cultural barriers will limit or misdirect their charitable efforts once media attention moves on. “Letting corrupt officials build your schools is a bad idea,” says Jones. Nevertheless, he plans to press ahead. “We have to go through the local government,” he admits, “but they’re in such dire straits, we hope they won’t insist they have to control everything. I’m hoping that we can go there, that we can get the permissions, that the government just says yes, you can do it. They seem to be open to accepting aid, money-wise. Are they going to be open to accepting technical assistance? I don’t know.”

Charity with Chinese characteristics

To be fair, the Chinese themselves have little experience with this sort of relief effort and with the political economy of NGOs, particularly foreign ones. Nevertheless, they face a problem doing it themselves. China needs to rebuild Western Sichuan quickly to ameliorate the ongoing economic hemorrhage in the region, to obviate the risk of plague, and to get people into permanent shelter before next winter. While there is rhetorical support, at least, for building better this time around, how that will be implemented is another question, because it will unquestionably be more expensive. According to one estimate, China needs $100 billion US dollars to rebuild Sichuan, but it is unclear whether this estimate accounts for the higher costs of more sustainable materials, more energy-efficient designs, etc.

Therefore the Chengdu Ministry of Commerce is eager to cooperate with foreign donors.  “Accusations of miserliness or stinginess have no connection with the facts,” says Chen De Ming, who heads the Ministry of Commerce at the national level. He points out that foreigners have already donated 1.7 billion RMB in cash plus 200 million RMB in goods, and have promised even more in the future. “This is not a small sum.”

He also took pains to note the efforts of foreign firms and individuals to engage in longer-term projects. “Foreign firms and multinationals are going a step further in concerning themselves with disaster relief, but how to connect with the relevant structures and mechanisms to help contribute to rebuilding efforts?” He notes that donations to registered charities are tax deductible and the corporate and individual levels; charitable contributions to NGOs or government organizations (at the county level or higher) can be deducted up to 12% of taxable profit, and individuals can deduct up to 30% of income, all pre-tax.  In addition, those who wish to rebuild schools can take advantage of a fund matching mechanism from the local education bureaus which was in place before the earthquake.

However, it remains to be seen how technical assistance and projects in which companies wish to retain a higher level of control will be handled. One Ministry of Commerce employee noted that firms are free to approach school districts and municipalities directly with project proposals; whether such projects will yield tax deductions will depend on how they are structured. While local lawyers also lack experience with this sort of thing, it would be wise to seek legal advice when engaging with local governments

Matt Vegh has, perhaps, the best process template. He and his partner Lin Tao have created a group called Project Sunrise, which serves as a connection service between corporate donors and stricken schools in Deyang County. “All I am is a way to contact the right people, it’s not a big heroic thing or anything like that,” he says humbly. (Vegh can be contacted at mattvegh@hotmail.com or 028 2885 7549). Vegh has been teaching in Deyang county for the last eight years; even better, he has a construction background and knows local engineers. He also knows how to get around most of the problems mentioned above through his experience with the Hope Project, a Chinese NGO that has built schools in Sichuan in the past. He believes the hands-on approach is best. “The Hope schools that survived the earthquake were funded by a company in Chengdu,” Vegh says. “The vice president of the donor company went to the site every day, personally oversaw the construction and argued with the contractors. ‘Put in more rebar!’ That sort of thing. You gotta have a contractor or an engineer, somebody trustworthy who can go out there personally.” Nevertheless, Vegh does believe corruption will be less of a problem this time. “The Deyang education bureau says they know they have to have a lot of transparency, and I believe them. I think this time they know they can’t take that chance. A few heads have already rolled, and there’s going to be more, from what I understand.”

In summary, firms who want to help should prepare themselves psychologically for the long haul. Giving cash may seem easiest, but deciding who to give it to, and making sure it’s put to good use once given, requires more due diligence than many might expect. Doing it yourself, or working in a multifaceted partnership with NGOs and localities is probably the best model. Either way, British firms face an opportunity here to improve the lives of the people of Sichuan, to deepen their connections with local governments, and at the same time to improve their own corporate image and their business prospects. It would be foolish to waste it.

Pete Sweeney is a Fulbright Scholar studying business policy in Chengdu. He can be reached at sweeneypro@cuberoof.com.

published in Danwei.org at http://www.danwei.org/disaster_relief/compassion_logistics_and_nerve.php

By Pete Sweeney

Jiao Na had come a long way to help the people of Sichuan. A Chinese teacher living in Kunming, she had seen the pictures and heard the cries for help. Not content to mail supplies, she contacted a local health bureau in Chengdu and arranged to purchase the supplies they said they needed to prevent a looming medical disaster: medical supplies, mosquito repellent, dry biscuits. She solicited donations from her friends in Kunming, some $700 worth, and booked plane tickets along with several companions.

However, when she got to Chengdu, she was astonished to find that nobody seemed to want the aid they’d requested. She made two stops, one at the Chinese Red Cross, and had her goods turned away for being too small in scale. When she met us at the Sichuan Provincial Hygiene Information Research Center, another collecting point for aid, she was tired of rejections. And yet the center appeared unexcited about her donations. Her receipts were not in order. They didn’t want to deal with foodstuffs or mosquito repellent. They suggested she go deliver it to the distressed regions herself, but the roads are closed to individual volunteers and she has no car anyway. “I don’t understand,” said Jiao Na. “I hear all these people in Sichuan appealing for help. I come up here and nobody wants it. If you don’t want this stuff, why do you ask for it? I just think it’s really weird.” And Jiao Na burst into tears.

Jiao Na had no way to know how poor her timing was. She had arrived in Chengdu just in time for its second wave of earthquake shock, but this time the shock was man-made. After a week of watching images of horror from outlying areas, the citizenry of Chengdu was no longer complacent about aftershocks. On Monday, the city held a “moment of silence” to commemorate the earthquake victims. This moment of silence was not, in fact, silent, but was marked by every air-raid alarm and car horn in the city detonating simultaneously. The effect was cardiac. Monday night the local government followed up by broadcasting a prediction that an “aftershock” between six and seven points in magnitude (as severe as the initial shock) would likely strike the city in the next 24 hours. This time the city panicked. Half of the city’s population, it seemed, leapt into their cars and fled. The main roads leading out of the city were all clogged. The tent cities, previously populated mostly by stubborn holdouts who distrusted the government’s assurances were now rejoined by those who did not have the ability or the inclination to flee. I slept on a sidewalk in front of a bar.

Metaphorically speaking, the first week of the earthquake disaster was like the honeymoon of a longer relationship. First the euphoria of survival and the closeness one feels with those you survived with. Then, as the news began to broadcast images of horror from the surrounding areas, a surge of sympathy and compassion as the population mobilized to help. Granted the tone was marred by a few panics, over the water supply for one. But over all optimism and community feeling prevailed.

But by the time Jiao Na arrived, the aid structure was clogged, charlatans and con men had begun to take advantage of the situation, creating fraudulent donation websites and selling stolen donated supplies like tent materials on the side of the road. According to an employee of a local chamber of commerce, the local business community is also confused and exhausted by the unending appeals for aid from a multitude of just-sprung-to-life aid organizations. China has little experience with NGOs; civil society initiatives are the province of the government. Now there are student groups, foreign aid organizations, individuals, and various government agencies all acting at the same time, but not in concert.

At this point the risk is that burnout will set in. Having dealt with the immediate effects of the crisis, distributed food, medicine, water, temporary shelter, will the Chinese neglect to address the fundamental problems that resulted in so many school buildings collapsing while the government offices stayed upright? Excepting the exploding size of the government bureaucracy (in the Qing dynasty the ratio of officials to peasants was 1:1000, today it is closer to 1:40), China’s rural infrastructure remains poorly developed. Frequently the development of public goods like education and health systems have taken a second seat to factories and office parks . . . or to the blatant corruption documented by Chen Guidi and Wu Chuntao in their (now banned) survey of China’s peasantry “Will the Boat Sink the Water?”

Chinese citizens like Ms. Jiao are clearly ready to pitch in, as is the international community, but the effort must be sustained over a greater length of time, targeting longer-term structural problems. The earthquake, as tragic was it was, is an opportunity to build again, and build better. While the earthquake was an unmitigated disaster, it would be a worse disaster to waste the newly mobilized energy of Chinese volunteers. Despite the fraying of nerves, this energy is far from dissipated. When we arrived at a Sichuan donation collection center, the cabbie eyed the boxes we were unloading from the trunk. “You’re bringing donations?” he asked, and then uttered words the foreigner never hears from Chinese cabbies: “I don’t want your money.”

Pete Sweeney is a Fulbright Scholar researching business policy in Chengdu, China

 

Six days later and aftershocks are still hitting

Chengdu. The death toll keeps rising, and many people (albeit far less than before) are still living in ornate tent cities in the street, in structures ranging from Plexiglas wagons to umbrellas propped on dirt. Every time it seems like things are about to get back to normal, another shock hits, and with it another wave of information shock; photographs from the outlying towns, showing scenes of devastation that one would never suspect from looking at downtown Chengdu, where the buildings are largely unscarred on the outside, where most of the damage indoors is limited to crumbled sheetrock and cracked tile, and where the expatriate community was never deprived of wireless internet connectivity.

The government’s response was intelligently transparent.

China knows it has to hit this ball out of the park from a public-relations perspective, and the strategy has paid off. The radio stations and TV have been broadcasting relentlessly upbeat messages; “as long as we stick together, we can overcome anything” is the constant refrain. Apart from the waves of screaming that went around the city streets when the aftershocks hit, I observed no panic here. Indeed, the children of

Chengdu were obviously enjoying a week’s vacation from school playing in the street. Most of the Chinese I spoke with had an informed attitude towards the earthquake, despite the fact that few of them had experienced one before. Stay out of the buildings, wait for the aftershocks to pass, sleep outside, cooperate.

That said, the crisis is far from over and it remains to be seen how sustainable this friendly atmosphere is. Apart from the small shops selling out of water and food, the local economy has taken a hit, at least in the short term. At the local ersatz antique market most of the shops were closed, and there were few customers, excepting one man who came to buy the fake money the Chinese burn at funerals. Every day brings another utility outage and another aftershock, including the one today which was fairly intense. Since the usual aftershock window usually closes after three days, their continued occurrence four and five days after the main event makes it impossible to settle down psychologically or otherwise. Some speculate that the numerous dams and reservoirs in the region are shifting their weight with every shock, amplifying tectonic instability.

And despite improved government transparency, one can still detect residues of distrust amongst the residents. The tent cities on the Sichuan University Campus are full of city residents who have been told by the government that it is safe to return home and yet refuse to do so. One family from the developed urban center inside the first ring road told me that they had received a text message telling them it was okay to go home (the government has been using cellphone text messages to deliver encouraging information about the restoration of utilities and so on), but they did not believe the building could possibly be safe. “We live on the ninth floor,” said one man. “The swaying was so intense. I’m not going back.” On the other hand, a pair of college students I spoke to over late night spicy noodles said they had no worries about returning to their dorms, but were staying in the tent city because it was so much fun.

For another example, when the city announced that it would be shutting off city water for a short period yesterday, a rumor immediately started that the water supply had been contaminated by pollution from a chemical plant explosion upstream. The closure of the water supply may have reminded Chengdu’s citizens of infamous benzene spill in northeast

China in 2005. In that case, the local governments colluded to cover up the spill, shutting off water to the entire city of

Harbin for three days, without offering any credible explanation. First they claimed they were doing routine repairs to the entire city at once. Once it was clear that no one believed this, they claimed that they had received an earthquake prediction! People fled the city in droves.

In

Chengdu, residents clearly suspected a similar coverup. They immediately stripped the shelves of

Chengdu’s shops of every drop of water. The government’s response was to publish a warning in the Chengdu Daily warning people not to heed the rumors about contaminated water. However, both the government official and the reporter retained their anonymity. Old habits die hard.

Western media coverage has been sympathetic to government efforts here, and hopefully this will ameliorate, to a certain extent, the damage caused by the misprision of reality that was the

Tibet crisis. The central government has perhaps learned a few lessons in public relations from its past experiences with other disasters, including the snowstorm this last winter. For example, don’t deny the undeniable, use the media to mobilize people’s emotions to develop civil society, and react quickly. At the same time, citizenry’s reaction to the water rumor, and their refusal to return home, shows how far

China still has to go to establish credibility with its citizens.

However, Chinese traditionally view natural disasters as closely linked with political developments. This year has already seen two natural disasters, plus the political crisis in

Tibet. The stock markets are wobbly and exports are off. On the one hand, this disaster has indeed given the central government a chance to recover face. On the other, the images of the collapsed schools also illustrates

China’s failure to deliver on its Western Development Strategy, which proposes to develop its interior and provide basic quality services to the countryside. The poorest Chinese were the ones most likely to live, work, and go to school in the sort of shoddily constructed cement structures that collapsed all over

Sichuan this week. The fact is, Chengdu has weathered the earthquake well so far, but Chengdu is a modern, sophisticated anomaly in the midst of a sea of impoverished provinces, and China’s increasing disparity of wealth is evidenced by the disparity of damage. Evaluating the quality of the government’s public relations coup is premature. Buildings could yet collapse, and now there are rumors of damage to the dams. Stand by for more aftershocks.

Pete Sweeney is a Fulbright Scholar from the

University of

Washington researching in business policy in

Chengdu, China.

The surge of investment developing countries are pouring into more developed economies is a phenomenon that is receiving increasing attention. According to Kofi Annan’s preface to the 2005 United Nations Committee for Trade and Development (UNCTAD) World Investment Report:

The conventional wisdom of developed countries as capital and technology exporters and developing countries as importers is gradually giving way to a more complex set of relationships. The geography of international investment flows is changing. Developing countries are emerging as outward investors, and their importance as recipients of foreign direct investment in more knowledge-intensive activities is increasing.

Outbound investment from the People’s Republic of China is part of this trend. An article in the China Daily claimed that outbound investment from the BRIC countries (Brazil, Russia, India and China) and other developing nations is a “sign of a new world order.” The claim sounds dramatic, but it is nevertheless indisputable. According to MOFCOM statistics compiled by Professor Lu Bo, Deputy Director of the Chinese Academy of International Trade and Economic Co-operation (CAITEC), China has established about 10 thousand companies in 172 countries and regions with a total investment of $90.63 billion. Thanks to its attraction of inbound investment and its accumulation of foreign currency reserves, China is now one of the world’s largest sources of investment. This naturally includes investments in developing countries. “Nearly half of US capital inflows over the past year and a quarter came from China, Brazil, Mexico, and Russia,” a Xinhua News article claimed.

Indeed, during the recent global economic downturn, driven by the subprime mortgage crisis in the United States, Chinese firms have emerged to inject cash into troubled firms like Morgan Stanley and Citigroup. Michael Heise, writing for the International Herald Tribune, called these firms “white knights from afar.” “Is [this] something to fear?” asks Heise. “The answer is no, at least, not directly.” If the Chinese Ministry of Commerce has its way, we are likely to see more of such Chinese knights in the near future. A recent article on the Chinese Council for the Promotion of International Trade (CCPIT) quoted Fu Zi Ying, Vice Minister of the Ministry of Commerce (MOFCOM), who argued that the current economic crisis offered Chinese firms unprecedented M&A opportunities. “Several well-known enterprises and research organizations have fallen into difficult positions. This offers Chinese firms a great acquisition opportunity. These [Western] firms possess well-known brands, formidable international sales networks, and relatively strong research capabilities. If our firms can successfully acquire them, we can use these resources to greatly enhance Chinese firms’ international competitiveness.”In the current political climate, however, Chinese firms still face obstacles investing in developed economies, particularly in the US. The Committee on Foreign Investment in the United States (CFIUS) recently blocked an attempt by Huawei, a well-known Chinese telecommunications firm, from acquiring a $2.2bn stake in the US firm 3com, citing security concerns related to 3com’s technology assets. Huawei is hardly the first Chinese firm to run into a wall when it comes to acquiring controlling stakes in US firms. The Chinese National Offshore Oil Corporation (CNOOC) attempted to acquire Unocal and was rebuffed due to security concerns. While not subject to a security review, Haier’s attempt to acquire Maytag was politically unpopular in the

US and was ultimately stymied.

Predictably, the Chinese are irritated and blame

US protectionism and paranoia. Opinion in the

US varies according to the speaker’s assessment of Chinese intentions. In short, a lot of political sound and fury. What does it signify?

First, much of the popular fear of Chinese investment in the US is hysterical, reminiscent of the widespread fear that swept through the US when Japanese firms began buying up US assets, or more recently the

Dubai port acquisition controversy. This is largely due to a poor understanding of the purpose of international direct investment, which can vary from deal to deal, and how it can affect national interests. The most dangerous canard is that foreign firms are more likely to destroy jobs when they acquire American firms than American firms are.Indeed, what is the national interest when it comes to foreign investment? For example, the logic supporting the acquisition of Unocal deal (and the blockage of same) rested on the premise that oil is not, in fact, a fungible market product for sale anywhere to anyone, but rather a strategic resource that should be physically controlled by the nation. Therefore if China acquires an American oil firm, it can turn off

US oil at the tap. But since most of Chinese oil currently passes through the Straits of Malacca under the eyes of the US Pacific Fleet, China’s control of Unocal would hardly allow it to dictate terms of oil supply to the

US. In short, if either the

US government or the Chinese trusted the oil market to function, there would be little point to the acquisition from a national strategic perspective.Huawei, on the other hand, is more complicated. For starters, Huawei’s original foray into the

US resulted in a large lawsuit. Cisco alleged that Huawei’s router products were made from pirated Cisco technology. While a confidential settlement was reached between the firms, Cisco did not formally close the case, presumably to retain leverage. Huawei went on to establish US affiliates and research centers in the US, but its business performance in the US market has been less-than-spectacular.Nevertheless, many Chinese find these investment barriers insulting, unfair, and counterproductive. One article in the Guangzhou Daily argued that not only are such barriers unfair, but if the US wants to resolve the trade surplus, it should encourage Chinese firms to export capital to the

US in the form of direct investment as a counterbalance. Other Chinese economists make arguments that such investment can help tame

China’s inflation problem caused by the renminbi glut. In order for such investment to make an impact on the enormous trade surplus, its scope would have to be amplified geometrically, but nevertheless.However, it’s unwise to mix conversations about trade with conversations about direct investment. Trade is the movement of goods, direct investment (as opposed to portfolio investment, which is the simple purchase of stocks and bonds) is the movement of control. The latter is far more complex than the former and requires market similarity, not complementarity. This is why the bulk of direct investment flows are between the US and Europe, not the

US and developing economies. The learning curve is much shorter for European managers, who operate in a similar legal and business environment as their American counterparts, than it is for Chinese managers.If

China wants to export capital for macroeconomic reason, it can do so simply by investing in bonds, as indeed it is already doing, or by letting the renminbi float, as is already underway. But direct investment should be a microeconomic firm-level decision, not a facet of macroeconomic strategy.In the short run, Chinese direct investment’s impact in the

US should not be overestimated. It makes up a relatively low portion of China’s GDP, even in comparison with other developing countries like

India. Despite the headlines, there are hundreds of Chinese firms quietly doing business in the

US.In the long term, however, Chinese direct investment in the US should be ultimately provide a net benefit to both parties, provided it creates value, local jobs, and avoids sensitive sectors. From the Chinese perspective, acquiring foreign experience (and training staff) is key to developing the competitive capacity they need to move up the value chain and pull the millions of impoverished Chinese trapped in dead-end manufacturing jobs along with them. As importantly,

China needs to provide more jobs for its college graduates, among whom the unemployment rate (around 40%) is unsustainably high and is a long-term security problem for everyone.From the American perspective, closer and healthier linkages with Chinese firms would not only facilitate business operations along the supply chain, it would provide greater legal leverage in conflicts of interest. As the recent controversy over quality control illustrate, it is quite difficult to gain recompense from Chinese firms that have no assets in the

US. As Chinese firms internationalize their operations, they become more accountable to international norms, as the Huawei-Cisco case illustrates.However, reforms on both sides are necessary. Many American policies towards China are, in fact, discriminatory, particularly those directed towards protecting US agriculture and textile sectors, and many of the US security concerns regarding China are paranoid. At the same time,

China’s reliance on SOEs to drive direct investment is problematic as it is difficult to ascertain whether an SOE’s acquisition strategy is driven by the profit motive or by political strategy. Therefore it is in everyone’s interests that private Chinese firms, as opposed to state behemoths, be allowed to lead outbound direct investment overseas. This means giving them better access to capital from Chinese banks, and removing barriers in the US that stifle Chinese competition in sectors in which they enjoy the greatest comparative advantage. For example, part of the reason Chinese manufacturing is so cheap is they have near unlimited access to a Chinese peasantry that cannot survive on their farm incomes. Were the US and Europe to open their agriculture markets, the result would drive up the price of manufacturing labor in China as peasants return to an economically-viable agriculture sector.

China must also stop encouraging domestic firms to invest abroad for non-business reasons. Obviously national pride is a poor reason to invest, as is national security, neither of which are the responsibility of the business sector. There are also other policies that have perverse effects. For example, the Chinese tax structure currently gives preferential treatment to foreign-invested firms. This encourages a phenomenon called “round-trip” investment, in which a mainland firm creates a foreign affiliate abroad whose sole purpose is to return to

China as a foreign firm. This means lowering domestic firms’ tax treatment to the same rate as foreign firms, and at the same time equalizing the regulatory treatment of foreign firms (who already operate under an information and “guanxi” deficit) so that everyone plays on a level field. In short, increasing the depth and quality of investment flows in both directions can only serve to harmonize both nations’ national interests. 

Anyone who has been following the New York Times coverage of Chinese behavior in Africa is bound to feel a degree of confusion. On the one hand, the Chinese government routinely exempts itself from its own laws, and the Chinese Communist Party (CCP) is even more exempt; you can’t even sue the party. China’s reputation for corruption precedes its reputation for technocratic development. Is this the sort of partner African states need to emerge from their now-traditional place on the bottom rungs of the development ladder?

This question is speculative. What is not speculative is the argument that to date, the West has clearly demonstrated that it is not the sort of partner African states need. Western governments have sponsored a long string of failed development agendas, from funding massive prestige projects like dams and power plants that the recipient countries could not afford to operate, to goofy Kumbaya-style social engineering snafus along the lines of Tanzania’s Ujamaa program. Now we have initiatives like Fair Trade Coffee, which insists that the only “fair” mode of business organization is the political cooperative, which excludes the two oldest African economic institutions, the individual family farm and the hereditary tribal hierarchy. Is it any wonder that Africans are as exhausted with the West as the West is exhausted by Africa?

The most recent initiative is the World Bank-led anti-corruption campaign, which until recently had the misfortune to be championed by weaponologist Paul Wolfowitz. It looks good on paper, but it has yet to bear fruit one way or the other; it is this campaign that is at risk due to Chinese interference, and is therefore generating all the bluster at the NYT. Is this bluster justified?

Before we can answer that question, I’d like to outline what China’s relationship with Africa is. First, China’s relationship with Africa predates its spiking oil demand by decades. China has long given its African diplomatic relationships high profile; Chinese premiers and ministers routinely make long tours of African states, and visiting African delegations are highlighted in the Chinese media. Why has China developed a relationship with a continent so far away? What strategic interests does China have in Africa?

First and foremost, Africa is in no way threatening to Chinese interests. African armies do not threaten China’s execution of its sovereignty- which does, propaganda aside, occasionally lead to interfering in the domestic affairs of other states, most notably her support for the Khmer Rouge in Cambodia, followed by her invasion of Vietnam in the 80s. And African companies do not compete with Chinese companies for market share. While both China and Africa were colonized by the West, Chinese statements of post-colonial cultural affinity seem a bit forced. Nevertheless, such statements cost nothing. Post-colonial African rulers appreciated being treated like potentates, as opposed to the scolding they invariably received in the West.

For China, the payoff from this investment of time has been significant. African leaders have been strong supporters of China in the UN and other global forums, and have supported China’s bid to position herself as a sort of first among third world equals. This has helped China muffle a degree of human rights criticisms, of course, but most importantly it has helped China advance her first priority- the diplomatic isolation of Taiwan.

Today it has also greased the skids of Chinese energy and resource investment in the region. China’s strategy regarding energy and resources is not oriented towards the market. Although oil is a fungible commodity i.e. it can be purchased anywhere for the same price, China does not trust the market will supply her with oil. For support of this theory, she points to the US involvement in the Middle East, which does not seem to be predicated on trust in the global oil market. The result is the US and China are competing for “equity oil,” i.e. oil that is never sold on the world market, but rather shipped directly to the owner nation. Chinese investment in the Sudan and Chad is driven by the desire to find oil and keep it off the market. Such oil will be shipped directly to China, refined in China, and sold, for whatever price the government sees fit, to Chinese consumers.

In exchange for this oil, however, China stands to sacrifice much of her formerly positive public relations with the West and with individual Africans, who have never confused their leaders’ interests with their own. Until now, China could plausibly claim to be a fellow post-colonial state. But with this strategy, China adopts an explicitly extractive strategy. China is not investing in African companies, African labor markets, or African people. China is investing in the mineral assets in Africa, in order to extract them. The “spillover” from such investment is always minimal, as they frequently lead to what economists call “dutch disease,” a condition in which the high price of a nation’s natural resource pushes its currency upwards, crippling the competitiveness of other export industries. And China, regardless of her statements of sympathy, is clearly not about to help develop an African state who would compete with her for textile or agricultural markets.
The result is that Africa rebel groups- who almost always eventually take power- are increasingly regarding China as the next colonizer. Such a rebel group kidnapped and murdered several Chinese oil workers in Ethiopia.

Given her leverage, China can certainly always re-negotiate with the next group of leaders. But such rebels can always begin their negotiations with China before they take power, by sabotaging oil production. In short, China’s non-interference strategy does not attempt to change the situation that makes Africa such an unattractive investment target in the West. Therefore it seems reasonably to expect the Chinese reputation in Africa to suffer the same fate as the West’s.

On the other hand, we should not confuse Chinese intentions with their actual effects. It may be that the best way to help Africa is simply pour money into her resources and leave her politics alone. The most demonstrable accomplishment of Western poverty-reduction efforts in Africa has been the employment of a large number of well-meaning white college graduates, who have been provided with Western salaries, domestic servants, and the self-satisfaction of having tried to help without any corresponding responsibility for having failed. No accomplishment of Western NGOs has offset the damage Western arms dealing and political meddling, and indeed most accomplishments trumpeted by one NGO have been duplicated, or offset, or undone, by another one, as NGOs and charities are primarily responsible to their donors, not their recipients. It would no doubt have been better to take the entire Western African aid budget spent to date, put it in airplanes in low-denomination bills, and airdrop it over Africa.

However, it seems a stretch to imagine that just building infrastructure alone will help African states compete economically, and the suggestion that high oil profits can drive sustainable economic development is demonstrably not true, as the South American example illustrates. And the irony is, the oil security China is receiving from such investments is chimeric, to say the least. China’s competitor for oil is the US. In the case of a war or similar crisis between the two countries, the US Navy has only to embargo Chinese oil from passing through the Straits of Malacca, and all of China’s African equity oil either becomes US equity oil or goes back out on the global market. China does realize this vulnerability, thus her interest in land-based pipelines through central Asia, requiring her to coddle up with an entirely different set of unpleasant dictators. But such pipelines are not intrinsically more defensible than sea lanes, and come with similar political costs.

The largest cost, which China has not yet publicly accepted, is the necessity for interference. Should China become dependent on African/Central Asian states for her energy security, she cannot tolerate rebel groups overthrowing her allies and establishing alliances with competitors. She cannot afford bidding wars. She must, in effect, develop a similar military capability the US has to protect a crucial economic interest far beyond her borders, and even more important, she must consider less expensive and more subtle forms of interference. However, given her fear of establishing/ceding a legal precedent that could be used to justify an international/US-led defense of Taiwan, I do not believe she has a logically consistent argument to hand. Therefore it is important to observe how China handles domestic instability in African states that affects her energy security.

Most important, however, is to awknowledge that this activity presents to threat to US interests. First, whether the profits of the multinational oil industry translate into economic and security benefits for US citizens is highly debateable. Second, the Chinese are largely developing inferior fields in instable countries that the US firms do not consider worth developing.  Third, it is in everyone’s interests that China acquire the energy she needs peacefully. Should China strike a massive oil supply in Africa, it will place a corresponding reduction of demand pressure on the existing market, lowering prices for everyone else. In fact, the people who have the most to fear from Chinese oil exploration are not US consumers, but rather the national leaders who are currently financing social spending extravaganzas based on the assumption that oil prices will stay high indefinitely, namely Hugo Chavez.

It appears that

China’s central government has finally begun to develop serious policies for advancing the commercial development of its manufacturing sector. Aviation Week has published an article (http://tinyurl.com/33yzzb)  quoting central government sources in the General Administration of Civil Aviation in

China, who have declared that the growth of new airlines and the purchase of new airplanes will be capped- with a key exception for airlines who purchase Chinese aircraft. This explicit support for the domestic manufacturing sector is a new and interesting development, since in the past the central government was largely content with starting up new, ambitious domestic aircraft programs and then watching them fail over the course of a decade.

The new policy is driven by several factors. Most importantly, the Chinese military still monopolizes much of China’s airspace, which restricts the growth of commercial aviation, both large and small (The Economist “Up in the air” May 10th 2007), and therefore the announcement is more a recognition of a military restriction (and the inability of civil aviation to effectively lobby against the military preference in airspace) than a policy initiative per se. Of secondary importance is

China’s lack of trained pilots- routes/movements using foreign pilots are also exempt, which is intended to discourage overworking Chinese pilots (the policy also restricts pilots from working overtime). Of tertiary importance is the effect this policy might have on historically weak domestic demand for

China’s indigenously designed ARJ-21, which has only sold 35-41 airplanes to date, depending who you ask. The program needs to sell some 400 to break even http://tinyurl.com/395hg4. But this effect is the most politically interesting.

The ARJ-21 has been in trouble since its inception, since it is experiencing the same problems as previous indigenous projects. According to some industry insiders, the management structure inside the program is still using a secretive, information-silo structure, in which horizontal communication between engineers, including between foreign engineers and consultants who are integrating their products into the Chinese-designed body, is highly restricted. This results in the same quality control problems that caused prior craft, in particular the Y-10, to be released far after their target release date (the Y-10 took ten years to develop and the ARJ-21’s first test flight has already been pushed back from 2006 to 2009). Aircraft developed in this manner tend to be obsolete by the time they are released, and have profound safety problems. According to one article in Xinhua news, the ARJ-21 release date was pushed back in part due to a management requirements change; the management team decided the plane needed to be longer than the original design. This is an expensive change to make in mid-process. It could have been caused by late detection of a safety flaw (the Y-10, which was a copy of the Boeing 707, was inbalanced), or by a discovery of a market/competitive requirement.

Since the aviation manufacturing sector is highly diversified, the lack of domestic customers for its planes (including its military craft) hasn’t put it out of business. They fall back on cars, refrigerators, etc., to support their massive personnel headcount. It is unclear whether these firms are actually profitable or not, and it is unlikely the heads of the aviation know themselves. But profitable or not, there haven’t been layoffs from the aviation manufacturing plants, so the AVICs difficulties haven’t contributed to the political instability problems resulting from urban unemployment. Until now, it appeared to me that the central government was satisfied with this arrangement, because it has, to date, largely allowed domestic airlines to scorn domestic craft, even joint venture craft, and instead purchase foreign vehicles. It has also been content to let all of its indigenous programs and its joint venture programs to die quietly on the vine.

However, the Embraer ERJ-145 joint-venture program in Harbin has finally found a domestic customer in Hainan airlines, which has bought 100 of the planes, 50 of which will be produced in

Harbin. This does not reach the Harbin program break-even point, but it is still the largest order for joint-venture craft built in

China placed by a Chinese airline. This may have been a political arrangement between Brasil and

China, since the sale was announced at a diplomatic summit between the two countries. Certainly Brasil, like its joint-venture predecessors, has every reason to be displeased that in exchange for its heavy investment in training Chinese engineers and managers to build its planes, it has received such lackluster domestic sales. The McDonnell Douglas MD-80 program only got 30 Chinese orders and the MD-90 program got none at all. This not only angered MD management, it contributed to the acquisition of that company by Boeing.

It’s unclear whether the policy exception allowing the purchase of “Chinese-made” aircraft will apply to the domestically-produced  ERJ-145s. This is a key question since I suspect that Chinese airlines would prefer to purchase the ERJ than the ARJ. The availability of credit and leasing terms will also play a role, as in the past domestically designed aircraft had to be purchased upfront, a highly unattractive proposition to any market-sensitive airline. However, all of this is moot if the ARJ-21 isn’t safe or comfortable. China’s airlines are already far more commercialized than the manufacturing sector and given the restrictions on airspace and the capacity at airports, the environment looks to become even more competitive. Therefore no Chinese airline would risk a crash just to support the development of the ARJ-21 program, and of course they can’t purchase a plane that isn’t available for sale yet. The current policy is in place until 2010, but it is quite possible that the ARJ-21 won’t even be commercially available by then. While there is certainly a delay between ordering an airplane and receiving it, it remains an open question whether the AVIC program will be able to take advantage of this policy initiative.

As interesting is the international effect. Right now the regional jet market is getting increasingly competitive. Embraer, Bombardier, the AVICs, Sukhoi, and now

Japan are all competing in the same space. That’s right, after a very, very long hiatus, Mitsubishi is now getting back into the airplane design business (http://tinyurl.com/2wo4ow). More on this subject later.

The history of civil aviation manufacturing in the People’s Republic of China has been largely a history of conflict, contradiction, inefficiency, and failure. China’s significant endemic advantages in this sector have been squandered or offset by various peculiarities of the political economy. The amount of wasted energy and capital is significant when one considers the high investment requirements of airplane production in the context of China’s enduring poverty.

Yet the Chinese government has never stopped trying to build planes. From the victory of the Chinese Communist Party (CCP) over Chiang Kai Shek’s Kuo Min Tang (KMT), the leaders of mainland China have repeatedly and publicly endorsed the goal of indigenous aircraft production, both military and civil, and for good reason. Unlike many smaller countries, China does not need to export aircraft to succeed. Fulfilling her own domestic market demand alone would produce a highly competitive aviation giant. Therefore China has embarked on numerous projects, both indigenous and cooperative, in which China invested large sums of capital building planes. Unfortunately, Chinese state-owned airlines repeatedly refused to purchase them. One McDonnell-Douglas executive gave voice to disbelief that was, by some reports, shared by their Chinese counterparts in the factories: “Chinese airlines simply do not want to buy an airplane that’s been manufactured in China . . . It’s totally amazing that the Chinese system permits this.”

The most singular symptom of China’s failure to produce a successful civil airplane manufacturing sector has been the failure of the indigenous airline market to support the venture. One might explain this by arguing that the indigenously-designed planes exhibited numerous safety problems, which is true, and yet why should state-owned airlines be particularly sensitive to safety issues? After all, they were not responsible to consumer satisfaction surveys, they were not exposed to foreign competition, nor did they have to fear lawsuits.

Most importantly, their purchasing decisions were and are nominally controlled by the central government purchasing agency. On the surface, it appears that the central government industrial policy exhibited a sort of schizoid tic as far as aviation was concerned; one half of the state refused to cooperate with the other half. The phrase coined to describe such intra-state conflict is Kenneth Leiberthal’s “Fragmented Authoritarianism” hypothesis, and however widely applicable this theory is to China at large, it certainly provides a useful framework from which to consider the political economy that engendered the failure of so many Chinese aircraft manufacturing projects. The Chinese central government was nominally both the producer and the consumer of Chinese aircraft. And yet in reality, Chinese aircraft producers and Chinese aircraft consumers exhibited almost completely opposed priorities. The right hand refused to buy what the left hand produced.

Another critical fact is that Chinese airlines not only rejected indigenously-designed aircraft, they also rejected FAA- certified joint-venture projects produced in cooperation with McDonnell Douglas and Embraer. The MD-80 project, sited in Shanghai, did manage to produce planes that flew, and flew safely, proving that Chinese engineers and managers could build planes according to Western safety specifications. And yet Chinese airline “purchasing managers” refused even these products, and even blocked the factories’ attempts to create their own customers i.e. start new airlines. This puts to rest the theory that the Chinese airlines rejected Chinese aircraft out of legitimate safety concerns.

Were the airlines rejecting Chinese airplanes for market reasons? Were the planes not competitively priced? This is a more productive line of enquiry, as one American source suggests that the Chinese domestic credit market was simply not in a condition to provide the sort of massive credit lines and payment plans available to Boeing customers, for example. Thus it may have been that Chinese aircraft were, in fact, much more expensive than foreign craft, since the Chinese manufacturers required cash payment upfront. However, if the airlines were behaving like businesses, not government ministries, this is in itself a puzzle. While the airlines obviously did not concur with central strategy as far as technology transfer in aviation manufacturing was concerned, this does not in and of itself imply the development of market sensitivities. At the same time these airlines were rejecting the MD-80 and 90 programs, they were not exposed to genuine market forces, and many of them ran at high levels of inefficiency, flying half-empty planes along low-demand routes. If these airlines began developing more market sensitivity to price and credit, what variation in the reform process allowed them to do so?

Regardless of the cause, the result is that most of China’s attempts to affect technology transfer from European, American, and Russian airplane manufacturers were either stillborn or failed to gain enough traction to produce any momentum in the domestic or export markets.

In the past two years, however, there have been several new developments that may prove significant, which will be analyzed in this paper. The first is the development of a domestic airplane leasing sector—most notably the establishment of the Shenzhen Financial Leasing Company—capable of purchasing planes and then renting them to domestic airlines. This, in combination with the significant foreign-exchange surplus the Chinese economic boom has generated, means that the credit-access problem may have been resolved or significantly alleviated.

Or it may not. Any predictions regarding aircraft manufacture must rely on the premise that successfully producing and marketing large civil aircraft is extraordinarily difficult for even the most advanced producers. As Airbus’ experience with the A380 shows, even the most minor of mistakes- in the A380 case, a CATIA software version incompatibility- can produce catastrophe if not detected and resolved early in the process. Should China clear every outstanding obstacle currently hindering her progress towards establishing a competitive civil aviation national champion, she still faces an uphill and expensive struggle in which luck plays no small role.