Chinese Journal Review: Chinese Labor Conditions, Extraterritoriality, Bank Vulnerabilities, and the South China Sea

January 2020

Happy New Year! Every month I survey the latest papers published in leading Chinese-language academic journals focused on domestic politics, foreign policy, economics, and technology. Translated summaries of those papers appear here. 

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In this edition:

  • China’s Labor Force is “Unsuited” for Transition to New Economy, According to CASS Report

  • Chinese Laws Should Have More Extraterritorial Reach, Argues Law School Dean

  • Chinese Banks are Most Vulnerable to the Distress in the Real Estate, Transportation, and Mining Sectors, Study Finds

  • Former Chinese Navy Spokesperson Argues China Should Take a More Assertive Position in South China Sea

China’s Labor Force is “Unsuited” for Transition to New Economy, According to CASS Report

Title: The Evolution, Friction and Transformation of China’s Employment System (中国就业系统的演进!摩擦与转型)
Journal: Economic Research Journal (经济研究)
Author: Zhang Peng (张鹏), Zhang Ping (张平), Yuan Fuhua (袁富华)
Publication Date: December 2019

  • Researchers from the government-affiliated Chinese Academy of Social Sciences (CASS) published a study that evaluated Chinese labor trends. China’s economic model has long relied on a large population size and a pool of low- and medium-skilled workers, they write. China now wants to transition to an economic model that prioritizes urbanization, high-quality development, and a more skilled workforce. 

  • The authors conclude that China’s labor force is presently “unsuited” for this transition. Using microdata from China’s Household Income Project (CHIP) and other sources, they write that low-skilled workers appear to be “locked-in” to low-end sectors and have difficulty transitioning to higher-skilled jobs. Further, when employment opportunities for low- and medium-skilled workers close, the data show these workers tend to take opportunities that pay less in other low-skilled sectors. This lack of upward mobility suggests that, as China’s economy evolves, more low- and middle-income workers will see reductions in income over time, they argue.

  • The authors analyzed 2013 CHIP indicators that measured workers’ education levels, typical contract type and length (fixed/permanent, medium-term, or short-term), sector, job type, age, gender, and number of times an individual has changed jobs. Using these data, the authors built an index and labor mobility matrix to estimate the ability of workers to move into new sectors.

  • According to their findings, when looking for new jobs, agricultural workers tend to stay within the agricultural sector (represented by the high 4.418 agriculture-to-agriculture score, above), although some will move to manufacturing, low-end service, and construction sectors. Agricultural workers do not move to high-end service sectors or to STEM, culture, or public- sector jobs, however. Construction workers do not move to agricultural sector jobs, meanwhile. Most tend to stay within the construction sector, and occasionally move to jobs in the manufacturing sector, high-end service sector, and low-end service sectors. Some workers in the STEM, culture, and public sector will transition to lower-skilled (and lower paying) construction, manufacturing, and low-end services sectors, but workers from these sectors do not transition to the STEM, culture, and public sector as easily.  

  • The authors write that these structural challenges create an accumulation of human capital in low-end sectors and human capital shortages in high-end sectors. Looking at job types, the authors also observe little mobility in terms of complexity of job function, including when workers switch sectors (e.g., farmers and assembly line workers rarely transition to office jobs). See the study for a much more exhaustive breakdown of labor-force dynamics, including analyses regarding education level, job type, and other factors.

Note: The government-affiliated Chinese Academy of Social Sciences publishes Economic Research journal.

Chinese Laws Should Have More Extraterritorial Reach, Argues Law School Dean

Title: Jurisprudence Analysis and Countermeasure Research on "Long Arm Jurisdiction" (“长臂管辖权”的法理分析与对策研究)
Journal: China Legal Science (中国法学)
Author: Xiao Yongping (肖永平) 
Publication Date: December 2019

  • In this essay published in the influential China Legal Science journal, the dean of Wuhan University School of Law, Xiao Yongping, argues that China should update its legal code to give Chinese laws more extraterritorial reach.  

  • Xiao argues that the United States uses laws with extraterritorial reach to China’s detriment. The US asserts legal jurisdiction if the effect of activities outside the US damage US interests or if individuals use the US dollar or use US web servers to commit crimes, Xiao writes. Well-known cases of the US asserting extraterritorial powers to sanction, prosecute or investigate Chinese entities include: the state-owned energy company Zhuhai Zhenrong, which the US Treasury sanctioned for purchasing oil from Iran; ZTE, a large Chinese telecom provider, sanctioned by the US Treasury and Commerce Departments for violating export control laws by selling American technology to the Telecommunications Company of Iran; Bank of China, which the Federal District Court for the Southern District of New York found in contempt for failing to turn over bank records related to a case against Gucci, and; the case of Huawei CFO Meng Wanzhou, who is currently under arrest in Canada pending her extradition hearing to the United States for facilitating illegal financial activity in violation of US sanctions on Iran. 

  • Xiao calculates that, since 2000, the US has filed 373 cases against Chinese entities under extraterritorial authorities, and that the frequency of cases against Chinese entities has increased in recent years. Between 2000-2019, most US cases filed against Chinese entities related to intellectual-property rights violations (147 cases), followed by contractual disputes (70), and product-liability disputes (47). There were 21 criminal cases filed against Chinese entities during this same time period, according to Xiao.

  • These laws limit Chinese companies’ ability to freely do business around the world, Xiao argues. They also infringe on China’s sovereignty, hurt US-China relations, and threaten many objectives related to China’s Belt and Road Initiative. 

  • Xiao argues that China should reciprocate by updating its laws to also assert more extraterritorial rights. Specifically, he notes China’s Anti-Monopoly, Antitrust, and Securities Laws are well-suited for jurisdiction expansion. He adds that these laws should be updated according to the “effect standard,” which stipulates that if a foreign entity’s behavior outside of China impacts China’s public interests, law enforcement and the courts should be able to assert jurisdiction. In addition to these specific laws, China should also explore updating other laws to expand legal jurisdiction, including those that govern internet security, corruption, intellectual-property rights, and financial supervision.

  • Finally, Xiao writes that China should adopt “blocking” laws - so-called to “block” the effect of US extraterritorial laws - to provide legal protections for Chinese companies that do business with entities that have been “arbitrarily” sanctioned by the United States. Among other benefits, these laws could allow Chinese companies to sue counterparties in the US or to sue US entities with operations in China for losses realized as a result of sanctions, he writes.

Note: China Law Society publishes China Legal Science, which is China’s leading law journal. In the December 2019 edition, in addition to this essay by Xiao Yongping, Beijing Normal University Law Professor Liao Shiping also calls for an update to Chinese laws to give them more extraterritorial powers. Interested readers should also read his essay.

Chinese Banks are Most Vulnerable to Distress in the Real Estate, Transportation, and Mining Sectors, Study Finds

Title:  Research on Risk Spillover Effects between Industries and the Banking Industry from the Perspective of Systemic Risk Management (系统性风险管理视角下实体行业与银行业间风险溢出效应研究)
Journal: Studies of International Finance (国际金融研究)
Author: Zhai Yonghui (翟永会) 
Publication Date: December 2019

  • Using a model developed by economists at Princeton and the Federal Reserve, economist Zhai Yonghui measures levels of interdependence between different sectors of China’s economy and the Chinese banking system. Zhai notes that financial crises often begin with failures in the “real economy” and then spill over to banks.

  • Based on her analysis, which used daily financial index data from 24 industries between 2005 to 2018, Zhai notes that China’s banking system is most vulnerable to distress in the real estate, transportation, mining, steel, and chemical sectors. A serious downtown in the real-estate sector would put as much as 5.33 percent of the banking sector’s value at risk (VaR), according to Zhai’s analysis.  (See her paper for a sector-by-sector analysis and associated charts.)

  • Zhai comments that it is not surprising that the real-estate sector poses the biggest risk for Chinese banks. At the end of December 2018, China’s real-estate loan balance was 38.7 trillion yuan, a 20 percent year-on-year increase over December 2017, and accounted for 28.3 percent of all bank lending. As housing prices have increased in recent years, so too have real-estate loan values. If housing prices suddenly fell, the ratio of non-performing loans would increase, and this would have serious impacts on China’s banking sector, Zhai writes.

  • In the transportation sector, Zhai notes that banks have lent significant numbers of short- and medium-term loans to pay for long-term transportation investments. The mismatches between debt and asset maturity dates create significant banking risks.

  • In the mining, steel, and chemical sectors, these capital-intensive industries have low liquidity and long turnover time and are very susceptible to external shocks, Zhai writes.

  • Similarly, Zhai notes that a crisis in the banking sector would spill over to industries that are highly dependent on financing. According to Zhai’s analysis, the real estate, steel, and non-ferrous metals sectors are most vulnerable to a banking crisis.

  • As policymakers consider reforms to deleverage China’s banks, Zhai argues these policies should be implemented carefully, given high interdependence between banks and major industries.

Note: The Bank of China and the China International Capital Corporation co-publish the journal Studies on International Finance. Zhai is a professor at the Henan Normal University School of Business.

Former Chinese Navy Spokesperson Argues China Should Take a More Assertive Position in South China Sea

Title: Research on the "Freedom of Navigation" in the South China Sea and the Harmless Passage of Warships (美国南海“航行自由行动”与军舰无害通过问题研究)
Journal: Asia-Pacific Security and Maritime Affairs (亚太安全与海洋研究)
Author: Xing Guangmei (邢广梅), Wang Jinnan (汪晋楠)
Publication Date: January 2020

  • National Defense University Law School professor Xing Guangmei is the former spokesperson for China’s navy and a deputy secretary-general of the International Military Branch of the Chinese Academy of Military Sciences. She and her co-author write that, since 2015, US naval warships have increased the frequency of their passage in the South China Sea for freedom of navigation exercises. 

  • China claims many disputed islands in the South China Sea. According to Xing and Wang’s analysis, US naval warships have passed within 12 nautical miles of Chinese-claimed islands 21 times since 2015 (once in 2015, three times in 2016, five times in 2017, five times in 2018, and seven times in 2019). These exercises directly challenge China’s maritime interests in the South China Sea and increase the potential for armed conflict between the US and China, Xing and Wang write.

  • After using much of the paper to chronicle China’s (oft-repeated) legal claims to the islands, Xing and Wang recommend China pursue the following policies:

  1. Use diplomatic, political, economic, military, and cultural means to pressure the United States to gradually begin to accept China’s rise. The authors write that the root of the South China Sea challenge for China is that the US cannot accept a rising China. The sooner the US accepts this as inevitable, the sooner tensions will reduce.

  2. Accelerate China’s transition from a “near shore” to a “dark blue” navy, including by providing security for other territorial straits around the world. Increase defense and military construction to narrow the military gap with the United States.

  3. Amend the UN Convention on the Law of the Seas so that it better reflects China’s interests by providing more international legal clarity regarding territorial claims.

  4. Sign a bilateral agreement with the United States that creates a mutual understanding regarding rules of treatment of warships in the South China Sea.

  5. Change China’s domestic legislation so that it provides more clarity for Chinese warships regarding when, if, and how they should treat foreign warships passing through Chinese-claimed territorial waters.

Note: The Development Research Center of the State Council publishes the Asia-Pacific Security and Maritime Affairs journal.