China has achieved remarkable economic growth since the 1980s. However, the country is still in the stage of social and economic transition and the communist party of China1 is facing challenges that can escalate into instabilities; therefore, institutional risks should be taken into account.
The Brevis Report reveals that the aviation industry is sensitive to GDP growth rate, economic stability, investment and so on. We analyzed these factors by reviewing reliable reports on China that were conducted by tier-1 media, and we found that the following issues can be important for Bombardier.
Political Background: One ruling party
China has a unique hierarchy2 that cannot be found all over the world. Although there is a mechanism allowing minority parties to share power, the communist party has been the de facto ruling party for 65 years since 1949 – the year in which the country was founded. It seems that the government is not favored by the people to some extent. One reason is that the people seek a bigger say in public affairs, but seeking power-sharing is not the most urgent thing for the people. Currently, corruption3 and inequality4 are the main issues that can shake the society, causing potential risks for companies who have heavily invested in China, like Bombardier.
It’s not rare that corrupted officials illegally gain millions of dollars by using their power.
The abuse of power has triggered anger among the public, especially as more evidence emerges, such as the release of a report saying that J.P. Morgan seeks benefits by hiring children of influential Chinese officials.5
Generally speaking, the Chinese political system is problematic due to the lack of surveillance, we cannot foresee if a self-correction can improve the public’s satisfactory level or the society is on the verge of a cliff. As the future of China is unclear,
Bombardier should disperse its investment in several emerging markets, and not risk putting “all of their eggs in one basket”, echoing the China plus one effect and doing business in other countries.
Business Environment: Currency and Exports
Chinese Yuan appreciated in recent years, benefitting the foreign exporters who either export finished products or export technologies. However, the recently-elected government decided to grant the Chinese Yuan more room for fluctuation, and international investors are heavily selling Chinese Yuan because they foresee a slowdown in GDP growth rate; the currency will likely start to depreciate, at least in a short period.
As we know, exports contribute a lot to the nation’s GDP, the appreciation of the currency is not favored by Chinese manufacturers and they urge the government to take measures to restrain the appreciation.
Also, the country has a huge number of shadow banks, which illegally absorb money from the public at very high interest rate, and most of them inject the money into overinvested real-estate market. However, the boom in the real-estate market is thought to be a bubble, a major price decrease in real estate market can lead to a disaster in the whole finance market and cause a selling-off of the currency, leading the country into financial turbulence.
The Brevis Report points out that the aviation industry counts on the support from finance institutions, if China’s finance market sneezes, the aviation market will get a cold. One-child Policy
As we know, China applied one-child policy since last century. This policy reduces the population growth rate to a manageable level, but simultaneously causes the employment-population ratio to drop. While the population of retired people is growing, the newly employable population is shrinking. All else being equal, the gap between labor demand and labor supply may continue to enlarge.
According to Solow model, the drop of employment-population ratio can lead to a decline in production - a negative impact on the GDP