Since the China US trade war began this year, it affects the global financial markets certainly. Just from the perspective of stock market, the most interesting phenomenon is the continuous downturn in China’s stock market and the slow growth of stock markets in various countries. However, it seems like Beijing does not concern about the current state of the stock market and even it is too lazy to say anything.
It is hilarious that it was tweeted to claim credit for China’s stock market, which is not the barometer of China’s economy. This comic behaviour in Chinese is giving yourself a bonus. Economists who are slightly familiar with the Chinese economy must admit that in the past a few decades, the China’s economy links to China’s real estate and other infrastructure construction rather than the stock market.
As to find the real risk in China’s economy, the ruling authorities has spoken openly many times in its own report. For example, when the ruling authorities intends to stabilise finance, it shows that the finance is unstable; recently the ruling authorities starts to manage internet finance, showing that there are problems with internet finance. This Survivor’s Deviation logic can be easily understood.
There are always Chinese who attribute China’s financial risks to the US government, which is transparently wrong. The biggest financial risk is not from the US government but the inner China. Although China opened some financial markets and adopted different monetary policies after Deng’s era, the US dollar cannot circulate in China. Even if more green paper is imported into China, the red money printed with Mao’s head is always the only currency in circulation.
Ironically, due to the particularity of domestic currency, investment in China is a safe choice instead. In China, measuring capital or asset thorough RMB is more accurate. Many investors ask whether should continue investing in China or not. My answer is generally at least China does not and will not have Detroit in the next 20 to 30 years.
This article is not about international politics or ideology, as economists are not politicians and do not need to consider these issues. I only serve investors. Now some investors ask where is the risk of China’s finance? As Beijing released a signal to open its financial markets, what should be aware to invest in China?
These two questions are the core questions need to be answered. Undoubtedly, US dollar will flow back to the United States, while RMB belongs to the human common destiny. I quoted the concept from President Xi If RMB is not linked to the US dollar directly to the Euro, Sterling, Japanese Yen and other currencies, it becomes the new US dollar that red paper will replace green paper.
I am not saying without foundation or against the US dollar. Instead, I mean US dollar cannot be separated from a reality from its connection with gold to oil, and to commodity trade: US dollar stably links to various currencies. This is originally the core interest of the United States, and it was the foundation of the strength of US dollar. All countries in the world rely on these connections to maintain their relations with the United States. The United States pays some benefits as the responsibility of the world’s first. Other countries are unnecessary to express gratitude in that a responsible boss should be friendly to employees.
But now Wanshington made the US dollar stronger instead of tender or considerate. When an American cowboy made a rampage into a girl’s home, savage violence may occupy her body but never the heart. At the same time, a noble young master, from well-off family, full of mysterious features of oriental culture and polite, appeared, the girl would only follow the master, ignoring the violent cowboy.
This is actually a trick of the Chinese ruling authorities, an old style. In 1949, the ruling authorities won China through uniting the poor and became China’s current legal regime. On contrary, President of the United States tries to represent the poor in the United States regardless of he is not a poor. Only one question needs to be considered here: does the president, a real estate dealer, really not understand the significance of real estate to China? Perhaps he is more worried about the sudden discovery by Americans of the significance of American real estate to Americans.
Since US dollar is going back to the United States and RMB is going to humanity, the United States is not the main reason for China’s financial risk. Therefore, the main reason is inside China, not outside.
I have a very good friend in China who is an economist and a professor in a university in one of the best developing capitalism cities of China. In spare time, he also offers investment advice to investors in order to get rich rewards. Investors that he serves all like to invest based on his advice, because he can always have insight into the risks and problems of China’s finance. Because China is not free, I cannot provide his name and his university. I will call him Pro. Li for short.
Pro. Li teaches at university and often train members of the Chinese ruling authorities. During the training, he would acquire several interesting news though chatting. Just like recent problems in China’s P2P projects, he forecasts as early as half a year ago. In his words, the problem is not the P2P model, just like whether a knife is a murder weapon depends on the user.
In his view, China’s financial risks, P2P projects and real estate industry are not real big deals. The biggest problem is still, corruption. Take his city as an example. In his city, there are almost all Chinese tycoon investment companies, including state-owned and Chinese financial tycoons owned. Compared with state-owned investment companies, Chinese financial tycoons’ companies are far worse, even those tycoons are like bosses of Wall Street. More often, they gain benefits relying on state-owned investment companies.
Moreover, state-owned companies have completely different operational system. Pro. Li once told me a very interesting story. Pro. Li had dinner with Wu, a branch manager of China Cinda Asset Management Co., Ltd, which is a state-owned investment company. Manager Wu unexpectedly called Chen, who has no blood relationship with him, father. He said father would help son that he would help his “father” become the chairman of China Cinda Asset Management Co., Ltd. Such situation would never happen in a real investment company, but appeared in a state-owned investment company. That is the real risk of China’s finance – corruption.
Why corruption is a risk to law-abiding investors? The reason is simple. Chinese ruling authorities is cracking down on corruption. If corruption exists in state-owned investment companies, will contracts signed by investors with these companies continue to be valid once the corrupt person is caught? Chinese ruling authorities needs to respond to this question.
Furthermore, where will managers of these companies use investors’ money if corruption exists? Pro. Li also gave an example, Manager Wu illegally invests in his friend Qiu by personal relation, and one of the projects involves tens of billions of RMB. In Pro. Li’s words, the sum of all funds in P2P project is not as large as investment Manager Wu made for QIU. If Manager Wu invests fine assets, it would be a good thing. However, his good friend Qiu has bad reputation in the financial world. Qiu deceived a Canadian Chinese investor through turning the investor’s money into his own money by providing benefits to local government officials. It is also said that he has not less than 200 personal bodyguards and gunmen. Those are real risks of China’s finance – investors’ money will enter the pockets of Mafia bosses through is state-owned investment companies, while investors will lose money and even cannot afford a decent skirt for their wives.
According to the information provided by Pro. Li, state-owned investment companies is the most important component of Chinese finance. Corruption, on the other hand, is weakening the credibility of state-owned investment companies. In Pro. Li’s words, the risk of China’s finance cannot be ruled out until Branch Manager Wu of China Cinda Asset Management Co., Ltd and Qiu, are faced legal sanction. Manager Wu and his good friend Qiu are only the tip of the iceberg that sank the Titanic.
Many economists always try to research through the Chinese stock market, which is obviously inappropriate. Manager Wu and his good friends are the one who really could break China’s financial system.
Regarding to signal of opening financial markets released by Beijing has released, what should be aware if invest in China’s finance? It is transparent after knowing above information. Mostly, we need to carefully identify the investment targets. China’s market ensures development of manufacturing industry in China. It is noteworthy that the development refers to private enterprises with manufacturing entities rather than state-owned investment companies.
Similarly，if ask invest in China’s service industry, I have the same answer, which is to go for private enterprises but not companies endorsed by state-owned investment companies.
Finally, investors should be reminded that Chinese businessmen and Chinese officials are two completely different groups, while managers of state-owned investment companies are officials not businessmen. Do not attempt to obtain fine assets through investing state-owned investment companies. Such investments will only infuriate the Chinese ruling authorities. It will confiscate capitals and properties directly via Discipline Inspection Department. I often tell my friends that the first criterion to invest in China is do not touch the cheese of the ruling authorities.
Disclaimer: the author is a professor from London School of Economics and Political Science who is willing to maintain anonymity. The opinions expressed in this article belongs to the author and do not reflect the opinions of us or our editors. Relevant legal responsibilities have nothing to do with us.