Archegos Tried to be the Fed and Wall Street

ZH: Bill Hwang Arrested: Archegos Owner Charged With Racketeering, Securities And Wire Fraud

Archegos, through Hwang and Tomita, effected this scheme by dominating the market for its Top 10 Holdings, as well as by “setting the tone” (i.e., engaging in large pre-market trading), bidding up prices by entering incrementally higher limit orders throughout the trading day, and “marking the close” (i.e., engaging in large trading in the last 30 minutes of the trading day) and by other non-economic trading, all with the goal of artificially inflating the share prices of its Top 10 Holdings.

That's a description of how the stock market has behaved since QE was started in 2009. The legal difference between Archegos and the stock market is the Federal Reserve and Wall Street banks acting as partners, can't be charged with setting the tone, dominating trading in its target markets, counterfeiting, wire fraud, marking the close and other non-economic trading, all with the goal of artificially inflation financial asset prices. That's "public policy" carried out by a privately-owned bank and its partners because the government gave this entity legal immunity.

A similarity between Archegos and the Fed/Wall Street is these schemes always blow up when the money runs out. The Federal Reserve's existence as a quasi government institution is not guaranteed. The Federal Reserve can lost its power if it upsets enough people, for instance by wrecking the economy with high inflation. Do you think DC politicians will hang for their crimes when they can hang the Fed instead? When the money stops flowing into the market, it goes poof like Archegos. The Fed is going to start pulling its support out next month. Enjoy the decline.

Illegal Alien Wages Collapse Under Open Borders

Increase supply and lower the price? Who'd have thunk it? Mass migration is now so out of control that even illegal aliens are seeing their wages collapse or are simply not being paid at all, because the person hiring them can find a new sucker the next day! And this isn't happening at the border where migration is always relatively high, but in far away places such as hipster neighborhoods in New York City.

This is not satire: Hipster would-be socialists are exploiting workers, thanks to Biden’s border disaster

On February 28, NBC News ran a piece captioned “Undocumented day laborers face harsh work prospects due to immigration spike”. As hard as it is to believe, neither the headline nor the video itself is satire.

The primary focus is on workers at the corner of Division and Marcy Avenues in the Williamsburg section of Brooklyn, known as La Parada, or “the stop”. The voiceover explains, “This is a place where immigrant women find a job for the day, primarily doing domestic work. Every day, up to 150 women wait here, bargaining for hourly pay that is often below minimum wage”.

Why, exactly, would workers bargain for pay that falls below the state and/or federal minimum? The video continues: “Often, these day laborers are undocumented”.

Here’s the problem, according to NBC News: “With more women looking for work, there is more competition. Desperate to find a job and with little to no English, many new arrivals don’t negotiate their rate.”

Increase supply and prices go down. This is basic economics. There is only one type of immigrant who immediately improves the economy: the super producer. The entrepreneur, the inventor, the business founder. Not someone who runs a convenience store or a restaurant, but a business that creates substantial new wealth. Productive people don't subtract from the economy and their children may become more productive, but they aren't making the average person better off unless there's a labor shortage, in which case adding labor can have an immediate positive impact. Less productive migrants are net negatives. They produce more GDP because they purchase basic necessities, but that money flows to corporations and the wealthy. They consume more welfare than they pay in taxes, sometimes substantially more. It adds more debt (inflation) into the economy and makes the average citizen worse off, the average worker far worse off because their effect on labor prices pulls everyone's wages down. Moreover, we can't ignore the raw numbers of immigrants. There aren't enough productive immigrants to cause problems such as overcrowding in schools. Low/no skill mass migration is the main driver of negative outcomes for ordinary Americans.

A high minimum wage is a terrible idea because many of these migrants can't produce enough economic output at a $15 minimum wage. What will happen is mass unemployment that drives up welfare costs, coupled with a large black market for sub-$15 an hour labor. The low living standards of American "minimum wage" workers was caused by three factors: feminism, mass immigration and offshoring. The first and third of those are over. Female labor force participation peaked already. Offshoring peaked. A growing desire for onshoring will reverse that trend soon enough, if wars and soaring transportation costs don't do it first. The last factor is more extreme than ever: open borders.

If you are not familiar with New York City or Williamsburg in particular, the neighborhood is rated as number one among “The 10 Most Hipster Neighborhoods on Earth” on Thrillist.

According to that outlet: “If hipsters have a mecca, it's most certainly Williamsburg. A world of bow ties, trilby hats, and suede chukka boots, where everyone's an amateur photographer with an unnecessarily expensive DSLR camera.”

Williamsburg is also extremely “progressive”, a blue enclave in a sea of blue in an area polling outfit FiveThirtyEight refers to as “The Elite Circles” (along with lower Manhattan), “the most progressive slice of the city”.

I trust that commuters are not traveling into La Parada from the more conservative environs (like Staten and Long Islands) looking for domestic help, so most of the would-be employers there are likely Williamsburg locals. It appears, then, that hipster would-be socialists are busy dickering for the cheapest, below-minimum wage workers whom they may or may not end up paying — a fact that speaks volumes.

Baizuo love to scream about $15 minimum wage, but I'm willing to bet the minimum wage in New York City could approach $20 an hour without mass immigration. Close the border and deport the illegal aliens, and watch wages soar. Imagine a person violently and gleefully stabbing a knife into the back of the American worker over and over while alternatively screaming "racist" at the worker and "Fight for $15" and you understand the mind of the modern Baizuo.

Gab Launches Parallel Economy Fund

Technology is worthless on its own. The same people who claim blockchain or Bitcoin can liberate people are the same ones who though the Internet would liberate political speech around the world. Instead, authoritarian regimes have achieve more complete control over their nations, while Western authoritarians are now empowered by this technology. Blockchain will create the perfect totalitarian prison where all economic activity takes place under the government's watchful eye or doesn't take place at all, and anyone who doesn't play by those rules can start shopping for their prison gear.

There is a term that has fallen out of usage: political-economy. Law, economics and politics are all intertwined. To leave off one leg of this stool, or to get one leg wrong, will ruin whatever project is being attempted. Assuming one isn't starting from a wrecked base, where simply improving the law can generate extremely positive benefits. Think China 1978, Peru in the early 1990s and so on.

In the West, the advance of authoritarian leftism has gone unchecked for decades. Most of the nominally "conservative" politicians are leftists. Their highest value is anti-racism, aka anti-nationalism and in the American context, anti-white. Conservative politicians spend their energy fomenting for war against Russia and China, undermine border control efforts, deep-six healthcare reform and defend BigTech as it takes apart the lives of free-thinking Americans (and Canadians , Australians, Germans, English and so on...) on the left and right.

Nothing can be gained from debate because debate is illegal. Debate is not wanted. There is no debate with authoritarian power. Ask the truckers of Canada if protest is allowed. People who desire freedom must return to a fundamental understanding of power: the political-economy. Whether diversity caused it or not, America has split into different nations. The United States of America is a false construct. Where "we" would debate before, there is only expression of power now. People who hate America, Americans and Christians their history, culture, people, politics and God, do not debate things like history or economics. They tear down statues, they ban symbols, they have their enemies arrested, fined and/or imprisoned. The shut down their businesses. They imprison them in their homes, inject them with experimental drugs, treat their children worse than criminals.

There is no way to stop this without accumulating power. If it were possible to debate again in the future, that first requires establishing a power base. If debate can not happen anymore, then Americans must prepare for persecution and eventually war. In the context of 4G, war has already started, but most of the public doesn't realize it yet. One way or another, Americans are going to a need a new political-economy. Gab: The Parallel Economy Fund

Gab will be investing in early stage startup businesses who are working to solve a set of problems in the Parallel Economy. This could be in technology, media, healthcare, finance, or a few other areas of interest to us that we will elaborate more on in the future.

Some of our areas of interest right now include:

1. Making Bitcoin more user friendly and privacy focused for everyday use

2. Censorship resistant shipping & logistics

3. 3D Printed 2nd Amendment protection

4. Decentralized Christian healthcare options

5. Software for homeschooling parents

6. Distributed pasture grazed meat distribution and butchering

7. Christian Entertainment/Content

8. Mesh networks, radio technology, and alternative forms of off grid communication.

9. Technology for Churches and planting Churches

10. Christian AirBnb

Gab will invest 25-50k in startup capital, Gab Ads credit, Gab Cloud services for free speech hosting services, and access to the Gab community of entrepreneurs for mentorship and help with scaling and distribution.

Eventually, the parallel economy will develop a functional parallel currency, and that's when things will get very interesting.

Even if you aren't interested in politics, politics will be interested in you. It will be impossible to not choose a side in the coming years. As happened with vaccines and mandates, people who went along will suddenly find they don't want to go along anymore. The circle of acceptable thinking and contrary opinions will keep shrinking. As the failures of USG pile up, the currency will eventually crack. There's already talk of price controls because of inflation. The Baizuo blame high prices on greed, instead of incompetent government and central banking policies. Nothing but destruction is coming for people who passively accept the current political-economy. The only choice is to accept it or not. If not, then it is long past time to get busy building.

Google Delenda Est

Can you see the stars aligning? Populist politicians are going to win in 2022 and there is growing evidence of criminal malfeasance at the BigTech companies...

Naked Capitalism: Unredacted Antitrust Complaint Shows Google’s Ad Business Even Scummier than Many Imagined

The State of Texas and fifteen other states plus Puerto Rico have filed a suit against Google for antitrust abuses in the online ad market. Late last week, the Southern District of New York unsealed the complaint, which at this point is the third amended complaint. We’ve embedded the document at the end of the post.

It isn't showing on the site right now, but the document is there (PDF): States Third Amended Complaint

Google shamelessly engages in fraud; in fact, the abuses are so bad that one wonders why the attorneys general are not separately pursuing those charges.

Here's one scheme dubbed Project Bernanke:

Yves at Naked Capitalism:

Mind you, I am not able to judge the merits of this suit, since antitrust enforcement has become so weak and precedents have also shifted to favor the big boys. One of the usual ways to successfully muddy the waters in an antitrust suit is to argue over the definition of the relevant market, as in to argue that the competitive space is bigger and the evil prospective monopolist doesn’t have a dominant share if you define its market “properly”.

Google should be fined out of existence for all the evil it does, but this scheme alone should implode the stock price because teh company relies on ad revenue. A nation that wasn't thoroughly corrupt would force Google to repay all the money and tack on treble damages.

By way of reminder, ever since its acquisition of DoubleClick, Google has become the largest ad tech vendor across each step of the value chain, with market shares as high as 90-100%, while also a major publisher itself (selling inventory on its owned and operated properties like YouTube). While most of this was more or less known, the Texas complaint made headlines for claiming that when faced with the prospect of Facebook supporting a disruptive technology known as Header Bidding, which Google viewed as an “existential threat,” Google struck a deal with Facebook. According to the so-called Jedi Blue agreement, Facebook would curtail its Header Bidding initiatives in return for special privileges when bidding in Google’s auctions.

There is more over at Naked Capitalism.

Will anything happen? The corrupt government allows malfeasance by BigTech, BigPharma and BigBanks. There is also the Federal Reserve's manipulation in the markets. A roughly 30 percent drop in Google should be a starter move in a long and winding bear market that eliminates Google as a major corporation in world. BigTech should be ravaged as their manipulative schemes come apart, profits decline and capital flees the sector. But will USG block it? I'm skeptical of anti-trust law at this time, so it's probably going to require political intervention of some sort. Come 2025 the U.S. could have a populist POTUS and Congress who will lift USG's protection of these corporations. Governments usually act well after the market has done its work though. Sarbanes-Oxley passed in July 2002. The S&P 500 Index bottomed in July 2002. It would go slightly lower in October 2002, and that bottoming process continued until March 2003. If history rhymes, the time to be getting short is now. 

The Federal Reserve Has a Credibility Problem

NYMag: Washington, D.C., Has an Insider-Trading Problem

The central bankers running the U.S. Federal Reserve are the closest thing we have to gods of the markets, their decisions on interest-rate policies and their bond-buying sprees watched breathlessly by everyone on Wall Street — and increasingly Main Street. Last year, the Fed’s influence became even more pronounced after the central bank pumped trillions of dollars into the markets when the global COVID-19 pandemic hit and financial assets of all kinds went into free fall.

As markets began to bounce back on the Fed’s massive effort, two regional Fed presidents — Boston’s Eric Rosengren and Dallas’s Robert Kaplan — were not sitting in some ivory tower pouring over economic data. No, they were actively trading their personal stock portfolios, benefiting from the Fed’s intervention.

The Fed has been criticized for many things in the past: It has been called a handmaiden to the big banks and accused of widening the gulf between the haves and have-nots in this country with a decade of rock-bottom interest rates that fueled raging-bull markets in stocks and bonds disproportionately benefiting the one percent. But until last year, its members had not been viewed as using their insider status to profit ahead of the public.

Rosengren and Kaplan resigned following a backlash after the trades were revealed through disclosure forms — which incidentally did not include dates of the transactions. Since then, the trades of Fed Chair Jerome Powell, a wealthy former private-equity executive, and Vice-Chair Richard Clarida have come under scrutiny, leading to calls from Senator Elizabeth Warren for the Securities and Exchange Commission to investigate.

This scandal creates more uncertainty around the Federal Reserve, but one certainty is it will lose some independence. What's harder to see is whether the Fed will become more corrupt and beholden to ruling class members such as Nancy Pelosi who want the 1-percent to destroy the 99-percent, or will it fall under the sway of populists? On the left, populists want hyperinflationary spending monetized by the Federal Reserve. They want the Federal Reserve and Wall Street to serve their interests. On the right, populists want power taken away from the Federal Reserve and Wall Street. At the last, they want zero support for bankers and Wall Street if a collapse cometh. The Federal Reserve's policy of "stocks uber alles," of pumping of stocks to the detriment of the economy, workers and social cohesion is coming to an end. This is the looming threat markets have yet to price in, but it could start as soon as Powell's confirmation hearing today.

The Federal Reserve is also losing its credibility as an inflation fighter with the CPI rising and still no rate hikes. The Fed's credibility is low on that score, but people assume they will do something. Hyperinflation doesn't happen because people expect the Federal Reserve will eventually act, when they have to, but this assumption is starting to fray. Finally, the Fed is even losing basic credibility on its public statements.

The Fed is turning into a corrupt clown show because it subverted all of its power to Mammon. To pumping Wall Street above all else, based on the lie that cheap money could somehow combat a corrupt government destroying the economy. The Federal Reserve has near zero power to improve the economy, but it does have great power to destroy. It chose destruction. Now the Devil has come to collect his souls. Will the Federal Reserve redeem itself or condemn itself to hellfire? Stay tuned to find out!

China Will Stop Barbaric Capital Growth

Self-explanatoy. Note that what is good for Chinese society is not necessarily a good thing for global capital.

Sina: 中央经济工作会议：要为资本设置红绿灯 防止资本野蛮生长

The Central Economic Work Conference was held in Beijing from December 8th to 10th. The meeting held that it is necessary to correctly understand and grasp the characteristics and behavioral laws of capital. The socialist market economy is a great creation. There will inevitably be various forms of capital in the socialist market economy. It is necessary to give play to the positive role of capital as a production factor while effectively controlling its negative role. It is necessary to set "traffic lights" for capital, strengthen effective supervision of capital in accordance with the law, and prevent the brutal growth of capital. We must support and guide the standardized and healthy development of capital, uphold and improve the basic socialist economic system, unswervingly consolidate and develop the public ownership economy, and unswervingly encourage, support, and guide the development of the non-public ownership economy.

Do you know the children's fable the Gingerbread Man? The fox is China and the Gingerbread Man is global capital.

King Dollar Becomes Emperor: Currency Valuation with Political Modifier

When I was in college my senior thesis was on economic freedom. I used the Fraser Institute Economic Freedom Index and looked through all the factors that go into the score to tease out what was important. Some of my sources were books such as DeSoto's Other Path (which also informs some of my thinking around blockchain). One thing I quickly found was signals were difficult to tease out because most developed nations were also politically free. China was a huge confounding data point because it was politically unfree, but moving towards economic freedom. Also, the index is subjective. China for example, doesn't have "hard" property rights, property rights are fairly well assumed in Chinese culture and the CCP largely reflects this tradition. Not to go down a rabbit hole, but I can both accept that Chinese property rights are very loosely held because I understand the CCP's power advantage in society, while at the same time recognizing that the economy functions as if this advantage will not be abused. Long story short, I was trying to look at economic development like a state and find what are the key components for prosperity?

If we assume a currency is to some degree a reflection of the entire economy and its economic freedom, then we should discount currencies of less free nations if the government's power stretches into economics and property rights. Singapore is the go to example of a nation with less poltiical freedom, but very high economic freedom. I'm going to leave off countries like the Peru described in DeSoto's book, that lack property rights because of poorly functioning law. I believe every nation is unique. A lack of freedom and prosperity can be cultural issues rather than political. The Amish don't allow technology after a certain date, yet they are free to leave and have property rights. Are the Amish as free as other Americans? My sense, informed in part by living in China for a long time and finding that much of what in the West was called communism is actually Chinese or Confucianism, is that the universalist approach of the West confuses culture, religion and politics. Most people freely choose to restrict freedom in some way. They elevate community, they believe in God, sacred things are priceless. The hyper-American view of individuality is not universalist, but particular. I think this all matters when looking at something like economic freedom, but throw that all aside. I want to focus on hard power. On goverment abuse of its political power.

One thing I've said about China's capital controls is that it devalues the yuan. Even though they are holding the line on the exchange rate, the yuan is worth less if it cannot be freely exchanged for foreign currency. That is to say, there is some theoretical value of the yuan and there is the price the government controls, and that theoretical prices goes down when something like capital controls are instituted outside of a crisis. I'm not arguing the theoretical price should be the market price, the market is always "wrong" for your personal valuation. My point is only that if we take all the components of what makes a currency valuable, and think blockchain here if you want, the ease of spending it and exchanging it is a component.

What is the value of the euro, pound, Australian dollar and so on if they are locking down their economies? If they can shut your business? If they can arrest you and place you in a detention camp? If some African country started doing this, the currency might well devalue, no? Assuming it wasn't a highly competent state like China that was engaged in some targeted persecution, a society-wide lockdown would obviously be a signal to sell the currency.

More granularly, what happens to economies that are locked down? The government takes on more debt to stimulate the economy and the central bank monetizes it. If we grade all the economies based on their lockdown policies and their central bank policies, which currencies are better and which are worse? The U.S. is a mixed bag, but if you can travel into the U.S., most of the South and West, the rural and Red states, have almost total freedom with respect to the pandemic. There is almost no mask wearing for example. The pandemic is over in these states.

What is going on in Australia is off the charts criminal. The state is behaving like a totalitarian dictator and everyone seems to think it's OK because the government was elected. Lifesite: Australian army hauls 38 citizens to quarantine facility over some positive COVID tests

Link: Northwest Territory detention camps open for business

So the exit question is, how would you value the Australia dollar if the government never relinquishes their power? Or what if Australia has permanently turned the totalitarian ratchet forward, such that they will eventually ease their economic controls, but they will not revert back to the pre-pandemic level. Is the Australian dollar worth more or less? Does it deserve a "permanent" haircut on the exchange rate with the U.S. dollar for as long as these conditions persist? If lockdowns create permanent economic damage via inflation, shouldn't lockdown countries see their currencies devalued?

Short Baizuo Cities

DC, New York, San Francisco. The time has come to short the Baizuo.

Also New York, San Francisco. Urban real estate isn't so hot without police.

Fed Officials Ring the Bell

Source: NorthmanTrader

Capital Flight From China Has New Destination, Institutions Become Day Traders

China's capital flight took a new turn in July with the BigTech crackdown sending money to heaven. The assault on U.S. listed Chinese companies finally turned back on China and shaved trillions off teh A-share market valuation. Retail and institutional investors are daytrading now as they are unsure of what the immediate future holds.

iFeng: 风暴眼｜机构彻底“韭化” A股直上直下震惊资本大佬 官媒：以改革应对挑战 (A-shares go straight up and down, shocking capital tycoons official media: reform challenges)

Core Aspects:

1. After experiencing an "avalanche" plunge in China's concept stocks last Friday, A-shares also plunged in the first few days of this week. On the two trading days of July 26 and 27, A-shares lost more than 4 trillion yuan. Northbound funds flowed out nearly 17 billion yuan in two days, and more than 3,000 stocks fell by their limit.

2. Behind the dramatic volatility of the stock market is that institutions and large funds have gradually become "retail accounts" and "leeks". Institutions have begun to follow suit, and large funds have frequently flown in and out.

3. Hu Xiaohui, chief investment officer of the Federal Reserve Securities, told Phoenix.com "Eye of the Storm": "The intuitive reason for this round of decline is due to the plummet of education-related listed companies, but the core logic is not only this. It should be seen that the release of consumption, The combination of factors such as domestic economic growth, central bank monetary policy, unfriendly international environment, and high market valuations has become the driving force for the merger."

4. On the evening of July 28, in response to the recent fluctuations in the capital market, Xinhua News Agency published an article stating that the fundamentals of China’s economic continued improvement have not changed, the foundation for the development of China’s capital market remains solid, and industry regulatory policies are conducive to China’s long-term development. . Responding to challenges through reforms is the meaning of the question.

The violent market volatility has also caused many private equity, public offerings and investors to ask questions: Do A-share companies need to be revalued? Has the logic of the capital market changed?

On the evening of July 28, an article by Xinhua News Agency answered the recent volatility in the Chinese stock market and the worries that existed in the market.

Xinhua News Agency believes that the fundamentals of China's continued improvement of the economy have not changed, the foundation for the development of China's capital market remains solid, and industry regulatory policies are conducive to China's long-term development.

The latter is the same bullshit all politicians and bureaucrats the world over say when things are going poorly. Financial markets respond to fundamentals in the very long-term, but in the short-term they are psychological. The CCP just nuked two of its most impressive industries that attracted foreign capital. Chinese investors are wondering what industry will be targeted next? Investors in the U.S. and elsewhere should pay close attention because this is what the public is baying for: anti-trust action against BigTech companies and corporations.

Taking a step back, perhaps this isn't a big news item for China in the long-term. The policy isn't a total shock for long-term China watchers. That opens the door to a bigger issue looming in the background: a Chinese and global economy that is in fact not on sound footing and perhaps vulnerable to a major shock. Worth remembering that it was the month of August in 2015 when China shocked global markets with the sudden depreciation of the yuan.

Wyoming Moves Bill to Legalize DAOs

Decentralized autonomous organizations can become legal entities if Wyoming turns this bill into law. Defirate: Wyoming DAO Bill Approved by Senate

Bill 38 was originally submitted in January of this year and sent to the Wyoming Senate’s Joint Corporations, Elections & Political Subdivisions Committee in early February.

The bill would enable DAOs would to legally register themselves as limited liability companies (LLCs), connecting the blockchain-centric business structure to the legal world. Such DAOs would then be recognized by local state authorities and more easily engage in contracts and legal agreements that are legitimate and enforceable in the eyes of state law. This could involve off-chain employment, investment and more, at last bridging the gap between blockchain and traditional systems.

According to Professor Wright in his Tweet-storm, Wyoming will also be building a registration API, which would drastically streamline the process for setting up legally-recognized DAOs.

Digital Tyranny in the West

The West is becoming a totalitarian society. Increasingly large numbers of the public favor socialism, which hands increasing power to a small elite. Support for the First and Second amendments are in decline in the USA. Traditional defenders of liberty and decentralization, such as libertarians, favor extreme centralization. They also support policies that would have pleased Stalin, as long as those policies are carried out by private companies. Google, a company at the center of the flow of information, is a quasi-Maoist state staffed by employees who would have fit right in during the Cultural Revolution, but since it is a private company, their violations of the American spirit are tolerated by many who would be up at arms if the government behaved 1/100th of 1 percent like Google. Totalitarian infrastructure is already in place, it is already being tested against fringe dissidents. Silicon Valley is racing ahead to complete it before they lose political control to a competent upstart populist. They vow to never repeat the mistake of Trump. And while there are hopeful signs of opposition on the right and left, it's quite possible they'll be prevented from doing anything by candidates who are in bed with BigTech.

Digital Maoism in America

China and the Untied States are moving towards a similar point, converging through different methods and from different starting points. China was poor and never had an open system. China is becoming wealthy and sometimes there are cracks of openness, but then central control takes over. China is becoming a rich country without political freedom and history is full of these examples.

The United States was a rich and free country in the past, but now it is becoming a poor and closed country. Universities are indoctrination centers, media are propaganda outlets, Big Tech companies remove dissident content in a manner too consistent with George Orwell's 1984.

I am not particularly bothered by China's social credit system because it is a one-state communist country. I don't agree with that system, but a social credit system allows for a more complete implementation of the CCP's ideology, it extends their control over the country. Social credit makes the negative aspects of China's system worse, but if it is successful, it is mainly hardening their already extensive control over social, political and economic life.

In America, a social credit system is the opposite of the American ideal. Yet for all the focus on China's social creditm, far fewer care that the United States is developing the same system. For some, it is because China bad. Anything China does is bad because it is authoritarian. If the U.S. does the same exact thing, it is good because America is free. If the Chinese government takes a person's house, this is evidence of China's disrespect for property, human rights and its totalitarian impulse. If the United States government takes a person's house, this is legal and for the public good. Some libertarians will get worked up about civil asset forfeiture, but when it comes to similar behavior by Internet giants, the "free market" camp does nothing about it.

For myself, I do favor building alternative companies to replace Big Tech, but I also support any effort to have these companies completely destroyed. I do not favor breaking them up. Fine them out of existence and sell their used office equipment and servers on eBay. They are to the USA what the CCP is to China. Luckily, a bipartisan effort to stop Big Tech is underway. Hopefully, it will be successful.

The Bipartisan Anti-BigTech Push Reveals Tech is Already Doomed

Negative social mood is ushering in negative views of technology. Instead of ushering in utopia, technology and technology companies will enslave the world to racist/SJW/CCP AI, take everyone's jobs and destroy the world. The shift in sentiment accompanied the ever sinking social mood. Attention from politicians also tells us the time to short technology is at hand. The last major tech anti-trust case came as the market was peaking and wasn't concluded until the bear market was underway.

...These companies have more power than Microsoft in the 1990s and they've abused it in ways that go far beyond Microsoft keeping competing browsers off new PCs. They've violated free speech rights and data privacy laws. They've created Orwellian systems to control thought and speech that mirror China's extensive censorship system. Amazon in particular has taken advantage of extremely outdated legal theories of monopoly and anti-trust. It used to be that a grocery store and a car dealer had little in common. A conglomerate with control of both couldn't transfer monopoly power from one to the other. In the Information Age, everything is linked. Amazon will wipe out pharmacies and groceries soon if something isn't done.

A generalized opposition to technology is also building as social mood turns negative: Socionomics Alert: Technology Makes Our Lives Much Worse. Although I didn't discuss it in that post, opposition to 5G is building based on health concerns.

As for the social credit system, I've written about it before: Framework for Social Credit System Already Exists in USA

There's no practical difference between China's "once untrustworthy, always restricted" system run by the government, and a U.S. version of "once right-wing, always restricted" run by private companies in conjunction with political groups like the SPLC. (In some ways the private system is more insidious in the West because many people think, "It's a private company, they can do what they want." If the Trump or Obama administration announced a social credit system, it would be soundly rejected by a vast majority of Americans.) The main difference in the United States is that people can build alternative companies and systems. The rise of cryptocurrencies accelerated in the wake of PayPal's moves because it became clear that even payment companies could become political weapons.

More broadly, political fracturing and "secession" are already happening in America, but it's taking place first in the economic sphere. As social mood trends negative there will be increased conflict, not less. Even though it won't be by the hand of government (yet), there will be increasing levels of censorship and authoritarian controls placed on users by private companies. This will come in two forms. One will be a "fair" censorship system that targets behavior. It might stray into some actual censorship or merely try to deal with bad behavior caused by rising negative mood. Amazon is actually a good example of the latter with their targeting of fake book reviews. The other will be "unfair" censorship that relies on political advocacy group definitions of "hate speech" or internal systems mostly likely dominated by left-of-center people in Silicon Valley. Authoritarians drift into whatever system allows them social control. Now that systems targeting user behavior exist, any company without strict policies on how they are used will eventually be subverted by political ideologies with penchant for thought control.

Now the mainstream is finally catching on. Fast Company has piece out on Silicon Valley's insidious social credit system today: Uh-oh: Silicon Valley is building a Chinese-style social credit system

IT CAN HAPPEN HERE
Many Westerners are disturbed by what they read about China’s social credit system. But such systems, it turns out, are not unique to China. A parallel system is developing in the United States, in part as the result of Silicon Valley and technology-industry user policies, and in part by surveillance of social media activity by private companies.

Here are some of the elements of America’s growing social credit system.

Insurance companies can use the information:

INSURANCE COMPANIES

The New York State Department of Financial Services announced earlier this year that life insurance companies can base premiums on what they find in your social media posts. That Instagram pic showing you teasing a grizzly bear at Yellowstone with a martini in one hand, a bucket of cheese fries in the other, and a cigarette in your mouth, could cost you. On the other hand, a Facebook post showing you doing yoga might save you money. (Insurance companies have to demonstrate that social media evidence points to risk, and not be based on discrimination of any kind—they can’t use social posts to alter premiums based on race or disability, for example.)

The use of social media is an extension of the lifestyle questions typically asked when applying for life insurance, such as questions about whether you engage in rock climbing or other adventure sports. Saying “no,” but then posting pictures of yourself free-soloing El Capitan, could count as a “yes.”

PATRONSCAN
A company called PatronScan sells three products—kiosk, desktop, and handheld systems—designed to help bar and restaurant owners manage customers. PatronScan is a subsidiary of the Canadian software company Servall Biometrics, and its products are now on sale in the United States, Canada, Australia, and the United Kingdom.

PatronScan helps spot fake IDs—and troublemakers. When customers arrive at a PatronScan-using bar, their ID is scanned. The company maintains a list of objectionable customers designed to protect venues from people previously removed for “fighting, sexual assault, drugs, theft, and other bad behavior,” according to its website. A “public” list is shared among all PatronScan customers. So someone who’s banned by one bar in the U.S. is potentially banned by all the bars in the U.S., the U.K., and Canada that use the PatronScan system for up to a year. (PatronScan Australia keeps a separate system.)

Uber, Airbnb and others have similar systems. They have already expanded the list to include racists and white supremacists. Now, consider that extreme left-wing people, the type who work for these companies, believe President Trump and everyone who voted for him are racists and white supremacists (regardless of the race of the voter). And they've already been abusing their powers within these companies to deplatform used from YouTube, Twitter and Facebook. Paypal and payment processors have already gone beyond targeting "hate" to banning pro-family groups.

Donation Processing Company Cancels Christian Group’s Service Because SPLC Labeled It a “Hate Group”

The Ruth Institute, whose primary focus is family breakdown, and its impact on children, informed LifeNews today about the discrimination. Officials indicated Ruth Institute’s on-line donation processor cut them off from further funding for allegedly promoting “hate, violence, harassment or abuse.”

The Ruth Institute learned late Thursday that Vanco Payment Solutuons, their on-line donation processing service, was cancelling their service immediately.

All of the pieces are in place. All of them. Systems integration and a will to use it is all that's needed. Silicon Valley may or may not overreach, thus far they've stuck to targeting the fringes, yet they've drawn President Trump's ire. Since the United States is experiencing an acceleration Cultural Revolution of its own though, it's only a matter of when the ratchet turns and something seemingly innocuous today, or a political view held by even non-extremist left-wingers, becomes the new "hate" idea that must be expunged by any digital means necessary. Barring an effort to stop this system now by salting the Earth beneath BigTech's feet, we'll have to wait and see what happens when they try to go big.

Other coverage of the topic on this blog

Social Credit Systems Coming to the West

Turn in Social Mood: Internet is Totalitarian Tool, Americans Itching for Trade War

This next one is an extremely important topic because many people who will balk at destroying a person's life (getting them fired, banning them from spending money online) may not have a problem with charging them higher prices and fees. Effectively, Silicon Valley could implement a private tax system based on your personal beliefs: Non-Anonymous Digital Cash Will Usher in the Age of Extreme Price Discrimination

Huxley Was Right: Totalitarianism is Sweet

If nothing else, watch the video in this post: Universal Basic Income is the Bribe For You To Accept Totalitarian Control

Finally, if things head in a negative direction, not only will alternative companies be needed, but full encryption of online activity. If you cannot hide all of your economic activity, you will have to conform to whatever ideology Silicon Valley promotes or risk losing your job, your property and maybe eventually, your life. Banning encryption is the "last mile" that allows for complete totalitarian control over information. Opposition to encryption is building, such as the government saying cryptocurrency is a tool for criminals, tax cheats, etc. The government opposed Facebook's Libra project at the outset, but I expect Facebook will eventually sell it as having all the totalitarian features that many in Washington would love to have. And since the government could outsource digital money to Facebook, it could avoid charges of totalitarian control, thus getting libertarians and other supposed defenders of liberty on board.

China Crisis Repeating a Familiar Pattern For the Last Time

Special topic | Central Bank Discusses Exchange Rate Twice in One Day! Yi Gang: I am confident that RMB will continue to be a strong currency!

Back in 2014, I wrote The Logic of Strategy: Yuan Devaluation and the Road to Trade War after reading Luttwak's book on how to contain a rising China. Luttwak's book has proven prescient. Beyond the arguments in the book itself, it fit the template of my macroeconomic model for China. I anticipated a weaknening Chinese economy, followed by a credit crunch and currency devaluation. Whatever path was taken, it seemed the U.S. and China were headed for a political, military, economic and currency confrontation.

One of the main reasons I wrote this blog over the years was to provide an alternative view on China. The standard narrative was China taking over the world. The yuan would challenge the dollar for reserve currency status, China's private economy would boom, reform would unleash the talent of the Chinese people and eventually, the U.S. would be pushed out of the Pacific either willingly or unwillingly. Events took a very different turn, and the Western narrative on China even contradicted what Chinese officials were publicly saying in the daily papers. A theme that would return in Brexit and Trump, through to today. The mainstream/establishment thinking glued to its own narrative rather than observing the facts on the ground. Great volatility and profit was and is still available to those paying attention.

A brief and truncated history of China's post-2008 economy

The yuan devalued in 2008, as covered in this post from 2013: Chinese Yuan Could Devalue 50% Or More (the title was a think piece, not a target). Instead of letting the market take its course, China did what it got accolades for doing in 1997: it did not join in the broader wave of currency depreciation. As a result, it may have helped arrest the 2008 downturn. The Chinese markets, emerging markets and many commodities would bottom in November 2011 (certainly on a relative basis). The U.S. economy experienced a shallow recession. And along with central bank action across the globe, the world's economy returned to a slow path of growth. Or not, depending on if you adjust for debt. Either way, the bill is coming due.

China never experienced healthy growth out of the crisis. It launched major infrastructure projects such as the national high-speed rail and citywide subway systems. It is possible to walk to most, if not all, major Chinese cities by taking a subway to the train station. However, this growth ended in 2011 and came with a run-up in debt. The stimulus was 40 percent of GDP in 2008 and was force fed through banks. Distortions were all over the place (such as SOEs borrowing at low rates from banks and loan-sharking at double-digit interest to private developers). The country experienced a real estate downturn as stimulus faded in 2011. In January, the real estate market was smoking. The WSJ ran an article titled: Real Estate Rage Erupts in Hangzhou. The rage was a fight breaking out among people trying to buy new apartments. By September, a new form of rage was setting in. Home buyers in Shanghai angry at massive price drops, smash offices

August 2011 was a volatile time for global markets. Europe's sovereign debt crisis was in full swing, the U.S. Congress was threatening to enforce a hard debt limit, one that would have terminated the U.S. government's ability to spend beyond its means. Gold would peak later that year. Emerging markets failed at their 2007 high. The global impulse created by central banks and China stimulus was over. There were hints that yuan depreciation could follow: Chinese yuan depreciation coming soon? By December, banks were selling dollars to halt the yuan's relatively minor slide: Devaluing the renminbi. It was a little late as devaluation pressure lifted by spring, but in July, investors were still shell shocked: Chinese hoard dollars. A credit growth cycle was underway though, one that wouldn't end until 2014.

As for the acute crisis, China saw falling real estate prices from June to Decemeber, with some currency depreciation into the early second quarter.

In 2014, China stimulus ran out. Resource investors and companies ignored the Chinese government's repeated warnings that there would be no repeat of the 2008 stimulus. The big blog post for that year was China Real Estate Rage Is Back; Ghost Cities Everywhere; Offshore Yuan Plunges; Talk of Falling Real Estate Prices Across China. By October, it was Liaoning Sounds Warning on Chinese Economy. The real estate development model looked busted. Local governments relied on real estate for GDP growth as traditional commodity-related industries went into recession. There was a real threat of the entire country tipping into recession should the decline in real estate be repeated elsewhere. Credit guarantees were blowing up left and right. Trust and bond defaults shook the notion that the government would always step in to prevent any default. Globally, the U.S. dollar bottomed in June and began a major bull market that appears unfinished. In November, crude oil began a plunge that would not end until 14 months later. Emerging markets would fail at their 2007 for a second time.

China would not escape with modest currency depreciation this time. In August 2015, it allowed the yuan to find its market price, far lower than the high of 6.04 in late 2013. The currency impact of this round would last until early 2017, with USDCNY touching 6.96 and threatening to break 7.00. It would cost China $1 trillion of its reserves. Global equity prices wouldn't bottom until early 2016 along with commodity prices. Bonds would peak around the time of the U.K.'s Brexit vote. The dollar would spike following President Trump's election. The crisis was acute for China, natural resources and currency markets.

This was also the point at which China ran out of political room. Eventually, the U.S. dollar was always going to break under the stress of the global economy. It was becoming too large for the Federal Reserve to control. It likely reached that point sometime in the early 2000s with China's entry into the WTO. At some point, America was going to say no more. Moreover, as China ran up its debt-to-GDP, the risk that the currency would devalue was rising. How unfortunate would it be if at the moment China needed to devalue most, the United States was ready to launch a trade and currency war?

Starting in mid-2015 and again in early 2016, China launched yet another round of credit stimulus following the implosion of the stock market bubble. Much of the stimulus would flow into real estate. By June 2016, Reform Can Wait: 4 Trillion Stimulus All Over Again as SOEs Pour into Land Market and also Ministry of Finance Owned Cinda Real Estate Becomes Land King. The government tried kicking SOEs out, but in February 2017, I posted SOEs Ordered Out of Land Market, Again

In October 2017, the green light for a national deleveraging is given by the National Congress. 19th National Congress: Deleveraging Will Have No Negative Effect on GDP

In summer of 2018, there was a report showing a speculative takeover in housing, beyond anything seen previously. Speculators Take Over Chinese Housing MarketBy September 2018, Fresh Reports of Real Estate Rage Signal Turn in Chinese Housing Market. China's economy has been slowing into 2019. Baoshang Bank failed and the Bank of Jinzhou needed a bailout, tying the story back to Liaoning 5 years earlier as laid out in China Credit Growth and Risk of Financial Crisis

China's stock market would decline in 2018 along with the rest of the world. Emerging markets experienced a failed breakout and fell below their 2007 high for a third time. They would recover this level in early 2019. They failed for a fourth time today, August 5, 2019.

The yuan has started depreciating again and broke the all-important former "line in the sand" of USDCNY 7.00. A simple overlay of prior events suggests the currency could depreciate for another 12 to 18 months, and that's if the magnitude is similar. As I recently discussed, the prior downturn saw trusts and a few bonds default. This time a bank has failed and another required a bailout. There is a trade war threatening even greater U.S. dollar pressure than the market alone creates. China has now been named a currency manipulator. Events have moved full circle back to the Logic of Strategy.

Whichever path is chosen, the economic and geostrategic paths will line up. An economic crisis in China will add the economic component to the emerging geostrategic China policy. A geostrategic decision to confront China economically would set in motion an economic crisis that would propel the strategy forward since China would respond in kind. The decision to halt rare earth exports to Japan and the widespread anti-Japanese riots of recent years already show how China will respond. A major confrontation from the U.S. would require an even larger policy response. Luttwak lays out some possible policy choices, starting with small ones such as banning technology transfers in a limited area such a military or telecom. I fully expect that were a Chinese crisis and devaluation to accompany another recession in the United States, the push for tariffs would find a bipartisan majority in the House and Senate.

Yuan devaluation is inevitable as soon as China enters a serious financial crisis. If the government refused to devalue, the nation would go through a 1930s style deflationary Great Depression. China is unlikely to allow the market to take the yuan lower in a panic collapse like a replay of 1997. At some point, it would announce a large devaluation designed to end the selling and the crisis. This will be called a political act in the United States (those who understand the economics will nonetheless spot the political opportunity) and the political push for protectionist policies will be too attractive to be ignored. The United States will retaliate with sanctions and the world will follow. This will put even more pressure on the Chinese economy and lead to a massive rise in nationalist sentiment (either that or anti-CCP sentiment, so expect the CCP to redirect it into nationalism). A chill wind will blow across the Pacific that will last a generation or more.

I was wrong about the 2014 crisis turning into a major global downturn. Whether central bankers arrested it or not, it terminated in early 2016. The signs of a 1937 event were there, but there was not follow through. I'm always open to the possibility I could be wrong again, but I don't think the next cycle will be similar. If I'm right, I believe we have arrived at the base camp of Everest. What I've written about over the past 8 years or so, had led up to the moment. The preparation is done. The main event is here. If I'm wrong, then I'm wrong about how it ends because I don't expect another stimulus out of China. It's too late, the political, economic and financial situation around the world won't allow for another coordinated kick of the can. We are crossing the event horizon into a new future for China, the United States, and the world order.

The Long Goodbye

This blog was started with the intention of writing about Chinese stocks, believe it or not. It turned into a meta joke over time as that is one of the least discussed topics on the blog. Perhaps there is another couple of years of activity on this subject, but I sense the end is beginning for this blog. It will finally be time to get a new address (maybe on a whole new planet) and a new topic that is years in the making. Already, my long portfolio is increasingly filled with junior gold and cryptocurrency miners. In the end, the biggest emerging markets of the next 10 to 20 years might be right at home.

Baoshang Bank a Symptom of Widespread Corporate Looting

Update: English version here

Many observers see the Baoshang Bank takeover as a banking story, but in good news for the banking sector and bad news for China's financial markets, it might be a sign of corporate looting instead. The Baoshang Bank incident came only a month after the Market Rattled by Kangmei's $4.4 Billion Accounting Error for example. At heart, China lacks property rights. Major shareholders can extract wealth and leave a hollowed-out shell of company in the hands of equity and debt holders. A major area of disagreement between China bulls and bears rests on this issue. Is the Baoshang Bank incident isolated or does it signal this problem is finally too big to handle?

Translation note: in a couple of places I changed the Google translation to "looting" and "hollowing out" as I think those are more accurate than the machine translation. Looting is a more accurate term for what is taking place, but the editorial itself did not use such a loaded word.

Caixin: Editorial | Baoshang Bank’s warning

Baoshang Bank was taken over and the action has just begun, but its impact on the market has gradually subsided. The bank has a large amount of funds to be controlled by the major shareholders tomorrow. occupied illegal , and it was difficult to return for a long time, which led to a serious credit crisis, which triggered the legal conditions to be taken over according to law for the first time in 20 years. This move is undoubtedly an important step in the "anti-risk" battle. This incident may have lost the sensation of news, but the reflection it brings should be long-lasting and profound. We should study how to prevent major shareholders from “looting” and explore how the regulatory authorities should deal with risk institutions in a timely manner to avoid problems.

At the beginning of the acceptance of Baoshang Bank, some market participants expressed doubts about whether this would impact the financial market when the downward pressure on the Chinese economy increased. There were also views on the trade friction between China and the United States, and questioned the timing of takeover. improper. Now it seems that these ideas are too much to worry about. The interest rate price signal in the interbank market indicates that the market has basically returned to calm. This is due to the thorough deployment and decisive efforts of the regulators. Several consecutive "answer reporters", explaining the reasons for taking over, the follow-up treatment plan and the liquidity of small and medium-sized banks, provided sufficient expectations to the market, eased market anxiety, and at the same time, the takeover action was proceeding in an orderly manner. However, this incident reflects the common problems of financial institutions represented by small and medium-sized banks and must be given sufficient attention. The takeover may be able to cope with the moment and solve the problem. However, the supervision should be institutional and normal, in order to cope with the endless financial risks. The Baoshang Bank incident is a lesson and a warning.

The crisis of the Baoshang Bank stems from the hollowing-out by major shareholders. This is not a new phenomenon. Similar incidents have long been commonplace and are not limited to the financial sector. However, due to the uncertainty, high leverage and contagiousness of financial risks, such hollowing-out behaviors are more harmful, spread more widely and more destructive. "Tomorrow Department" and "Ampang Department" have been wiped out one after another. Their methods have long been known. They are nothing more than resorting to capital evasion, capital injection, false capital injection, and mass transfer through improper affiliate transactions, depending on the financial institution as a "cash machine". Since the majority shareholder has mastered the absolute right to speak, the internal control mechanism of financial institutions is ineffective, and financial risks are finally detonated, which has severely hit financial credit. In China, there is still a long way to go to improve corporate governance in financial institutions.

Although it isn't directly applicable in this case, my mind goes back to cartoon I saw in the late 1990s of a man in a restaurant, paying for a fake bottle of XO with counterfeit renminbi. Both are happy. As long as you take Chinese financial statements at face value, you can invest with confidence!

The "financial crocodile" smashed not only the internal control of this layer of window paper. The "Tomorrow Department" incident has been more than two years, but the large amount of capital exchanges between the Baoshang Bank has not been significantly affected. Data show that as of the end of September 2018, the total debt of Baoshang Bank was 503.4 billion yuan, of which 212.9 billion yuan was absorbed by various deposits, and the inter-bank liabilities (including interbank deposit certificates) were 221.1 billion yuan. In 2018, the rating of the interbank deposit receipts of the contractor bank has been negative. Is the counterparty collectively neglecting risk management or completely disregarding the potential risks? It is difficult to draw conclusions. However, the "comprehensive beliefs" firmly believed by all parties that "there will always be people who have the bottom" have undoubtedly played a role in fueling the situation. As long as the return is high, the risk can be put aside. A mature financial market can never be so strange. Breaking the industry's belief in the business, it has tried in the process of taking over the Baoshang Bank, but it may not be thorough enough for various practical reasons. The next step needs to consider the regulatory system and process, how to prevent the emergence of the Nth Baoshang Bank.

If you want to promote an air of calm, do not use the term "Nth."

The Baoshang Bank incident reflects the bad ecology of financial institutions such as small and medium-sized banks. They have weak storage capacity, low internal control levels, bad growth, a large number of peers, and high costs. On the other hand, in recent years, China's financial industry has shown unprecedented prosperity. The added value of the financial services industry has been rising in proportion to the GDP, even surpassing the developed countries such as the United States and Britain. However, behind this surface prosperity is the constant pressure on the real economy. Finance is the blood of the modern economy and relies on the real economy. The development of the financial industry is inseparable from the soil of the real economy. If a large amount of money is only vacated in the financial sector, or even become a "blood machine" of the real economy, the existence of relevant financial institutions will have a big question mark. The reform of the financial supply side is to solve this structural problem. To build a multi-level, wide-coverage financial system, we must be able to effectively serve the real economy and meet social needs. At the same time, we must try our best to break down the institutional and institutional obstacles that restrict financial services. In this regard, we must make greater determination and courage.

This paragraph is the essence of many China bear theses. The U.S. economy is over-financialized, debt and interest costs are choking the real economy. China has by some measures surpassed the United States in its financialization and in the velocity of its debt creation.

As mentioned earlier, there have been some doubts about the timing of taking over the contractor's bank. Regardless of the endorsement of interest, it is necessary to distinguish the deviation of knowledge. Strengthening financial supervision should not set too many preconditions, and find that violations of laws and regulations should be promptly issued, otherwise it is tantamount to connivance or even collusion. The position of supervision cannot be loosened, and there should be no extraneous factors, otherwise it will become an opportunist. Over the years, the shareholding ratio and the number of homes held by the “Tomorrow Department” have long violated relevant regulatory requirements, but they have not been corrected for a long time. It can be a unique exception, which has transmitted very harmful to the financial market. signal. It is very necessary for the central bank and the regulatory authorities to face this "historical issue" and take it out. It should become a new starting point for strengthening supervision and reshaping China's financial ecology.

The storm of the Baoshang Bank incident has largely subsided. The person in charge of the central bank said that there is no plan to take over other institutions. We are also looking forward to this. However, the warnings issued in this case are not lost in general terms and should not be ignored. Established in 1999, Tomorrow Holdings constitutes the "wonderful situation of the 20 years in China's financial industry." Only by thoroughly disposing of the "Tomorrow Department" and its kind, and preventing the "Tomorrow System" from the system and supervision, the Chinese financial market is only Have a beautiful tomorrow.

Calm was restored to parts of the financial market after Bear Stearns went bankrupt. It didn't last. The biggest question around the Baoshang Bank takeover was why now, why this bank? Financial problems are normally swept under the rug. Was it a warning short to others, is it really a unique case as the regulators argue, or is it a sign that accumulated losses and fraud are becoming to large to handle?

A New Worry for Chinese Investors: Fake Cash Balances

Reuters: Chinese firms' missing $6 billion tests regulators' resolve

Drugmaker Kangmei Pharmaceutical Co Ltd, a constituent of MSCI’s global indexes, in April said an “accounting error” led it to overstate cash in 2017 by 29.94 billion yuan ($4.4 billion). This month, Kangde Xin Composite Material Group Co Ltd, a producer of high-polymer materials, said its auditor could find no trace of the 12.21 billion yuan that it said it held in a bank deposit.

Regulators are investigating both cases and neither company has offered detailed explanations for the missing billions.

Weak governance has long been a black mark against mainland Chinese companies. Yet these cases have still stunned many investors as they involve straightforward cash, and because the sheer size of the disappearances is equivalent to more than half the two groups’ combined market capitalization before they disclosed the issues, triggering calls for tougher punishment for any corporate wrongdoing.

...But cash, sitting in bank accounts, is low on that list. Any big-sum cash fraud would be tough to pull off without help from bankers or auditors, said accounting consultant Ma Junsheng.

...Kangde Xin also disclosed a CSRC probe. In a series of statements this month, it said it did not exclude the possibility that its cash was appropriated by controlling shareholder Kangde Group. It is also said it was seeking to sue deposit holder Bank of Beijing Co Ltd.

SCMP: US$369.6 million in defaults at apparently cash-rich firms expose flaws in mainland Chinese auditing practices

财新： 巨额存款何以"不翼而飞"

Updated: Chinese Scholar Lights Up Social Media With Maternity Fund Idea

Update: An article with more detail on the policy proposal is posted at the bottom.

A Chinese scholar has come up with a fertility enhancing policy. Force everyone to have a savings account for children, but it can only be unlocked if you have a second child.

iFeng: 央视严批倡设生育基金“砖家”：少打群众的歪主意！

Original title: "Establishing a maternity fund system" is a ridiculous suggestion

What is ridiculous is family leave. Who pays for it? The company pays for it because the government simply mandates time off for workers. Do companies pay the full cost? No. They adjust their hiring practices to reduce the risk of paying family leave: hire fewer women of child bearing age. Family leave policies penalize the people they're trying to help.

Family leave is a perfect example of voters (in democratic countries) wanting something for free. Neo-Socialism is built around the idea of mandating actions, but not paying for it. Obamacare is an example of Neo-Socialism, albeit an extremely ineffective one that was instead designed to loot middle class Americans. Force everyone to buy insurance. The cost falls on the individual, not government. Family leave is another one. Force companies to bear the cost of the policy. Forcing everyone to have a savings account to finance family leave puts skin in the game.

Recently, some media published a signed article on "Improving Fertility: A New Task for China's Population Development in the New Era." Among them, the "establishment of a maternity fund system" triggered a strong rebound in public opinion, and social media was slamming.

First look at the expert's specific recommendations: the establishment of a maternity fund system, try to achieve the self-operation of the two-child birth subsidy. It is stipulated that citizens under the age of 40, regardless of gender, must pay a maternity fund at a certain percentage of their salary each year and enter their personal accounts.

The expert further pointed out that when a child has a second child or more, he or she can apply for a maternity fund and receive a maternity allowance to compensate women and their families for short-term income losses caused by the interruption of labor during the reproductive period. If the citizen has not given birth to two children, the account funds will be taken out when they are retired. The maternity fund adopts the pay-as-you-go system, that is, the maternity fund that has been paid by the individual but has not been taken out, and can be used for the government to pay the maternity subsidy to other families, and the insufficient part is subsidized by the state.

It would be more effective to confiscate the accounts after age 40 and use the funds to pay for the maternity leave. [Update: see below, this is in the proposal.] The state could see how behavior changes and could set the tax much lower assuming most people still only have one child. That's how China should carry it if it wants to maximize fertility because nudging works. Neo-socialism is often effective at changing behavior (even if it creates more problems down the road). Leaving the money in the account makes sense because people with fewer or no children need it for retirement, but as long as the state is providing pensions, confiscating it and making it a pure tax will lead to higher fertility.

These so-called suggestions give people a feeling of "suddenly separated from the world". If it is not in black and white, it can't be believed, even though we have seen many experts in these years.

First of all, fertility is the basic right of human beings. It is the freedom of individuals and families to live or not. We can encourage fertility through propaganda, or we can formulate incentives to guide fertility, but we cannot punish those who are not born or have fewer families in the name of “establishing a maternity fund”. This kind of suggestion is unfounded, unreasonable, and inconsistent. It is contrary to common sense and exposes the lack of professionalism of researchers.

Anyone who uses a system such as Social Security and doesn't have children is effectively taxing families. A person with children must pay for their own children, plus retired people. Social Security is a ponzi scheme based on rising population. If you do not have children, you are "stealing" from the fund. That's not hyperbole. There's no savings in the fund. Your retirement is paid by younger workers. If you don't add new workers to the pool, you're "stealing" from the fund.

This is how things work in socialist systems. Personal responsibility and incentives get lost in the complexity and the rearranging of social relationship. If there's no social security, then people understand the incentive to have children for old age. If they don't want or can't have children, they know to save all that money they would have spent on children for retirement, to pay someone else's children to take care of them. Social security creates free riders who do not have children and do not pay into the system.

Secondly, if you don’t want to beat the masses, don’t move. In recent years, with the rapid economic growth, the people's living standards have improved significantly, but at the same time we have to see that the burden on housing, education, medical care, etc. is still very heavy, and the level of Chinese household debt has remained high for a long time. According to a report just released by the Institute, as of 2017, the ratio of household debt to disposable income in China is as high as 107.2%, which has exceeded the current level of the United States.

The reason why China's current fertility rate is not high, in addition to economic and social development, women's labor participation and other objective reasons, the sharp rise in the cost of raising children is an important reason, this is the consensus of the community. Some young people want to have children, but they are really under pressure. The cure for the right medicine is to solve the reality and worries of people's births through a series of effective preferential fertility policies and public investment in real money, rather than the opposite. In fact, the wool from the people, it seems to be a national worry, but it is a high-level black. This is also the key to why such a proposal will be unanimously criticized by public opinion.

People always want free stuff.

Moreover, China's economy is in a critical period of transformation. Faced with the uncertainty of foreign trade and the diminishing marginal effect of investment, the role of domestic demand in economic development has become more apparent. We must do everything possible to reduce the taxation, reduce fees, improve social security and other policy measures, enhance the momentum of domestic demand, and promote the transformation and upgrading of consumption, rather than the so-called "fertility fund" to increase the burden on the masses. Therefore, whether it is from the improvement of people's lives or from the long-term consideration of healthy economic development, we should try our best to let the masses' wallets bulge, instead of squatting.

The critics are right about the tight finances of Chinese consumers. People don't have spare capacity to be paying into a maternity fund. It's also true that lowering home prices would be a more effective policy. Where family formation is affordable, people have more children. (A big reason why mass migration costs are under estimated is the pressure it puts on real estate prices. Migration policies are annihilating living standards in many Western countries. China's urbanization policy is driving its GDP and also crushing its fertility.) However, China struggles with lowering real estate prices and instead comes up with policies to correct the problems caused by planning, or more fundamentally from having an atheist-materialist value system at the core of the CCP.

The best policy is do nothing. Don't create socialist systems that destroy civilization from the ground up and people will deal with the problems in organic, sustainable ways. A maternity fund only looks like a bad idea because the family leave and social security are very stupid ideas that create massive unintended/unseen costs. Institutionalized stupidity is expensive and socialism is a low intelligence system down to its dysgenic effect on fertility. Stupid people also don't understand how socialism inevitably leads to totalitarian systems or collapse because they don't work. Government increasingly becomes involved with healthcare, education, even fertility, because its own policies creating massive contradictions in the society.

When it comes to fertility, it's not only socialism destroying the society. It's also capitalism. As some have put it, the cities are "IQ shredders" that maximize current GDP, but will eventually collapse future GDP because the people producing high levels of GDP leave few to no heirs. An extreme example of eating your seed corn. Until policymakers understand the fundamental flaws of their systems, unlikely because they are ideologically and even morally opposed, the countries they "manage" are headed for extreme downward adjustments. They have a massive turkey problem that is playing out on multi-generational time scales. The benefits are collected by those living today and the costs will be borne by future generations.

Update: In the post, I said the proposed fertility-boosting policy would work better as a tax. The article I read didn't fully explain how it would work. It turns out, the scholar did propose it as a pay-as-you-go system where the money would be taxed from people with one or fewer children, to pay for maternal leave of people with two (or more?) children. The money would be replaced when they are in retirement, in a roundabout way by the children the policy is designed to help.

提高生育率： 新时代中国人口发展的新任务

Establish a maternity fund system and try to achieve the self-operation of the two-child birth subsidy. It is stipulated that citizens under the age of 40, regardless of gender, must pay a maternity fund at a certain percentage of their salary each year and enter their personal accounts. When the family has a second child or above, they can apply for the withdrawal of the maternity fund and receive a maternity allowance to compensate the short-term income loss caused by the interruption of labor during the growing period of women and their families. If the citizen has not given birth to two children, the account funds will be taken out when they are retired. The maternity fund adopts the pay-as-you-go system, that is, the maternity fund that has been paid by the individual but has not been taken out, and can be used for the government to pay the maternity subsidy to other families, and the insufficient part is subsidized by the state.

Chinese State Rising: Only Two Types of Companies Can Survive in China, SOEs and Foreign

Life is good for SOEs in China and hell for private enterprises who cannot obtain credit and go overseas for equity listings. Credit disinflation in China is not a falling tide that lowers all boats, but a political one. Those with connections have credit, those without do not. Assets on private balance sheets are being sold below market value to state-owned and state-backed enterprises. Even though the number of state-enterprises is decreasing, their control over the economy is growing.

iFeng: 叶檀：大变化！不管股市、楼市、还是债市

In the future, only these two types of enterprises can survive and fight each other: state-owned enterprises and foreign companies.

State-owned enterprises, especially central enterprises, are in a gratifying situation.

At 3 pm on July 12, Peng Huagang, deputy secretary general of the State-owned Assets Supervision and Administration Commission of the State Council, introduced the economic operation of central enterprises in the first half of 2018.

In June, state-owned enterprises realized a profit of 201.88 billion yuan, a year-on-year increase of 26.4%, setting a historical record. In March of this year, state-owned enterprises have set a record high of more than 160 billion.

In the first half of 2018, central enterprises realized a total operating income of 13.7 trillion yuan, an increase of 10.1% year-on-year. The income of 17 enterprises increased by more than 20%, the income of 43 enterprises increased by more than 10%, and the profit reached 887.79 billion yuan, a year-on-year increase of 23%. The efficiency of 37 enterprises increased by more than 20%, and the efficiency of 58 enterprises increased by more than 10%.

Industrial enterprises in central enterprises have a better life. In the first half of this year, the profit reached 515.28 billion yuan, a year-on-year increase of 33.9%, which was higher than the average growth rate of central enterprises by 10.9%, and the increase in profits accounted for 78.6% of the increase in profits of central enterprises.

The economic growth rate has reached the best level in history, and the leverage ratio of central enterprises is declining. By the end of June, the asset-liability ratio of central enterprises was 66%, a decrease of 0.3 percentage points from the beginning of the year and a decrease of 0.5 percentage points year-on-year.

Supply-side reforms, as well as credit tightening, first let state-owned enterprises and central enterprises have a good life.

Last year, state-owned enterprises' revenues reached 50 trillion yuan, and profits reached 2.9 trillion yuan, up 14.7% and 23.5% year-on-year respectively. Central enterprises' revenues were 26.4 trillion yuan, and profits were 1.42 trillion yuan, up 13.3% and 15.2% year-on-year respectively, the best year in five years.

The investment in state-owned enterprises is on the rise, and the growth rate of investment in private enterprises is declining. For private enterprises, the most important thing in the past two years is to live.

In December 2017, Xu Shanda, former deputy director of the State Administration of Taxation, screamed at the speech. Last year (2016), our economic growth was 6 percent. In the investment field, mainly supported by state-owned capital, the growth rate of private capital investment is only about 3%. In the state-owned capital investment, more than 80% rely on the so-called infrastructure construction.

This year is also the same, the external compression, the main pressure is private enterprises, the equity property pledge channel is blocked, P2P off, some private enterprises can not even borrow at usury rates. In order to survive, the companies are listing overseas.

The near-term outlook for private companies is not good.

Regardless of the stock market, the property market, or the bond market, private enterprises have to stand by for the time being.

Two days ago, in Shenzhen, I met a friend who was doing private placements. They said that they invested in a potash mine in the northwest and took the initiative to sell the controlling stake at a low price to a state-owned enterprises. Although the state-owned enterprises spent "3 billion" to do things, they themselves one billion can be made, but if you still have to cooperate, you should be "seeking a peace." In the past two years, the price of the mine has not been good, and there is no turning point in the future. In recent years, it has not been prepared for large-scale investment.

Another example is the listed company Jinyi Culture, which announced on July 9 that the real controller, Zhong Luan and his brother Zhong Xiaodong, intend to transfer 69.12% and 4.20% of the equity of Bikong Longxiang to Haikejin Group. The price is 1 yuan.

Bikong Longxiang holds a 17.9% stake in Jinyi Culture and is the controlling shareholder of the company. According to the latest market value of Jinyi Culture, Zhongjia Brothers sold a stock with a market value of nearly 900 million yuan for only 1 yuan.

The shareholders of Jinyi Culture had problems, the investment was radical, the stock price fell, the cash flow broke, and they were forced to sell for 1 yuan.

The buyer Haikejin Group is a subsidiary of the State-owned Assets Supervision and Administration Commission of Haidian District, Beijing. It is the controlling shareholder of Sanju Environmental Protection and holds 29.71% of the shares of Cuiwei.

In addition to paying 1 yuan, Haikejin Group can help Jinyi Culture to borrow 3 billion yuan, including but not limited to direct financing (direct borrowing), providing credit enhancement (guarantee), etc. The cumulative amount of liquidity support is not low. It is worth RMB 3 billion.

During a deflationary event, assets are sold far below market value. If you have access to credit or have government backing, engineering a deflationary collapse moves assets from debtor to creditor. In China, the SOEs are taking over good private assets at firesale prices. This is a hidden tax that doesn't show up in economic calculations.

The Shenzhen Stock Exchange also has a tendency for state-owned enterprises to acquire equity. It is even more obvious for SMEs. Even Vanke has found the Shenzhen Metro as a backing.

According to the data of the Shenzhen Stock Exchange, as of June 30, the listed companies in Shenzhen Stock Exchange suspended a total of 206 major asset restructurings. Compared with the previous two years, the number of companies has decreased significantly. The total number of major asset restructuring plans has been disclosed 82 times, involving transaction amount 2843. The amount of 100 million yuan was basically the same as that of the same period of last year. The average single transaction amount was about 3 billion yuan, up 22% year-on-year.

In the first half of the year, the Shenzhen State-owned listed company merged and reorganized 22 singles, with a transaction amount of 95.6 billion yuan, accounting for 38% of the total amount of mergers and acquisitions transactions in Shenzhen. Compared with private enterprises, the number is small and the amount is large.

The investment in listed companies of large state-owned enterprises and small platforms continued to emerge. China Merchants Group injected high-quality port assets into Shenzhen Chiwan to integrate intra-group assets. COFCO injected fuel ethanol, starch and corn deep processing R&D enterprises into COFCO Biochemical. It is the only corn deep processing company that integrates scientific research and production.

In addition to the injection of group assets, some state-owned enterprises issued shares to private entities to purchase assets. Fengle Seeds purchased the shares of its corn seed company from 34 natural persons. Aerospace Development acquired three information security and big data technology service providers to strengthen the information security sector.

The reasons for mergers and acquisitions and injections are various. In short, they are all beneficial to the economy. In fact, there is nothing more than a word. At this stage, who has resources, at present, in which direction resources are flowing.

For example, prove the "soft power" of state-owned enterprises.

In June of this year, I chatted with the local bank chiefs of a big bank. She said that because the risk of deleveraging is endless, their bank's main loan direction is still the big city city investment company and large state-owned enterprises. This is the lowest risk practice at this stage.

From Vantage to Country Garden, the dealers couldn’t help but the developers continued to squeeze the cycle. Even the industry leaders are precarious, and the pressure of other companies can be imagined.

Crash here

Clear-minded people know that private enterprises can solve employment and strengthen market competition. Only a few people are crazy to completely eliminate private enterprises. The reason for the current situation is that the credit system of the domestic market has been decided. Every time it is leveraged, it can only be private enterprises, and they are the most risky. Especially those private enterprises that have invested aggressively in the expansion cycle and have no moat support.

It can be concluded that, fundamentally speaking, despite the market reforms of forty years, the current private enterprises still do not have the qualification to compete with state-owned enterprises.

Why can foreign companies compete with state-owned enterprises?

Because of the huge trade pressure, openness has become the main theme. In the fields of finance, high-tech, high-end services, we must gradually liberalize and have already made a large-scale open attitude.

On July 12, foreign media reported that BMW had plans to increase the share ratio of BMW Brilliance to 75%. Although it was quickly rumored, it came to the forefront.

Tesla, a new energy vehicle company, has set up a factory in Shanghai. This is a state. It is worth noting that Tesla still has sufficient funds to build factories?

According to the 2018 quarterly report released by Tesla, the company's net loss during the period was 785 million US dollars, an increase of 90%. Where does Tesla's funding for building a new factory come from? Wall Street's financial hackers have been singing Tesla, is it possible for Tesla to get billions of dollars in Chinese stocks or banks?

n the future, it will be the competition between foreign companies and central enterprises, and it will be competition between large funds and large enterprises.

On the surface, the number of legal persons in central enterprises is decreasing. By the end of June this year, central enterprises had reduced the number of legal entities by 11,261, with a reduction rate of 21.58%. Don't take this number too seriously, know that the real control is in resources, not quantity.

All of this makes people think of a sentence. Even an established nation like Zhou still regards self-renewal as its mission.