Jack Ma's Empire is under investigation by Beijing's SAMR.

Anbang(安邦) Insurance and HNA Group, which were disliked by the Communist Party, ended up with the worst result in the past. This time, Jack Ma’s Alibaba empire has crossed a line that the party would not allow. It is not sure whether the blade will stop at Alibaba or not. There might be possibility that Beijing’s State Administration for Market Regulation(国家市场监督管理总局) will continue to regulate further on other Internet giant companies such as Tencent. Creating an atmosphere of excessive fear can reduce the vitality and motivation of the firms, so the regulators might control the degree; however, we should bear in mind that there is nothing as important as the authority of the party.

State Administration for Market Regulation (SAMR) has reported to investigate on the antitrust over the practice called “二选一”, which means “choose one out of two (platforms)”. The practice is to force sellers who has been operating on Alibaba platforms such as T-mall and Taobao to stop a business relationship with a competitor, namely, Pinduoduo or JD.com. This is to head off the rise of the competitors and keep its dominance of e-commerce market.

SAMR has stated the word ‘etc(等)' to suggest that the charges are not limited to one. It means that other charges have already been detected or that the charges will rise further in the future investigation process. Alibaba said it would comply with the investigation.

In addition, the People's Bank of China and other financial regulators have decided to summon Alibaba's financial affiliate, Ant Group. 

The People`s Bank of China said in a statement that it will soon call in Ant Group for investigation. The statement included that the regulator would supervise Ant Group in accordance with market principles and laws to implement fair competition, protect consumers' legal rights, and regulate the operation and development of financial services." China Banking and Insurance Regulatory Commission (CBIRC) and China Securities Regulatory Commission (CSRC) will participate in the investigation. In a statement posted on WeChat, Ant Group pledged to strictly abide by the authorities' regulations.

CBRIC and CSRC are the state agencies that the firms and financial companies do not want to confront; meaning that issue should be regarded very seriously.

The Communist Party proposed "strengthening anti-trust regulations and preventing reckless expansion of capital" as one of the eight major projects in the economy meeting. They also stressed that "anti-trust and unfair competition prevention are basic conditions for improving the socialist market economy system and promoting quality development."

Thriving to end monopoly

The number of commercial transactions through Alibaba is astronomical. The annual transaction history of customers is an extremely useful big data. Based on this, Ant and Alibaba established DB and sold joint loans with banks. Ant has collected commissions by providing credit information to local banks with weak CB (Credit Bureau) functions. In the case of joint loans, if Ant is responsible for about 2-5 of the loan, the local banks partnered with Ant will pay the remaining 95-98. Ant Group can play big money with a small amount of money. As such, local banks may lose their customer base and their loan margins decrease by paying commissions to Ant Group, but it is difficult to give up Ant's platform to increase customers and remain their business.

Although Alibaba has been revered as an icon of innovation, without help of Great Firewall policy, Alibaba would not be this giant figure. In other words, Alibaba, Tencent, and JD.COM were able to succeed thanks to the authorities' establishment of ecosystems that are difficult for U.S. or European competitors to reach on Chinese market.

Anyways, with the money raised, IT giants began to dominate mainland’s startup market in the last five years. Alibaba has been raising funds through various ways to the Chinese startups for further tech innovations. It was big chance for startups to accept the investment from the biggest Chinese e-commerce company. That is how the first generation of IT giants have manipulated the ecosystem of startup companies.

Well, many will say this would not be a big issue. If it is legal, then the funds to the startups will be the energy for innovation.

However, the Party was not pleased with what Alibaba was doing. IT giants like Alibaba are growing into "Big Brothers" that are increasingly hard to control. In China, "big brothers" should be the only one, Communist Party.

Other IT giant companies could be punished along with the investigation. A fine can be an example of the penalty but the style of the Party is traditionally beating ‘the one example’ which can show how the Party is a strong governor. Jack Ma’s empire will likely get hurt this time. The world biggest IPO was suspended, so it would not be surprising to see any disposition.

As the People's Daily, the party's official newspaper, commented, "The strengthening of anti-trust in giant companies has a noble concept of easing the monopolistic structure and protecting the profits of small and medium-sized businesses (SMEs). The e-commerce ecosystem, which is dominated by a few dinosaurs, is disadvantageous to traditional (offline) retailers and small sellers.

Source: Nikkei Asia, WSJ, Global Monitor

https://asia.nikkei.com/Opinion/Jack-Ma-punishment-a-lesson-for-China-s-other-tech-bad-boys

https://www.wsj.com/articles/beijing-sends-alibaba-an-unwelcome-christmas-present-11608806388?mod=searchresults_pos1&page=1

https://www.globalmonitor.co.kr/view.php?ud=202012241734505431daadac7a4c_41

How will Biden Administration affect global trade?

Joe Biden (Democratic Party) was selected as US president in November 2020. U.S economy has been stagnant since the emergence of COVID-19, which diminished purchase power of overseas supplies. However, if the US economy recovers as economic stimulus measures reach agreement, the demand from U.S. consumers will increase, which is good news for global economy and trade. Nevertheless, due to the increase in monetary base and the velocity of dollar supply, it is highly likely that Biden's major pledges will act as a pressure to appreciate other currencies (only Turkish Lira is depreciating its value). There is also high possibility that Biden will maintain a strong policy toward China to protect U.S. industries, which is in need for other countries to monitor and prepare.

Dealing with China

Similar to the previous Trump administration's trade policy, Biden administration will also show strong stance towards China in terms of trade through strengthening solidarity with the alliance. It is expected to respond strongly to unfair trade practices in China in collaboration with allies and expand to areas such as human rights, labor, and the environment (climate change).

Protective Trade Measures

The possibility of withdrawing tariffs against China and Article 232 measures imposed by the Trump administration is expected to be low, and import regulatory measures such as anti-dumping and countervailing duties are expected to continue to protect domestic industries.

Trade Agreement 

It is a position that it will not proceed with a new trade agreement immediately after election, and even if a trade agreement is promoted, there is a high possibility that the Democratic Party will demand strengthening of requirements such as labor and environment provisions traditionally emphasized.

These three factors are the position that the United States will lead the world trade order and rebuild the leadership of the United States through multilateralism and restoration of trust with allies.

How will these affect to the global trade? The recovery of the US economy through expansion of stimulus package and rules-based trade policy are expected to have a positive effect on global trade, but there is a need for continuous monitoring of disputes between the US and China and fluctuations in exchange rates and oil prices, and protective trade measures (Buy American). 

To conclude the existing concept of US-China conflict remain unchanged. Unlike Trump's unpredictable and extreme tariff wars, trade policy with China is likely to become an imprisonment for China through coalitions with allies. Therefore, the trade dependent country like Japan, Korea and Taiwan should pay close attention to Biden's economic pledges and the process of industrial protection policies.

Market scenario when Democratic Party sweeps [Blue Wave].

As the US president, one third of the Senate and the entire House of Representatives comes to a close (November 3^rd, 2020), a survey found that Democratic Party candidate Joe Biden continues to lead the race against Republican candidate Donald Trump by big difference according to CNN. Reportedly, in a poll of voters who are willing to vote, Biden was leading Trump 54% to 42%. It was analyzed that the gap between the two had been the largest for 20 years. However, we do not know whether the poll is exact or not due to many reasons as some insist CNN is part of Democratic Party supporter. Forecasting which party will take over White House and Congress is fairly impossible. But the guesses of market direction are emerging as polls indicate that Democratic Party is about to sweep.

Bond Market

The scenario that can cause the greatest volatility in the bond market in the short and long term is when Democrats occupy both the White House and the U.S. Congress. If this scenario is comes to reality, the US 10 year Treasury is expected to surge creating bear steepening yield curve. In order to cover the 2 trillion +a stimulus plan, more fiscal budget is needed. Therefore, the government will likely to raise tax and issue additional treasury. Therefore, as supply of government bond increases, the more interest rate is needed to raise the fund for stimulus package.

Stock Market

Meanwhile, a steep rise in Treasury yield is expected to have a negative impact on the US stock market. If tax hikes and new taxation are implemented as Democratic Party's pledge, it will lead to ‘crowding-out effect’ with investors in risk-off stance and a decline in corporate investment. However, there is possibility that stock market would not fall very sharply due to hope in support of policy mix; combination of monetary and fiscal policy. Since the liquidity environment is being floated, the risk of the crowd out effect is not very big deal. The outlook for the stock market is quite mixed due to many possibilities.

Currency Market

The dollar has been weakened mainly due to three reasons: relatively strong Chinese GDP growth has made Chinese currency attractive, investors are buying Chinese corporate bonds (yields are higher than U.S) as Chinese government is steadily in progress in opening their financial market, and expectation of Democratic Sweep (Blue Wave). This can be quite controversial as many investors think that treasury yield increase, the value of currency rise together. However, the yield only applies to market interest rate (usually 10 year). Since Fed is targeting call money rate (short term interest rate), low chance of strong dollar will likely to appear. Fed will continue increase money supply as more stimulus package is needed, therefore, more chance of inflation will emerge, which means real yields will fall more than nominal yields grow. Please check my blog below.

https://techongstudy.blogspot.com/2020/09/real-yield-is-reason-for-market-mover.html

Global Trade

Candidate Biden and Democratic Party's trade pledge does not differ much from the current Trump administration's trade policy. Candidate Biden pledged to promote trade policy that benefits Americans such as labor market. The policy is to recover domestic unemployment rate deteriorated by COVID-19 and strengthens domestic manufacturing industry in the slogan of 'Made in America' and 'Buy American'. “Economic security is national security”. Biden announced to correct China's unfair trade practices and reform China's structure, which undermines the multilateral trade order. The strong policy toward China is expected to continue regardless of the election results.

Source: Saint Luis Fed 

https://fred.stlouisfed.org/series/T10YIE#:~:text=The%20breakeven%20inflation%20rate%20represents,Constant%20Maturity%20Securities%20(TC_10YEAR).

Source: U.S. DEPARTMENT OF THE TREASURY

https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=realyield

Rise and fall of the leaders [reformers] in emerging countries.

The regime has changed when the country was in the middle of economic crisis. French former President Charles de Gaulle pointed out that the great leader emerges through the encounter of exceptional periods in history. From mid 1990s to the early 2000s was known for the crisis in the emerging countries due to their fundamental economic deterioration mostly because of foreign debts. Numerous reformers emerged amidst economic crisis to convert the downturn position into opportunity of gaining popularity. However, there was rise and fall in their regime. Below leaders are the examples of it. 

Vladimir Putin [since 1999, Russia]

While Russia was struggling to escape from the severe financial crisis of 1998, Vladimir Putin was appointed as the Prime Minister of Russia, endeavoring relentless reform efforts, including reducing Russia's debt. With help from Herman Gref (Minister of Economics and Trade of Russia), and Alexei Kudrin (Minister of Finance), Putin led reform and growth of Russian economy, saving budgets from their crude oil exports or investing in new industries. Promoting tax reform along with financial efforts to prepare for recession was also one of the improvements. To reduce corruption, tax types were reduced from 200 to 16 types, and all officials who were involved in tax corruption were fired. However, rise and fall always come. Over the time, politics and policy using populism declines the productivity and the leader tends to become arrogant when he or she takes the power for long time. These factors have a fatal impact on the economy of one’s country, halting reform, and the leader concentrates on his or her power dominance. Putin has fired Kudrin leading to the economic slowdown as commodity price drops.

Luiz Inácio Lula da Silva [2003-2010, Brazil]

Luiz Inácio Lula da Silva, former president of Brazil, took over the regime from Fernando Henrique Cardoso and reformed one’s economy. He was the first president from Worker’s Party. During the times of South American economic crisis of 2002, Brazil economy suffered with a plunge in the Real (Brazilian currency) value and Ibovespa index (stock market) due to hyperinflation. As Luiz da Silver’s election victory in 2002 motivated the early reforms. He appointed Henrique Meirelles (former FleetBoston Financial Bank Chairman) as the president of Banco Central do Brasil (Central Bank of Brazil). The chairman rose the benchmark interest rate by 25% to fight inflation. With economic help from surging price of steel and other products, Brazilian economy has improved tremendously. However, the former president was found guilty of corruption and money laundering in his regime and was sentenced to 12 years of prison on January 25th. 

Recep Tayyip Erdoğan [2003–2014, Turkey]

During the time Turkey was suffering from serious financial crash in 2001, large quantities of Turkish lira were facing massive outflow into U.S. dollars or Euros. This was chance for Recep Tayyip Erdoğan to gain his popularity. He has served as Prime Minister of Turkey from 2003 and contributed to the economic reform by appointing competent economic advisors such as Finance Minister Ali Babacan. The Prime Minister has contributed in reforming pension system, passing laws to privatize state-owned banks, liquidating bankrupt companies more smoothly, maintaining a surplus budget and strengthening the state finances. As a result, the average per capita income will rise by more than $10,000. But it has changed from pragmatic reform to its political power and corruption. In his third term of regime, the practices to create the atmosphere of the Ottoman Empire has led to the corruption and scandal. 

Deng Xiaoping [1989-2002, China]

Amid China had difficulty in economic growth in 1980s, Deng Xiaoping came to power in 1989 and visited New York and Singapore to benchmark their economy which later influenced China’s pragmatic improvement. The Communist Party authorities implemented the market reforms by de-collectivization of agriculture, the opening up foreign investment, and encouragement for entrepreneurs to start businesses. Privatization and contracting out of much state-owned industry was carried out since a large percentage of industries remained state-owned. Lifting of price controls was a major reform in following free market economy. Later In 2001, China joined the World Trade Organization. However, the political repression, including the 1989 Tiananmen Square protests, increased public demand for political freedom that corresponds to the economic freedom he promised to give. 

Others

Colombian President, Alvaro Uribe Velez, elected after two financial crises in 1990. He put effort in the economic growth by restructuring the country's finances and quelling the guerrilla rebellion, which were regarded as an obstacle to national growth. However, his beautiful days did not last long, He has lost the public's trust and failed to succeed in three consecutive terms. Suharto was in regime for 31 years in Indonesia. He has made high growth in 1970, 1980, escaping from poor countries. However, corruption of family and school relations delays were discovered and made riots in Jakarta. General Augusto Pinochet, former Chilean dictator, controlled over hyperinflation, fiscal spending and debt when Chile had struggled with the economy. However, It has been revealed that Pinochet embezzled public money from 1973 to 1990 and took $26 million through arms smuggling. Former President of Argentina, Nestor Kirchner struggled to get out from economic downturn. He has tightened the economic belt in 2005 and the economy slowly recovered. However, in his regime, the details of bribery received from construction and energy companies were released, which made the president in bribery scandal. 

[Columbia, Indonesia, Chile, Argentina]

It is not only emerging country.

Advanced countries such as U.S also have rise and fall of the leader. Ronald Reagan, former president of United States was a symbol of a reformer with economic victory against the Soviet Union, Japan, and Germany. Even though he has suppressed hyperinflation, he could not avoid scandal issue. 

Exception 

Not every leader has rise and fall. There are exceptions. Venezuelan former radical populist President Hugo Chávez Chavez promoted experimental socialism but has laid more economic downturn. However, Lee Kuan Yew ruled Singapore for over 30 years, but his energy for reform has never cooled down. Singapore economy has never been in serious downturn during his regime. Mahathir Mohamad has years achieved economic miracles when he was taking role as Prime Minister of Malaysia. There was no corruption or scandal during his era. 

[Venezuela, Malaysia, Singapore]

Source: Rise and Fall of the Nation [Ruchir Sharma]

Which party is better for the stock market?

Two of presidential debates have been proceeded; the two candidates are preparing for the presidential election on Tuesday, November 3rd. The dollar has been weakened mainly due to three reasons: relatively strong Chinese GDP growth has made Chinese currency attractive, investors are buying Chinese corporate bonds (yields are higher than U.S) as Chinese government is steadily in progress in opening their financial market, and expectation of Democratic Sweep (Blue Wave). As Democratic Party has less philosophy on fiscal soundness (stability), the more hopes on stimulus measures and government expenditures are putting dollar on pressure. However, investors often misunderstands that Democratic Party or Republican Party will help the stock price rise.  However, the direction of stock market is not determined by particular party from either bipartisan. The history explains the reason. 

The S&P 500 index originally began in 1926 including only about 90 shares, so called ‘composite index’. Since the appearance of S&P 500, average annual increase rate of Republican Party was 9.3% while Democratic Party was 14.5%. This may look good for Democratic Party. However, The Great Depression and Financial Crisis was a big factor for stock market deterioration during Republican president. As S&P index started, the Great Depression came in three years as president was Republicans (Coolidge and Hoover). Right after the depression started to fade away the stock market skyrocketed 53% during the first year of Democratic president (Roosevelt). It applies similarly to President Obama as stock market surged about 27% during his first year of president right after President Bush, whose stock performance was -37% in the fourth year. 

Excluding these huge fluctuations, the average annual return rate was close to 11.1% for Republicans and 13.6% for Democrats (In fact, except for Hoover and Roosevelt, the Republican Party has been higher than the Democrats.)

Annual yields during the presidential term

The first year has been 8.1%, 9% for second year, 19.4% for third, and 10.9% for the last year. An interesting pattern is that in year 3, stock prices never had low returns except in 1931. And in the fourth year, the negative rate of return was four times including the financial crisis, but often recorded double digits except for that. 

In the first half (first and second year) presidential term, the rate of return is highly volatile. The negative returns is higher than in years of three and four. Investor’s avoiding legislative risks in the first half is the main reason. The legislative risk gives big impact on the stock market. The legislation contains redistribution or regulatory change in property rights. Politicians push for legislation, saying it can bring about amazing social development such as antitrust law and rules based on populism. The coercive policies are implemented in the first and second year which raises more of risk on stock market. Later, legislation risk decreases in the second half of presidential term.

Why is it divided into the first half and the second half? First of all, the meaning of the word politics is ‘poli’ (many Latin words) + ‘tics’ (blood-sucking ticks). Every president thrives to achieve only goal which is to be re-elected. So, most of legislation should pass the congress in the first or second year. That's why midterm elections haven't always had good results (except George W Bush). Most pass legislation within two years of taking office. After that, they passed less than before, and political risk aversion fell to a low level. On third year, the stock market starts to rise. In the fourth year, the average return is good because of some political activities ahead of the election. C the side effect takes place for extreme situation, but the stock market usually outperforms because strong legislation is not passed.

For example, in the first year of Obama, Health Care Reform was promoted, and in the second year, the Dodd Frank Act was passed. However, in the third year, there were no critical legislation except for raising the limit of government debt.

So what do investors or entrepreneurs think? Usually, they support Republicans since they execute business-friendly campaign as many think Democrats are less business-friendly and stock market-oriented. When the Republican president is likely to be elected in the fourth year, the stock price rose 15.6% per year whereas 6.7% rose when Democratic Party is likely to be president. Meanwhile, in the inaugural year of the Democratic president, the stock market rose 14.9% whereas, Republican President rose only 0.8%. Investors commonly think The Democratic Party condemns Wall Street however, they later change into moderate stance regarding stock market in the election year. Don't make Wall Street rich people angry. In other words, just because the Republican Party is in power does not mean that the stock price will rise significantly or that the Democratic Party will significantly decrease. When it comes to dollar, the dollar weakens on election year when Blue Wave is on expectation as Democratic party prefer more government expenditures. Later, the dollar gains its value. Otherwise, when Republican sweep is anticipated, the dollar strengthen expecting of firm fiscal soundness. However, Republican has fiscal deficit later on especially on the Reagan times. Meanwhile, Clinton times had the record fiscal stability. 

Presidents who were not re-elected

Regarding S&P 500 so far, 14 of the presidents have been re-elected, while Ford, Carter, and George H.W. Bush were the ones who failed. In the case of Ford, except for the election of congress member, he has never won any election. The reason that Ford became a president was because President Nixon resigned attributing to Watergate Scandal. Ford, who was vice president that time, became president. Carter defeated Ford and became president. He was lucky to compete for election with the weakest president. But Carter's misfortune, the misery index (calculated by adding the seasonally adjusted unemployment rate to the annual inflation rate) due to oil shock, and the strongest candidate in the Republican Party's history (Reagan, the greatest communicator), failed Carter's tenure. Father Bush had to fight with a slight recession in the fourth year. He was unlucky because he inherited huge budget deficit from Reagan, the former president. FED hiked interest rates to responded to negative impact of previous president's economic policy. As soon as the term ended, the downturn ended, but the best debater in history, Clinton, appeared in the election race. “It's the economy, stupid,” said Clinton who was elected after the campaign of attributing the fourth-year stock market single-digit growth to economic recession. During the Bush era, the economy was not very bad and even though he won the war, he gave the regime to Clinton. .

Source 1: Stocks for the Long Run [Jeremy Siegel]

Source 2:  Markets Never Forget [Ken Fisher]

Source 3: https://www.macrotrends.net/2482/sp500-performance-by-president

China halts Australian coal imports due to political conflict.

China is struggling with Australia over coals and cottons. China is taking a series of 'retaliation measures' against Australia after Australia began seeking support from European leaders for an investigation into China’s response to the pandemic. 

Chinese authorities have recently taken steps to virtually halt imports of Australian beef, wine, barley, and recently coal. Now Chinese government is reportedly targeting Australian cotton as well as the target of retaliation according to South China Morning Post. 

Australia’s economy is now under heavy pressure of lockdowns in the country’s second-largest city with its international border closed. According to WSJ, Australia is experiencing its first recession in 28 years. Australia has experience in avoiding global financial crisis hit a dozen years ago thanks in part to China’s stimulus efforts on its infrastructure expenditures which needed Australian iron ore and other minerals to build bridges and skyscrapers.

For the past decade, China has been Australia's largest trading partner and now accounts for 32.6% of its exports. China selected Australia as strategic partner over its rival Brazil for importing Australia's mines such as iron ore, coal and gas which fueled China's growth.  Australia is preferred for their quality and geographic proximity. The deal benefits both nations.

China has already delayed Australia’s iron ore custom clearance in April due to conflict with Australia over the issue of the COVID-19 virus. Commodity experts predict that it will be difficult for China to impose additional import sanctions on Australian iron ore since 60 percent of China’s mining is imported from Australia. There will be sharp rise in iron ore prices if China continues to ban imports of Australian iron ore.

Source

https://www.wsj.com/articles/china-sentences-australian-to-death-as-bilateral-relations-fray-11592045994

https://www.wsj.com/articles/australia-worries-coal-is-chinas-next-target-as-ties-fray-11602665386

https://www.wsj.com/articles/chinas-economic-squeeze-on-australia-extends-to-cotton-11602839413

The Global Economic Crisis from China Has Started

“There is an opportunity that comes once every 100 years"

The global economic crisis from China has already begun, and a book has been published in Japan by two renowned economist, Miyazaki and Tamura, claiming that this crisis has an opportunity that comes once every 100 years. The new book “The Global Economic Crisis from China Has Started” explains the cause of the crisis from China, which will bring more shock global financial crisis 2007-2009, and suggests concrete method to find opportunities in this crisis. The global economy in 2020 is likely to be a more difficult year than ever in history. It is because there is a high possibility that the economic crisis caused by inflation from China, which has been constantly raised so far, will become a global economic crisis in the aftermath of the US-China trade war.

Unlike what appears to as trade war due to U.S. trade deficit, the essence of the U.S.-China trade war is the war of technological hegemony. In the empire of IT or IoT represented by tech companies so called MAFAA (Microsoft, Apple, Facebook, Alphabet, Amazon), VS AT (Alibaba, Tencent), it is  a fight to take control of technology hegemony. U.S. cannot afford to let China dominate such an important future industry. However, China also has to revert their industry from traditional manufacture industry which produces little profit to the high value-added industry.

China 2025 (Smart Manufacture+) is the best project for China from avoiding in debt-ridden environment and raise its GDP. The problem is that Japan and South Korea are the most affected countries in the U.S.-China trade war over global economic hegemony. Korean investors must come up with strategic countermeasures in case the friction between the U.S. and China continues. This is to minimize the damage and take advantage over opportunities. The book mainly focuses on the risk, which is steadily arising from U.S. and China trade disputes such as China's OBOR (BRI) policy and China Manufacturing 2025, and internal issues in China.
See my blog: https://techongstudy.blogspot.com/2020/08/china-wants-to-revitalize-its-domestic.html

Fighting for techno-hegemony
The background of the trade war began with a number of complicated reasons, in which China has made rapid progress in attracting technology and capital from around the world to become a technology powerhouse that surpasses the U.S. based on a huge trade surplus. As, Chinese exports have been blocked due to the trade war, China is concentrating its domestic economy mostly in technology area. The U.S. government found that it used all sorts of methods, such as corporate espionage and acquisition of foreign companies, such as technology theft and human resources transfer. Recently, as China's ZTE and Huawei (Tik Tok recently) have begun to outpace U.S. technologies in semiconductor and telecommunication technologies, which are key technologies in the future. The dispute between the U.S. and China has intensified as U.S. has pressured China in the form of competition for technological hegemony. This is said to be the same in both partisans (democratic and republicans).

Chinese leader Xi Jinping will never end his presidency by extending his term indefinitely in the National Assembly in 2018. China is expanding its belt and road initiatives with its huge trade surplus capital against the U.S. as a weapon. Before Trump administration, many of the Wall Street-linked relatives and politicians who sought wealth through 'China capital'. After entering the Trump administration, China's prestige grows and threatens the United States. The way to stop it at the source is to intervene in Chinese trade surplus that attracts enormous wealth of China.

Belt and road initiative
The book provides detailed examples of the problems of China's RBI development project. Common problems are that China lends money to emerging and frontier countries through RBI. Projects are monopolized by Chinese companies, major equipment is imported from China, and Chinese laborers are used. The debts leased to developing countries are marked in dollars and carried by the local government. If the debts cannot be paid off, China confiscates the infrastructure or land. The United States recognizes the seriousness of the matter, and Vice President Pence warns of this plan as a 'debt trap'. China is even building a military base (Djibouti, Africa) through this project. In the one-on-one plan, there is a new version of Silk Road intention to secure crude oil in preparation for an upcoming military conflict. Countries that are trapped in debt by OBOR are Pakistan, Sri Lanka, Cambodia, Maldives, Myanmar, Bangladesh, Malaysia, Indonesia, Nicaragua, Venezuela, Thailand, Nepal, Angola, Madagascar, Uganda.

RMB and inflation issue
Issuing more RMB than US dollar reserves, can lay concerns about inflation sooner or later. On the one hand, the United States and Japan support China appropriately, fearing the impact on the world if the Chinese economy collapses. Mainly Japan plays this role because Japanese policy interest rate is negative, so most of Japan's funds are invested abroad, and are borrowed from China through Panda bonds.
"A Panda bond is a Chinese renminbi-denominated bond from a non-Chinese issuer, sold in the People's Republic of China. The first two Panda bonds were issued in October 2005 on the same day by the International Finance Corporation and the Asian Development Bank." - Wikipedia

Japan is also well-known in having massive fiscal deficit, but the authors say that Japan's debt is near zero according to the balance sheet. (Japan is the biggest net creditor country in the world) Unlike the high debt rates of the U.S. and China, Japan has a high savings rate, so financial assets such as deposits and stocks are said to be three times the GDP. (Most of debt-holder is BOJ and its nation) 

Covid-19
Currently, China is not only facing pressure from the United States, but also neighboring countries such as India. There is also internal problem in China as growing sign of dissatisfaction with the government has started to emerge and Covid-19 crisis has triggered it.

Will China collapse in crisis? Well, the paradigm of dispute has reverted from trade tariffs to national security and diplomacy problem after first U.S. and China agreement and pandemic. This book shows historical events through specific examples and data. Global investors are very exposed to the relationship between United States and China; reading this book can serve as an opportunity to seriously think about how to catch global economy trend and prepare for it.

Why is South China Sea a very big issue?

Background of South China Sea conflict
In the past 20 years right before the WW2, Japan was reigning South China Sea. However, after being defeated in the war, they stepped back from the territory. About 6 countries started claiming for sovereignty over the Sea. The countries, which are involved in the territorial dispute, are Vietnam, Philippines, Taiwan, Malaysia, Brunei, and most importantly China.

Why is South China Sea important?
1. The South China Sea is a region of tremendous economic and geo-strategic importance. One-third of the world's maritime shipping passes through it, carrying over USD 3 trillion in trade each year including imported crude oil. About 80 percent of China's energy imports and 39.5 percent of China's total trade passes through the Sea.

2. Huge oil(estimated about 11 billion barrels) and natural gas reserves are believed to lie beneath its seabed. The disputes include the islands, reefs, banks, and other features of the South China Sea, including the Spratly Islands, Paracel Islands, Scarborough Shoal, and various boundaries in the Gulf of Tonkin.

Why is U.S. involved in this conflict?
There are four islands in the South China Sea. Spratly Islands and the Paracel Islands are the main issue among those four. Vietnam and Philippines challenged against China for the territory during 1974-1999, but failed to conquer. In 2013, China built military bases by building artificial islands which later created complaints from neighboring countries about 'Navigation Freedom'.

Experts now see the South China Sea as a conflict between U.S. and China, and forecast that there is high possibility to escalate into a military conflict. Chinese artificial islands have latest missile in that Sea; however, more than half of the U.S. forces in the Indo-Pacific region are near there. If the conflict rises between U.S. and China, then the countries nearby will take the risk of damage.

Source: Wikipedia about South China Sea
https://en.wikipedia.org/wiki/Territorial_disputes_in_the_South_China_Sea

Chinese companies be delisted if they fail to comply with U.S. audit requirements

Trump Administration announced that Chinese companies listed on the U.S. stock exchange could be delisted if they fail to comply with U.S. audit requirements according to plans recommended by the Trump administration. There were several problems that Chinese companies did not disclose financial statements sincerely. Companies that have already been listed have been given a deadline for compliance by 2022. Also companies that have plan to list in the U.S. stock market in the future must comply with audit requirements prior to listing.

The regulation against Chinese companies can imply two meanings.
1. To eliminate financial fraud regarding to the precedent issue such as Luckin Coffee listed in Nasdaq last year.
2. To use China as a tool for the next election. Threatening Chinese companies can switch the issue from inferior COVID-19 countermeasures.

WHO and China are the easiest target to change COVID-19 issue right before the election which will held November this year. So investors should think carefully.

[News from WSJ]
https://www.wsj.com/articles/trump-administration-seeks-crackdown-on-chinese-companies-with-shares-traded-in-u-s-11596748284?fbclid=IwAR2z7QR9dqwLMF1LbW3Rz0t0_cmVQWooxp6APzwGI9IBaGgEzfXwBLwUrq4

China wants to revitalize its domestic market again

China has announced that it will revitalize its domestic market again. In the past, there was attempt to stimulate their Chinese domestic market right after financial crisis of 2007-2009. It is famous that Chinese corporate have massive debts due to excessive investment to increase the employment rate and GDP.

To solve this issue, China has attempted to internationalize its currency RMB by pushing forward OBOR(One Belt One Road) which later changed its name to BRI(Belt and Road Initiative). The ambitious plan is for economic development and commercial project that focuses on improving connectivity and cooperation among multiple countries across the continent of Asia, Africa, and Europe.

Stimulating its domestic economy by its huge population (over 1.4 billion) can be very convincing, however, the weakness in its risky currency has made their plan failed temporarily.  Increase in FFR(Federal Fund Rate) announced by Federal Reserve has caused Chinese currency outflow.

Also, there is risk in two factors why Chinese have difficulty in revitalizing its domestic market at this moment.

1. China has a lot of corporate debt, so the companies may not be able to hire low-income groups, so overall income may not go up.
2. Unlike the United States, China has insufficient energy resource, so relying on imports would be unavoidable. (China needs U.S Dollars to import the commodities. In order to stabilized the Dollars, they have to export and earn the capital)

In addition, RMB is a risky asset, so there is a risk of outflow of local currency which might cause serious stagflation(most of emerging market faces this problem).

However, finding alternative energy would be the number 1 priority in order for China to grow stubborn. Movements to foster electric vehicle batteries in recent years is to activate the domestic economy, which will help achieving their ultimate goal, Smart City Project and Made in China 2025.

[News from WSJ]
https://www.wsj.com/articles/chinas-xi-pledges-stronger-domestic-market-global-ties-as-strife-with-west-brews-11595409718?fbclid=IwAR3ffVUWdzks9P5h_iIOwKVR6vtKO55IsMlX1JShN-o6Ewi-Ov0oLNlwhW4