A Tale of Two Businesses: 4,000,000,000,000 Revisited

I talked about the audacious RMB 4 trillion stimulus package earlier. The well-respected Prof. Leung agreed it, so I can’t disagree more.

It’s a modern Keynesian approach, on infrastructure spending. The ten key items laid out - covering road/railway construction, healthcare, education, environment, and all other election issues - is here.

Still, there’re choices to make. For example, shall it be spent more on building roads or schools? This is what puzzles me recently. Allow me to look further in this long post.

The Education Business

China’s a 9-year mandatory education system. It’s mandatory, but free: no tuitions, students only need to pay textbook at cost. If you ask me, I’d say it’s a huge commitment.

Here’s some stats for primary schools.

• 333,058 primary schools run by DOE and communities
• 100 million of 100.8 million school-age enrolled, enrolment ratio 99.3%
• 5.6 million full-time teachers, or roughly 20 students per teacher
• '07 governmental education expenditure was RMB 1.2 trillion, or 16% of government expenditure and 3.3% of GDP
• For primary school, the expenditure was RMB 2,200 per student plus another RMB 400 from the mish-mash pool

Here’s a typical budget sheet of one (poor) school. As you can see, it’s almost 100% funded by the government, and teachers are not well-paid.

The Road Business

Here’s an example of the road business. Zhejiang Expressway built road, gas stations, service centers, and more importantly, toll-booths.

It’s provincial government controlled, Hong Kong Stock Exchange listed (00576.HK), ADR shares traded from New York to Berlin to London.

At today’s depressed price, market value is around RMB 19 billion. The executive director, a former government prosecutor, owns 3%, or over RMB 500 million, down from peak value of RMB 1.5 billion. Why is corruption necessary?

At a glance, the road business is quite good business. You can just sit there and collect money, without competition. I suggest you buy the stock – the dividend payout ratio is over 6% assuming no growth, a better deal than putting money in the bank. Oh, if it interests you, they diversified a bit into the brokerage business, highly profitable.

The Choice?

The choice is yours. I have no idea.

 

http://icecurtain.blogspot.com/

Hedge Fund in China

I was buying insurance online the other day, and I found a hedge fund in serendipity, buried in my insurance company (or shall I say financial conglomerate). Look at this and this.

Some specifics on 平安财富鹏远核心一期集合资金信托计划

Hedge Fund? First of all, it is a hedge fund, though they deny it. Hedge funds are well known by the 2/20 (i.e., 1~2% administration fee plus 20% of benchmarked return). This fund charges: 1.5% admin fee, 20% of return, 0.25% keeping fee (?), 1% front load, 5% before-schedule redemption fee. Hedge funds court wealth individual et la, this fund set an entry level of RMB 3 million, so not for little people like me. Is it a hedge fund or not? Why play coy?

Who Handles the Money? If it’s not a hedge fund, it’s a FoF. Notice the listed investment consultant, 鹏远（北京）管理咨询有限公司. I guess it’s very possibly those guys who manage the money, via the hat of the “largest hedgie company,” and they profit-share in some way. I don’t see any reason why they’re here otherwise.

Expected Return. Noticed the return they promised (but not guaranteed)? Expected return 6.5%~10.5%, no upward limits, by investing in share-collateralized financing projects. Umm, I wonder how they can achieve it. Before fees, the required gross return would be 10%~15%, while the PBoC benchmark loan rate is 5.4%. If they leverage up, they’re more a hedge fund.

Investors. They’re open to both individual and institutional investors. The institutional part usually consists pension fund, college endorsement, etc. I wonder who are those ones in China.

“Nobody’s Worth That Much”

This is wild: 唐骏年薪为何十亿.

Although the number is a bit of a widespread hyperbole (thanks to the over-enthused hearsay reporters), it’s still really, really wild.

If I may describe the new employer 新华都, the appropriate word would be .. silly. I guess they carried out the event more as a PR campaign than hiring a star manager, only I don’t see how they’d cash in the built awareness. The read here is that they do funny things and they don’t care about spending. Remember the name and don’t be a shareholder.

I talked to my compensation consultant on this. The reply is, first of all, “I thought China is a communism country, am I wrong?” Second, the price tag would get almost anybody, if price is the only consideration, so he hopes the hired is really that good.

He has an additional thought: if he’s to advise that 新华都, he’d have them retag the price to RMB 888 million (instead of the stated RMB 1 billion, whatever is in it) - the new luckier number would do absolutely the same in all aspects. As for the RMB 112 million saved, he’d bill them half of it for the advice. A better deal for everyone, isn’t it?

P.S., A CEO compensation benchmark:

http://icecurtain.blogspot.com/

Help Needed for a Bean Counter

A friend of mine is shorting soybean futures and this is a rather nerve-racking piece (大豆临时收储政策煮成“夹生饭”). Seeking information from policy wonks:

• Q1. “在国际大豆吨价持续低于3000元的情况下，官方按照吨价3700元收购200多万吨大豆所造成的结果是，其余数百万吨的大豆砸在豆农手里，销售无门.”Who gets to sell and how is it decided?
• Q2. “这一系列的调控措施将东北地区豆价稳定在了吨价3500元以上，而此时国际市场大豆价格仍徘徊在3000元左右，与国内形成500元—700元的价差.”Any risk of government imposing trade barriers, eg. tariff hike, quota?
• Q3. What will the government do with the pile-up? Will they buy high and sell low (as a subsidy to the oil manufacturers)?
• Q4. “自从7月份以来，国际粮油价格高台跳水，大幅滑落。国际大豆吨价从高点时的近万元跌到目前的3000元左右。作为国内最主要的大豆产地，黑龙江地区国内豆价也一度跌至3200元左右，逼近豆农的成本价。”[..] ““我们算了一笔账，以目前的市场价儿，要像往年一样正常开工收购生产，企业一天得赔三四百万元。”黑龙江省最大的民营大豆油脂加工企业阳霖油脂集团营销总经理陈维庆说.”What the heck is happening here?
• Q5. “在陈维庆和田仁礼看来，大豆收储计划无疑是市场的搅局者。“与进口大豆相比每吨有高达600元的差价，注定加工就是个‘死’，生产越多亏得越大。”[..] “黑龙江海伦市豆农路春江说。“现在我卖3100一吨企业都不要，更别说政府3700的保护价了。”Am I missing something here? Any legal risk doing transaction below policy price?
• Q6. Is the provincial government running a surplus or deficit?

Why on earth are they doing this instead of simply ladling out some cash to the farmers?

My friend is lashing out at me as a commie. Can’t be more painful..

Ponzi Scheme, Revisited

I mentioned the Ponzi Scheme days ago, for a totally different reason. Now it’s dream comes true: the Madoff scandal.

The real estate bust that’s dragging the world almost into the Great Depression 2.0 seems another Ponzi Scheme to me. Collectively, it just won’t hold, though unlike the Madoff case you can’t blame no one specifically (or equivalently, you can choose to blame everyone altogether).

That’s what we call an “asset bubble,” stock market boom included. When the tide rises, everybody claims victory, only it can’t be the case because the gain can’t be realized altogether without the next or “Greater Fools.” That’s why I am kinda up against government’s interfering the stock market.

All those said, however, ironically, we did once try to hold up the market, successfully, with billions of dollars, at Hong Kong, the presumably fairer, freer, and more discipline-driven marketplace, in defense of George. Prof. Lang has a detail account here. He might be wrong: George may have made a loss, instead of a killing. But we’ll never know.

So sad..

Commies in America

If you don’t know about Wikipedia or Craigslist, you’re Internetly dumb.

• Wikipedia: Alexa rank #8, 60 million visitors/200 million visits per month; 75,000 active contributors on more than 10,000,000 articles in more than 260 languages; My personal encyclopedia.
• Craigslist: Alexa rank #40, 40 million visitors/200 million visits per month; in 450 cities in 50 countries; My personal furniture broker.

It’s perfectly understandable if you don’t know this: Wiki is a registered not-for-profit organization, now asking for donations; Craigslist could make over $500 million a year, but they don’t want to.

Here’s the best part: Wiki is run by a staff of 23, Craigslist 24.

A bunch of commies!

What's NOEs' Worth

Inspired by Prof. Lang, here’s some stats from the State-owned Assets Supervision and Administration Commission, collectively owned by the good people of China:

“2006年，全国国有企业户数共计11.9万户，比2003年减少3.1万户，年均减少8%。但累计实现销售收入16.2万亿元，比2003年增长50.9%，年均增长14.7%；实现利润1.2万亿元，比2003年增长147.3%，年均增长35.2%；上缴税金1.4万亿元，比2003年增长72%，年均增长19.8%；企业资产总额29万亿元，比2003年增长45.7%，年均增长13.4%；户均资产2.4亿元，比2003年增长84.6%，年均增长22.7%。”

Here’s a simple valuation:

Net Income of all NOE is RMB 1.2 trillion, Market Value =

• RMB 6 trillion @5x P/E
• RMB 12 trillion @10x P/E
• RMB 18 trillion @15x P/E
• RMB 24 trillion @20x P/E

It’s roughly the total market value of listed on Shanghai Stock Exchange or Hong Kong Stock Exchange, or the worth of Mongolia, or any of a list of African countries.

咸评郎咸平

Lang Xianpin (郎咸平) is quite a phenomenon. Sometimes he’s overwhelmingly right, sometimes awfully wrong. Sometimes he contradicts himself, sometimes I don’t know what he’s talking about. But most of the time, he’s entertaining, even shamelessly.

He’s good conceptualize complexity into a language that everybody understands (sometimes on sacrificing the accuracy of the message), and striking the point out repeatedly. I would speculate that if China has a US-like political system, he’d win elections and make a popular congressman.

Here’s a labeling piece.

Send your kids to his school. They would not only find it intriguing but hopefully learn something at the same time.

Our Money OK!

I always think that mutual fund is a good business, not necessarily for investors, but surely for asset managers. Imagine you manage a fund of RMB 100 million for 1% fee, you make a million for sure, no matter how the fund does (though it matters a lot). In a sense, hedge fund is part of the asset management business, except it serves a special group of people on a different incentive plan and under different regulatory requirement.

The money pools can sometimes grow really big – here’s a list [PDF]. I learned that when a fund reaches the billion range, higher-than-normal returns become increasingly challenging, that’s why I found the ‘07 result of the Social Security Fund (SSF) jaw-dropping.

“本报告期末，按成本计算，基金资产总额4396.94亿元，其中：社保基金会直接投资资产2327.54亿元，占比52.94％；委托投资资产2069.40亿元，占比47.06％。按市值计算，基金资产总额5161.52亿元。

[..]本报告期基金已实现收益1129.20亿元，已实现收益率38.93%；本报告期浮动盈利增加额324.30亿元，经营业绩1453.50亿元，以此计算的经营收益率为43.19%。”

What? 43.19% on a multi-billion fund, and 38.93% realized? Given that the stock market shot the light off last year, it’s still a surprise.

Digging further, I found this in the Investment Guidelines.

“第二十八条 划入社保基金的货币资产的投资，按成本计算，应符合下列规定：(一) 银行存款和国债投资的比例不得低于50％。其中，银行存款的比例不得低于10％。在一家银行的存款不得高于社保基金银行存款总额的50％。(二) 企业债、金融债投资的比例不得高于10％。(三) 证券投资基金、股票投资的比例不得高于40％。”

And this is what the fund manager did when the stock market skyrocketed:

“近几年来，社保基金理事会按照社保基金资产配置计划的要求，对股票投资进行了双向的纪律性再平衡操作。从2003年至2005年，社保基金股票占总资产的比例，低于资产配置计划的目标比例，社保基金面临股票投资不足的风险，不利于社保基金长期保值增值。因此，社保基金逐渐增加了股票投资比例。2007年，由于股票市场大幅上涨，社保基金股票投资比例，在进入目标比例区间后一度超过目标比例，较大偏离了资产配置的比例区间，使社保基金整体风险超出资产配置计划要求的风险承受水平，需要通过再平衡操作来降低股票投资比例。因此社保基金进行了纪律性再平衡操作，使股票投资比例回到了资产配置目标区间。”

Thanks to the discipline, my pension safe! Yeah!

Can’t wait to see this year’s balance.

$1 Trillion for Christmas Shopping

You are in suit business. Usually you sell a suit for RMB 1,000 on a cost of RMB 800, so business is good.

One day an importer from Iceland called you for an order of 100 suits, paying ISK 70,000 (Iceland Kroner) per suit, delivery at 6 months later.

You checked the exchange rate: the price equals RMB 1,200 (ISK 10 = RMB 1), enough to compensate delivery and other extra costs. Besides, you're excited to open a new business line in Europe. So you decide to go ahead.

...Upon delivery, ISK depreciated to ISK 20 per RMB 1.

International business brings an additional risk, the currency risk. Unscrupulousness will blow things up, sometimes costly.

That's why I can never understand why there's the Forex trading business for individual investors. I can't see any legitimate purpose beyond pure speculation. And it's leveraged.

China's $1 trillion

This explains why it bogs my mind when looking at China's USD 1 trillion reserve.

It's accumulated over the years when China was running a large and rising trade surplus with the US. The 2007 Current Account (I don't know what it is) stood at around $300 billion, or 7% of China GDP.

The nature and the sheer number makes it a bit larger and more complicated issue than the suit business. It seems both side consider the imbalance more a prob.

Prof. Wu spoke about it recently from the China side (吴敬琏：解决内外失衡的出路在于推进改革，实现增长模式的根本转变). You cannot find a more educating explanation. Warren Buffett also expressed his concern on it.

However, more questions remain. For example, when RMB appreciated 10%, does it mean that the reserve has lost $100 billion in value? Now China is pegging RMB to the dollar, how should China manage the Forex policy in the future?

Most importantly,

How should China spend the Money?

Right now, China is holding a huge amount of US treasury notes, using the US as a bank while trying to figure out how to spend the lump sum.

Chinese economic development has in a sense taken a route of Japan (and I have to say that it's not necessarily a good sign). It may help to take a look at Japan.

Japan was running trade deficits and accumulating foreign reserves. Besides holds a big sum of US treasury notes, it's been in a shopping spree around the world. Overall, it holds $3 trillion in financial assets around the globe, plus a FDI position of an additional $1 trillion. It bought the Rockefeller Center and Columbia Pictures.

Can China do that some day? Will China do that?

Save the Chevy Volt

Last time I checked, the US has 14,947 airports, China has 467; the US has 226,612 km of railways, China has 75,437; the US has 6,465,799 km of roadways, China has 1,930,544 km.

The strange thing is the big airlines (AA, UA, Delta), big auto makers (GM, F and Chrysler, known as the Detroit 3) and Amtrak are all in bad, bad financial shape.

The Detroit 3 are now requesting government assistance. The 3 CEOs last time jetted themselves to the Capitol Hill, seeking $25 billion federal loans collectively. They came again for $34 billion today by driving their brand cars, after selling off their corporate jets and voluntarily reduced their salary to $1 per annum. GM's Rick Wagoner, for example, took the wheel in turn with his staff on the Chevy Volt, the electric car.

Here's GM CFO explaining the situation.

According to a CNN poll, 61% of Americans oppose the automaker bailout. Harmony is never the virtue of American Capitalism. The Dow Jones Industrial Average first appeared in 1896, no wonder that all but one company on the list disappeared over the years.

One more piece of information for your consideration: the Detroit 3 have been for years losing market to the Japanese, Korean and European competitors, who are building transplants in the US. In other words, 61% are willing to risk letting go their national brands and live with Nissan Altima and Volkswagens.

I can't help wondering what if the same incident happening in China? What will the government do, say, to the big state owned enterprises (SOEs) in trouble? How to save all those jobs at stake? How Reform Worked in China?

There's a lot to think about, though what definitely not to do is this.

Lendingclub

Muhammad Yunus won the 2006 Nobel Peace Prize on Micro-financing. (The 2007 one went to Al Gore.)

I talked about in the last post the well-developed consumer credit market, though not necessarily an all-good thing. The credit market, and the capital market in general, is at a flinging but premature stage, because the banking system is a national monopoly. Credits for small and medium business (SMB) are especially lacking.

So I think micro-financing might be a way to go. Here's an introductory piece: What Microfinance Means for China’s Growth.

A funny story (with a kinda cruelty) from the article:

One of the borrowers I talked to was an extremely small man with a hump on his back that makes it difficult for him to do physical labor. When he took out his first micro-loan, he was literally a beggar living on the street. The loan was 300 RMB, less than fifty U.S. dollars. He used the loan to buy a small pig that he kept with him on the street and begged for food for it. When it was available, he performed what limited day labor his disability allowed to pay for scraps. Months passed, and the pig grew. At the end of the year he sold the pig for slaughter. He repaid his loan and made close to 200 RMB besides.

These sort of stories are everywhere across poor countries like India, Bolivia, Honduras.

If you think this kind of model won't work in the U.S., look at this one - Lendingclub, P2P-based microfinancing.

The essence remains the same, except it's been Americanized, with the Internet, Fico scores, Venture Capital, convertible notes, preferred shares, warrants.

If you have some extra cash, you might consider giving it a try.

Stimulate the Domestic Demand

The amazing growth rate of the Chinese economy has partly driven by the export growth of the manufacturing sector. "China is the world factory," as they say. It's done by maintaining a certain level of price discrepancy by a currency peg to the USD, attracting FDI while supplying abundant labor force to the world.

Now the export (around 35% of GDP in '07) is deteriorating responding to the global recession, how to stimulate the domestic demand becomes more important.

It's actually an old topic that's been talked about for years. Chinese economy saves almost 50% of GDP, hence the high investment rate. In comparison, the U.S. saving is 20%. As for the household sector, the Chinese saving rate is 50%, while that of the U.S. is virtually zero.

I have some random thoughts on the disparity of the consumer saving/spending rate between China and the U.S.:

First, there's a cultural thing. US consumers have a passion on shopping for some reason. read Born to Spend, I shop therefore I am for an understanding.

To support it, US has a well developed consumer credit market: the total consumer credit outstanding stands up to $2.6 trillion. It's not only mortgages, but HELOC, car loans, credit card, etc. it allows you to pay installments even for furniture.

Besides, US has a consumer credit system to back it up. Every citizen has a credit score, a historical score keeper for your past credit borrowing and repayment as well as a gorge for creditors' lending decisions.

A sound social safety net (pension, healthcare, unemployment insurance) is also significant. Although the US doesn't carry too much pride in this area - the Viking countries are role models - it should be well developed.

Income inequality counts. I'm not against Grandpa Deng's "Let some get rich first" policy, but some part of Chinese population is really, really poor. If someone brags to you the market size of cell phones in China, saying "if everyone buys a phone, it's a 1.3 billion market." he's bullshitting.

Finally, there's the long-term economic and social stability.

What's not on the list is a booming stock market. If you're a frequent reader of this blog, you know that I have some beef with "十教授上书建议扩大内需把提振股市作为切入点." The last post is here.

Those lame ducks spoke again today:

"是不是能够使用资本市场的提振措施来刺激国内的需求，从1998年的时候刺激房地产，刺激股市，的确对后来的内需起到了很大拉动作用，这在十年前是有成功经验的。10年前已经有过成功经验的情况之下，推出这样一个以刺激股市为内容之一的内需提振政策，我想应该是有点效果的。"

"根据美国经济学家的测算，就是行情好的时候，财富 效应对消费需求具有一个固定的带动系数，比方说，股票涨了100元，肯定其中要有7元或8元钱，拿来去消费。这是一种非常巨大的消费需求支出比例。"

I've never heard of US federal government interfering stock markets. In fact, they hate doing it.

What are you suggesting, professors? A government-led Ponzi Scheme?

I want my digital TV.

Got Milk?

As usual, have to lay down some groundwork first.

Shareholder Value

When you own common stocks of a company, you are an owner of the company. Not that you can sit in the boardroom, but you are a owner.

The CEO, COO, and other C-and-Os works for the company on compensations. Since you own part of the company (no matter how tiny it is), technically those guys work for you. This is called the Principal-Agency relationship, which mean the management of the company have a contract with you to serve your interest by maximizing shareholder value.

That's why the major decisions have to be approved by the board, who's the representative of the shareholders.

牛根生's Bad Luck

牛根生(LaoNiu, thereafter) is my idol. I found him adorable not only because he's one of the most successful self-made entrepreneurs in short supply in China, he's also been around and outspoken, and he pays himself a million RMB salary.

He recently ran into some cash flow problems, caused by melamine. Mengniu, the milk business he built was like a child to him, seeing it on the verge of collapse must've been excruciating. So LaoNiu wrote a long letter, and he cried.

The Chinese business society, a well built harmonious society rides into rescue:

"据牛根生的信件内容，在得知蒙牛所处的窘境后，已经企业家出手相助。牛根生在信件中写到：柳传志连夜召开董事会，48小时之内就将2亿元钱打到了“老牛投资”的账户上；俞敏洪闻讯，火速送来5000万元。傅成玉先生打来电话说，中海油备了2.5亿元，什么时候需要什么时候取。牛根生还提到，田溯宁、江南春、马云、郭广昌、虞峰、王玉锁等人都打来电话，表示随时随地可以伸手援助。"

First of all, I have to say that Chinese big enterprises seems very cash abundant. More appallingly, they spend it as their own money.

I mean, Mengniu is a good business (though profit is a bit thin), LaoNiu is a good manager. So I think he will surely get out of it. But what if, in the worst case, the loan goes bad? Whose loss will it be?

Shareholder value, ring any bells?

Anti-GDP

“[GDP]measures everything, in short, except that which makes life worthwhile.” - Robert F. Kennedy

Suppose you are an ET coming to the Earth taking notes on the national economies, the first question you ask a country would very possibly be "What's your GDP?"

GDP, Gross Domestic Production, is surely one of the most important measures. Nonetheless, like any measures, it has its fallacies. Here's an incomplete list:

• Sustainability - it doesn't account for irreversible destructive behaviors, like deforestation.
• Efficiency - increased efficiency (eg. by reducing health care cost) will actually decrease GDP.
• GDP vs. GNP, or Gross National Production - doesn't measure what's happening across national borders (outsourcing, FDI, etc.)
• Black Market activities, which is a big thing in some Latin American countries, not included
• Income Distribution - it's an aggregate that doesn't represents how income is distributed. Or it doesn't measure inequality.
• Most Importantly, Structure - GDP is a hodge-podge measure that doesn't address the structural problem.

A most illustrative example of the structural problem is the former USSR (our endeared big old brother). After the Soviet Union collapsed, the Russian economy shock-therapied 50% of GDP out of itself, much worse than the Great Depression by the measure of GDP. When asked why, a Soviet scholar said, "We made guns." The USSR economy was 1/3 military related.

Save Mr. Market

If you are in the stock market, I think you should read or should've read this piece:

"[..] you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who [..] appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. [..] If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game. As they say in poker, "If you've been in the game 30 minutes and you don't know who the patsy is, you're the patsy."

- Warren E. Buffett

Value vs. Greater Fool

I learned in the Corporate Finance course that there're two approaches toward the stock market.

One is by fundamental values. Say you wanna save an amount of money. You checked the CD rate: it's 5%. at the same time, you're considering buying the stock of the ABC company: the closing price of the day is $10, and it's paid 6 cents dividend per year for 2 years. You figured that despite the risks, the stock yields more thus is the better option. Congrats! Call yourself a value investor, like Buffett.

The other is the Greater Fool Theory. It says that there's no price too high, as long as you can sell it at an even higher price to the next fool. If this is your thing, and you're confident that you can time the market well, congrats to you, too. This is the index used a thousand times to show the U.S. housing bubble that destroyed the world economy. You'll know when you see it.

Recent events and my plumbing portfolio value made me believe that the GF Theory fits better. But to be a money winner, you have to be a bit of a gambler and an excellent mob psychologist.

Something Weird

Which theory you believe is your choice - it's your money after all. End of story, until I read this: 十教授上书建议扩大内需把提振股市作为切入点. If you own stocks (A or H), it absolutely worth your time reading it.

Some best part below:

"激活股市的关键是锁定当前股市下跌的主要原因，对症下药。中国股市一年来下跌幅度超过了70%，远远超过美国股市近40%的下跌幅度，我们认为我国股市下跌的主因是内因而不是外因；内因的宏观政策原因目前已经解决，而股市自身的“大小非”和“大小限”等制度性缺陷却至今仍未消除。目前股市“大小非”和“大小限”合计高达1.18万亿股，比两市流通股的两倍还要多。大小非的问题不仅极大地改变了沪深股市的供求关系，而且改变了市场的估值体系，即使股市跌到1000点，这些一元钱左右的低成本股票仍然有利可图。无论1.18万亿的限售股在现实中是否会流出，对于投资者而言都是悬在头上的一把“达摩克利斯宝剑”，对于市场信心和流动性都是致命的威胁。"

(老师们好！06至07年间，中国股市上涨300％，美国股市上涨30％。请问，上证指数突破6000点大关的时候，我在习读《马列主义》和《毛选》，“大小非”和“大小限”原地不动，老师们在哪儿混哪？）

“建议国家外汇投资部门和公司把战略重点从美国转到香港，购买当前质优价廉的H股公司，动用500亿美元左右的外汇在香港市场吸纳H股，其意义：(1)化解外汇储备风险；(2)知根知底，风险可控，加上手中的政策工具，可确保国有资本保值增值；(3)围魏救赵，履行国际承诺，进退自如；(4)守住了香港“桥头堡”，就堵住了外部金融危机对A股市场传输恐慌，有利于A股市场稳定。”

（顶！可惜我不炒股，能不能把我那份（30美元左右）还我？我特想筹钱买台数字电视）

In short, their suggestion is: the government should be the Greatest Fool.

Alas, if there's an argument, I guess they're right and I'm wrong. This is a concluding remarks: 尚福林:努力提高各类机构入市资金比例. It's a great article: everything he said sounds so right, only I can't remember a thing of what he said as soon as I closed the link.

Damn, my digital TV!

But still, I don't think I will send my kids to where those profs teach.

4,000,000,000,000

A caveat emptor first: I don't know what I am gotta talk about in this post. But the number is everywhere, so I decided the sheer size of it deserve a post.

Get Some Sense

Since we don't encounter numbers like this one everyday, let's try to make some sense out of it first. Chinese GDP '07 was a bit short of RMB 25 trillion. So the 4 trillion is something like 15% of GDP. Or look at it in another way: if doled out evenly, every citizen will get a good RMB 3,000. Way to go?

It seems we're already in a sense into the New Deal mode, which was an effort to cure the Great Depression. The conclusion? By the judgement of our beloved Party leaders, the situation is kinda really bad out there.

How It's Done

Macro policies has two channels - either monetary (a list of hot actions here) or fiscal (a proposal here). The TARP is targeting to save the financial system. I personally consider the monetary policies more fun (I don't know why).

The point of distinction is, putting aside what they can do, it decides how the money is distributed and who owns what.

According to my read into the 4-trillion plan, it sounds like a fiscal plan: standard op items like infrastructure, education, healthcare, environment, plus tax cut and housing and farmer subsidies. At the same time, monetary policy is of course expansionary (also here).

How It's Funded

I have a limited knowledge of the fiscal in China. However, my guestimation is: the major banks will loan the money to the government, at some interest rate. It'd be amazing to the capitalists, but we nationalized the banks long before the capitalist Europe and U.S.. Take that, capitalism!

Still, it bodes a big time government deficit. The federal spending is around 20% GDP in '06 with a deficit of 1%, and the treasury notes outstanding is RMB 5.2 trillion today.

I guess what I'm saying is, if a major part of the 4 trillion goes fiscal, it's not easy to pull off the funding. It'll be a war-time like public debt issuance.

And I keep thinking about its side effects, though things like this make my head explode..

Let's Wait and See

If you're interested in the early-wave spending, it's here. We'll wait and see for the rest.

Now ponder this: you're head of a government agency, and you're told that your budget have just been doubled, what will your reaction be?

It's tax payers' money. Spend it wisely, comrades.

Banks, Leverage & All That

The reason why the Congress appeared more prudent to bail out the Detroit 3 (I believe they ultimately will, on both economic and political purposes) than the banks is this: the 3's products are cars, which money can buy, while the banks' product is money, per se.

How Bank Makes Money

This is a horribly-simplified version. Suppose you put down $2 million capital to open a bank. Taking $8 million deposit and lending out all $10 million, you got yourself a business model.

Your Balance Sheet reads (in $mil):

Asset	L/E
Loans $10	Deposits $8
	Equity $2

Now Suppose that you pay an annual 5% interest on deposits and collect 10% on Loans, on an operating cost of say $0.2 million (retail spots, headcounts, check clearances, ATMs, call centers, online banking), you make (10*10% - 8*5%) - 0.2 =$0.4 million per year, with a ROE of 20% on your capital.

Income Statement (Tax Free)

Interest Income	$10 mil*10%	$ 1 mil
Interest Exp	$ 8 mil*5%	$ 0.4 mil
Operating Cost		$ 0.2 mil
Net Income		$ 0.4 mil

"Terrific business!" You say. Indeed. And you can make it better by leveraging up more: if you increase the deposits to $18 million and loan out another $10 million, you make (20*10%-18*5%) - 0.2 = $0.9 million. ROE climbs to 45%.

Balance Sheet

Asset	L/E
Loans $20	Deposits $18
	Equity $2

Income Statement

Interest Income	$20 mil*10%	$ 2 mil
Interest Exp	$ 18 mil*5%	$ 0.9 mil
Operating Cost		$ 0.2 mil
Net Income		$ 0.9 mil

2 key money-making numbers here: the leverage (defined as assets/equity, in the latter case, 20/2=10) and interest spread (defined as loan rate-deposit rate = 10% - 5% = 5%).

But the leverage is a two-edge sword. In the first case, if you lose 10% loans, you are halved down to $1 mil. In the second, you're wiped out.

What May Go Wrong?

Forget about tax and operating cost, or even regulatory restrains, asset allocation, and funding (more on these topics later. as I said, it's an over-simplified demo), you have to face three major risks: namely credit risk, interest risk and bank run.

Credit Risk: You wouldn't expect collect all the loans. They go bad for various reasons.

Interest Risk: This one's tricky and comes from the term mismatch of deposit and loan. If you borrow at 5% for a 2-year deposit and lend out at 10% on a 10-year loan, and 2 years later when you wanna roll over the deposit but prevailing interest rate shoots up to 15%, you become 5% under. Sounds unbelievable, but it happened. More later..

Bank Run: Notice you lend all money out, so if a customer wanna withdraw some cash - say $1 mil - you have to sell assets to meet the call. It usually is not a problem, since you can leave some cash in the vault to take care of the daily flow. But it becomes a real problem when, for some reason, a large group of customers come all together - this is called a "bank run." If you couldn't secure additional funding, the only thing to do is to liquidate your assets, often times in a "fire sale." Rarely happening, it's kinda bad. More later..

ABC - A Horror Story

Under the guidance of the other post, I bumped into the 2007 10K of Agricultural Bank of China. It's a big 4.

Balance Sheet:

Income Statement:

Several things to ponder:

• First of all, it's a big bank - RMB 6 trillion in assets. Not one of the biggest, but big, ranked #277 in the good old Fortune 500.
• But, wow! It's levered up to 70X.
• Assets expanded 19%, though not a surprise given the Chinese economy.
• Interest income RMB 200 billion / Assets RMB 6 trillion = 3.3%
• Interest exp RMB 102 billion / Liabilities RMB 5.9 trillion = 1.6%

I know it's a coarse calc, but so far so good, right? Since the Chinese banking industry is a national monopoly and ABC operates mainly locally, interest risk and bank run are not worries. the only potential problem is credit risk, on which the B/S shows a reserve of a bit above 1%, which would be well compensated by the interest spread. It can cushion 3% bad loans assuming a recovery rate of 50%.

Then I caught this in the financial summary:

The last line: Non-performing Loan 23.5%.

What's Is It Leading to?

I have to say I'm amused. I know Chinese banks are different, but this one seems sooooooooo bankrupt. Here's an aftermath.

And ABC keeps doing this. An excerpt as follows.

低迷的农产品市场或迎来一阵春风，消息人士透露，国家将在东北大豆主产区新增加150万吨的国家收储大豆，同时新增国家收储玉米500万吨、水稻750万吨，借此稳定国内大豆、玉米等农产品种植面积，保护农民种植积极性。

另一位业内人士透露，农发行已在11月中旬向中储粮总公司拨付了总额140亿元的大豆国家收储资金，如按照大豆每斤1.85元计算，意味着将收储400万吨，除10月份已收储150万吨，此次将新增收储250万吨，但官方对此消息还没有证实。受此消息影响，大连商品交易所的大豆期货价格已持续数日上涨。

To my knowledge, this was part of exactly how the Japanese economy's gone bad after a boom.

Understandably, it's a quagmire hard to get out, for complicated reasons. Talking about how to fix it is above my pay grade.

But it's not right. It just isn't.

The Great Depression

"Indeed, it could be argued that the ultimate emotional and intellectual consequences of the Great Depression were not finally erased from the mind of humanity until the end of 1980s.."

- Murray N. Rothbard, American's Great Depression

So the Great Depression (which in writing must be capitalized, like "the Internet") has been forgotten until lately, when it's mentioned more frequently in comparison to today's financial/economic tumult.

Personally I consider it a bad analogy - the Great Depression is the mother of all recessions, only some in the 19th century appeared worse. What keeps surprising me is we are getting closer and closer to the early 30's.

This is a slideshow of the brutality during the Great Depression in the United State - though it was a global party.

• The DJ Index snowballed 88% from peak to trough
• GDP halved
• Though Real GDP dropped about 30%.. Due to deflation 
• Industry production halved
• Unemployment shot up to 13 million, or 1/4 of the workforce
• World trade shrank by 2/3
• And, oh, over 10,000 banks failed.

Why did it happen?

The short answer is: it's a myth - after all those misery, nobody knows for sure - though it had something to do with the Gold Standard.

Under the Gold Standard, gold is the (international) money. Paper (or fiat) notes can be exchanged into gold at your wish. And the global trade was paid in gold bullions.

When the market tanked, the hot money ran overseas so that the gold reserve shrank. Consequently, under the fractional banking system, the money supply and hence the aggregate demand dwarfed.

Furthermore, lack of confidence triggered bank runs and bank had to shore up reserve, and it further decreased money supply. It's a vicious circle. This explains the deflation, which jacked up real interest rate, another hard-to-resolve factor that stymied the economy.

Meanwhile, the supply side failed to adapt, perhaps due to the sticky wage (wage level not adjusted with the damped demand).

So it went that the supply didn't meet the demand, and things went wrong, all over the world.

What about now?

I'll bet on "Helicopter Ben" to continue casting the spells to save us, because he's a "Great Depression puff," self-claimed. And he's got the mustache to prove it. It's a telling indicator: see here and here.