No Sympathy for Shadow Banking in China

Andrew Stiles

When China’s stock market bubble burst in 2014 and 2015, many people of China’s labor class lost their life savings. While the government fully reimbursed investors with money in state-owned banks and investment firms, the Chinese Communist Part [CCP] offered no relief to investors purely in the private sector. This is largely due to the rise of shadow banking in China – that is, investment firms that are able to circumvent the strict regulatory standards that most Chinese investment institutions follow. Growth in the number of these new Chinese firms peaked just before 2011, but has drastically declined since 2013.

Over the past few decades, China has rapidly become privatized, and a significant portion of the population runs personal finances through the private sector, as opposed to state-owned banks. This portion of the population has suffered severe financial losses without any form of loss insurance. China has a mandatory retirement age of 50 for women and 60 for men, so citizens who are near or above this age are panicking, now that their nest eggs are gone.

Many of the affected citizens are taking to the streets to demand assistance from the government. Wall Street Journal reporter Chuin-Wei Yap followed a Chinese citizen named Yang Bao Yu, who had lost his $37,000 retirement savings when a Chinese shadow banking firm closed in 2014. Chuin-Wei wrote that the firm had promised returned of up to 18%, which attracted millions of ‘mom and pop’ investors. After losing his retirement savings, Yang Bao Yu joined hundreds of protestors demanding that the government aid them, but the CCP sent police forces to disband the protestors.

As more Chinese citizens realize that the government will not take responsibility for their failed private sector investments, investor confidence in China could continue to destabilize. Chinese regulators are attempting to solve this problem by eliminating shadow banks, and the government has jailed many of the firms’ executives for trying to subvert regulatory standards. The CCP may be able to purge the markets of these shady firms, but this does little to improve the financial security of millions of small investors who were irrevocably damaged when Chinese markets collapsed.

 

Economic Growth Goals in China

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Carlos Fineman

Can China continue its economic growth?  Chinese President Xi Jinping supposedly has the answer. He states that China’s economy is capable of creating 10 million jobs throughout the country this year and more than 50 million before 2020. This increase in employment would allow China to continue to expand its gross domestic product by 6.5% per year in order to accomplish China’s goal of doubling its economy of 2010 by 2020. 

Many economists in China, and around the world, fear that the increase in debt needed to support that level of growth might stimulate China’s economy but at the cost of small businesses.  Government-owned businesses in China have significant advantages over, and are more reliable than, private businesses. However, some public sector jobs at mines and steel mills are in danger of being cut.  Premier Li Keqiang was not definitive about how many individuals the government would lay off, but assures that it will provide as much as $15.3 billion in support funds for these workers.

The central bank of China has outlined several reforms that it must undertake to continue to keep the economy growing. Chinese economists and political observers believe many of these reforms will never be actually implemented; nonetheless, China will begin to institute a tax on banks. One tax in particular is a 6% tax on the interest that a bank collects on loans.

China cannot afford to see a dip in economic growth or a decrease in exports.  If China continues to be forced to cut into its foreign exchange reserves - which have already fallen by as much as a third during the past three months - then production will stagnate and foreign investment will fall.  Many foreign investors are already wary of Chinese monetary policies and the country’s ability to set its own currency value.  Foreign investors will continue to seek other countries in which to invest until they believe that China can produce the same type of growth that it has in the past.

Apple Takes on the Feds

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Emily Han

On December 2nd, 2015, a married couple opened fire in a rented banquet room in San Bernardino, California. In the aftermath, it became clear that the shooting was an act of terrorism, but at the time, no one could have predicted that the situation would lead to a heated dispute between Apple and the FBI.

Following a failed attempt to unlock the attacker’s iPhone, the United States Justice Department demanded that Apple provide the means to get inside the phone. More specifically, the FBI wants Apple to produce an iOS software that will breach key security features on any iPhone.

The software requested by the FBI allows any user to unlock an iPhone in their physical possession. Apple refused this demand almost immediately, and publicly announced that it will never breach the privacy of its customers.

While this may be comforting to many Americans, there are presumably other motivations behind Apple’s decision. Particularly, Apple has a huge business incentive to protect privacy, which has given the Justice Department reason to denounce the company. The Department of Justice believes that Apple’s refusal is “based on its concern for its business model and public brand marketing strategy,” rather than legal rationale.

Apple is the world's largest information technology company by revenue. The company has maintained a high level of brand loyalty, and is the first U.S. company to be valued at over $700 billion U.S. dollars. Privacy and security have become part of its brand, especially internationally, where two-thirds of its nearly $234 billion a year in sales are made.

China has recently become one of Apple’s biggest iPhone markets, second to America. However, this was not easily achieved. It took Apple six years to persuade China Mobile, the country’s largest wireless carrier, to finally sell the iPhone. When taking into account the efforts Apple has put into opening a market in China, as well as the abundant profits it is generating there today, Apple clearly has a huge incentive to keep China in check.

Hence, if Apple were to cooperate with the FBI’s demands, major problems may arise on the global stage. China would certainly be interested in obtaining such software, and Apple would have limited ability to control their use of it. As a brand that attracts many of its customers with its innovative safeguards and ensured privacy, this is a situation they want to avoid.

The major issue that concerns the majority of Americans, however, is their right to privacy. Many citizens have showed their support of Apple’s resistance via social media posts. Apple supporters have even held protests in cities such as San Francisco to demonstrate their approval of the company’s decision.

Chinese Foreign Investment

Carlos Fineman

China has prided itself on its economic development over the last decade. China’s ability to generate a huge amount of foreign currency from international trade has allowed it to be prosperous and elevate its international credibility. In 2015, China held $4 trillion in foreign currency from other countries. In the past, China has been able to pump this money into infrastructure and other building projects. This rapid growth encouraged foreign nations to also invest in these projects. However, in recent months China’s reserves have fallen - approximately one third of its reserves have dissipated in the last three months.

Now, however, China’s economy has begun to slow down, and foreign countries have begun to divert their investments in other countries (e.g. Japan). Other developing countries are beginning to become competitive with China’s cheap labor and export advantages. Foreign countries are now looking to other places as China has become more developed but more expensive to invest in.

All of this is contributing to China’s recent struggle to maintain its currency value. Many people believe that the People’s Bank of China will let the Yuan (also called Renminbi) depreciate instead of taking more out of their reserves. This is crucial to China’s ability to stay competitive in the labor market, and so Chinese officials are limiting Chinese banks from lending Yuan in order to maintain control over the amount of currency in circulation. China has also begun tightening its own foreign investment, hoping to maintain control over the outflow of Yuan.

China has always had a tight control over the valuation of its currency. Until now, it has been able to successfully maintain the Yuan’s value, and encourage the large inflow of foreign investment. Now that this has begun to slow, investors are concerned about how long China can dip into its reserves until it will be forced to devalue its currency, which will further drive away foreign investment.

Full Speed Ahead for India

Henry Whipple

As turmoil continues in China’s economic markets, their position in the center of the global economy is fading, and producers in China’s once booming manufacturing industry are seeking other countries in which to operate - namely India due to its surging economic growth.

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In fact, much of India’s recent success is due to China’s shortcomings across a variety of sectors. While China’s foreign direct investment has decreased by 1.3% from 2014 through 2015, India’s soared upwards by 46% over that same period. Additionally, wages for blue-collar workers in China have skyrocketed over the past decade, and the government’s military displays of force throughout the fall of 2015 have led to concerns that it is too risky a location for business. In contrast, India currently offers both significantly lower wages (a much more attractive prospect for manufacturing companies) as well as a seemingly stable democracy.

Citing the Reserve Bank of India’s policy rate cut last year, PricewaterhouseCooper (PwC) is already forecasting India’s growth for 2016 at 7.7% for the second consecutive year. Increased household consumption and recovering investment across many South Asian nations has helped spur similar progress, as well as falling levels of inflation due to the drop in gasoline prices. Such forecasts along with the competitiveness of these emerging markets have prompted many analysts to consider the possibility of India becoming the world’s next economic power of the 21st century. 

Despite the optimism surrounding India’s robust economic growth in the manufacturing sector, some components of its economy give cause for hesitation. In late 2014 current Prime Minister Narendra Modi launched his “Make in India” campaign, an initiative that focused on almost exclusively on improving infrastructure and creating attractive opportunities for foreign investors and manufacturers. Yet, since that time, little progress has been made outside of major corporations, leaving many inadequate roads, rail lines, and ports unfixed. The country is also dealing with levels of urban air pollution that surpass even those of China, and they will only increase with the continued increase in manufacturing growth.

There are still positive signs for investors and manufacturers looking to operate in India. With Indian officials’ emphasis on the importance of manufacturing in their country, as of late 2015 there are around ten million young workers joining the labor force each year, and the median worker’s age is nearly ten years below that in the United States or China. Both figures suggest that even if India’s soaring economic growth is unsustainable, the nation’s working population will help to put it in a better position. Ultimately, India’s fate might solely depend upon China’s ability to recover from its economic downward spiral. Analysts don’t expect China to relinquish its market share easily, but without a sooner-than-expected recovery, China will have difficulty putting India’s success on hold.