Author Archives: Yi Deng

China’s New Silk Road Is Worth $62 Billion Dollars

Thesis: China will inject $62 billion dollars of capital to support its “New Silk Road” plans to build infrastructure links to foreign markets. The action will build up Chinese sway in the world.

China plans to build a new silk road, especially for Beijing’s “One Belt, One Road” strategy, which is to build roads, railways, ports, natural gas pipelines and other infrastructure stretching into south and Southeast Asia, the Middle East, and through Central Asia to Europe to create demand for China’s industrial exports. If the plan works well, it will extend Chinese sway across Asia. What’s more, combine with the Beijing’s diplomatic success in securing the support of more than fifty countries for the China-led Asia Infrastructure Investment Bank. I believe Chinese sway will be boosted in the world.

China wants to use its massive foreign exchange reserves to inject $62 billion dollars of capital to two of the three “policy banks”, China Development Bank and Export-Import Bank of China, which are established only for financing infrastructure and other policy priorities within China and abroad. According to the official data, China’s foreign exchange reserves owned $3.7 trillion dollars. 

Obviously, the New Silk Road will help China to expand its export market. Also, more foreign infrastructures that connect with China will add more foreign trade partners to China. On the other side, to inject money for infrastructures will also help to support the slowdown in China’s economy. The reason is that most of the foreign infrastructures will be contracted by Chinese companies.

Another reason for the New Silk Road will boost Chinese sway is that Washington was stepping back from international economic leadership. Some Republicans wish to close the US Export-Import Bank because the funding almost runs out. If the Bank is eliminated, it will stunt growth for small and big business that rely heavily on sales from China. In 2014, air transportation industry hold 45.2% of amount money for the US Export-Import Bank. I believe if the Bank is closed, it will hurt so much on air transportation sector including Boeing and Ryanair.

In conclusion, the New Silk Road plan is a long-term plan. And the “policy banks” are non-commercial banks. It still needs more time to transform them into commercial entities. However, once the New Silk Road plan is on the right track and the developments are sustainable, at that time China will boost its sway not only across the Asia area but also across the world.

World Economy: Potential Output Growth

Thesis: The world potential output growth is slowing down and it may cause week investment, low real and nominal interest rates, and other problems.

The latest World Economic Outlook released by International Monetary Fund (IMF) indicates that the world potential output growth is decreasing. “Output is ‘at potential’ when it does not generate inflationary or deflationary pressure. It is unsustainable if generating enough demand to absorb the output of the economy requires too much borrowing, real rates of interest rates that are far below zero, or both”. (Financial Times) The following charts show that both output expectations and potential output growth are decreasing.

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The charts also show that potential output in the advanced countries, the decline began in the early 2000. The potential output in emerging economies, the decline began after 2009.

I agree with that the decreasing of potential output growth will cause week investment and low real rates of interest rates. Assume there is a balanced economy; people’s savings are equal to the amount of money they want to spend on investments. However, if the potential output growth starts decreasing, which means they will make less money than usual, so the level of desired investment will fall. But the amount that people want to save might not fall, or not by as much. On other words, if people know that they will be poorer in the future, they might want to save more for their future. If that happens, the only way to balance the savings and the amount of money they spend on investment is to decrease the real interest rates. Because savings will earn much less than investments and people will start their investments again.

I do not think the real interest rates will be cut again and again. If the potential output growth keeps decreasing, finally it will cause the savings glut. Then there will be too many problems after that. As the Nobel laureate Paul Krugman notes, “the real exchange rate may just not fall far enough and the economy might suffer from permanent stagnation instead. The rest of the world might be unable to run offsetting deficits sustainably.” The IMF also points that low potential output growth might also cause credit bubbles and unmanageable debt in the long term.

At last, no matter if the low potential growth is temporary or permanent, it will be a crucial problem to solve for the economy. I believe new policy actions such as encouraging innovations, increasing worker productivity, and Demand support through monetary will be released soon in order to boost investment and capital growth.

U.S. Will Eliminate Net Energy Imports by 2030

Thesis: If U.S. eliminates net energy imports, it will finally become a net energy exporter.

Recent years the domestic energy industry is getting prosperous and the efficiency of using energy grows at a very fast speed. According to the report from the Energy Information Administration (EIA), the U.S. could soon export more energy than it imports and it shows the potential to eliminate net energy imports in the 2020 to 2030 timeframe. Therefore, I do agree with that finally U.S. will become a net energy exporter in the future.

Although the energy prices are sharply lower right now than a year ago, the projections in the Annual Energy Outlook 2015 that released by the Energy Information Administration shows U.S. net energy imports will continue decline in the near term. The following figure shows the projections of U.S. net energy imports in six cases.

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As we can see, the overall trend is decreasing, which means the imports will decrease over time. For High Oil and Gas Resource trend, we can see that the quantity of quadrillion Btu of imports goes to negative after around 2018. It means the exports will excess the imports. For a long-term, the trend will reach at around -30 in 2040. I assume if exports excess the imports that much, then there will be no need for the imports.

What ‘s more, I also agree with that the production of energy resources will keep increasing. As American drillers keep pumping, the U.S. will meet more of its own energy needs in the future. The projections in the Annual Energy Outlook 2015 also show that U.S. oil and natural gas production will continue to rise over the next five years. The following figure shows the U.S. total crude oil production in four cases.

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Based on the graph, the projections show that the total crude oil production of U.S. will keep increasing after 2013 and reach at around 17 million barrels per day in 2040. I agree with the projections because I believe the advanced technologies are playing an important role for growing the U.S. energy economy.

In conclusion, I believe in the future the technology for pumping will improve thus the production of crude oil will also increase. As the production of crude oil increases, the imports will finally decrease. And the exports will start excessing the imports. If the production increases at a very fast speed level, I think finally the exports will take place of imports. Therefore, there will be no imports.

China Stock Market: Irrational Exuberance

Thesis: China stock market is irrational exuberance and technology stock has reached its peak.

Chinese stocks are a real standout among the world’s equity markets, having nearly doubled in less than a year. According to Bloomberg, “The Shanghai Composite Index rose for an eighth day on Friday, climbing 1 percent to 3617.32, the highest close since May 2008 and the longest stretch of gains since Oct. 14. The gauge rallied 7.3 percent this week, as transaction volumes soared, margin trading surged to all-time highs and new account openings rebounded to the highest level since December”. The following chart shows a high jump since December 2014.

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What’s more, there are about 700 companies in the Shanghai and Shenzhen stock exchanges with a price to earning ratio of above 100. We have read the book “A Random Walk Down Wall Street”. We understand that if the price-earnings ratio is too high, that mean the earning per share is not giving the right level related to its high stock price. Since we all agree that price to earning ratio above 100 is considered relatively high, so I believe for those companies whose P/E ratios are above 100, their stocks are kind of bubbles. The earning per share does not lead a right way to its stock price. Thus, with the high jump of Shanghai Composite Index, I believe the China stock market is irrational exuberance and has reached its peak.

I think a big warning is because of the growth of Internet technology in China. Recent years the Internet technology grows at a very fast speed. Most of the 700 companies are actually Internet technology stocks. The report shows that the industry is leading gains in China’s $6.9 trillion stock market. Moreover, their valuations have an average 220 times reported profits. That is why they all have a high price to earning ratio for their stocks. The data from the past shows that the technology companies in the U.S. had an average price to earning ratio of 156 when the Nasdaq Composite Index peaked in March 2000. After it reached the peak and the bubble started bursting, the stocks dropped by 50 to 70 percent. I would say what China stock is happening is that the technology bubbles are ready to burst very soon. People are easy to become speculators because of the low cost of violation in stock market. I truly believe that based on these abnormal valuations of technology stocks, the dot-com bubbles will burst very soon and China stock has reached its peak.

Revised 5: Gold And RMB (China’s Yuan) Internationalization

Thesis: Since the price of U.S. dollar increases, the price of gold will decrease. The expansion of the gold market in China will finally increase the purchasing power of the gold. Thus it will push forward the RMB (China’s Yuan) internationalization.

Both the price of gold and China’s currency, RMB (Yuan), are affected by the price of U.S. dollars. As we know the economy of U.S. is recovering, the time for increasing the interest rate is coming soon. Federal Reserve Bank of Kansas City President Esther George mentioned that given the improvements in growth and what appear to be relatively stable prices, it is entirely appropriate to talk about raising rates. She also said, “I am not bothered by where we see inflation today”. The official believes that it would rise back to the 2% target over time. I can say Ms. George truly thinks the economy is getting better from every aspect.

With the U.S. economic recovery is stronger, gold thunder began to weaken. The IMF data shows that the value of gold reserves is still stable and it turns out countries are increased gold reserves. Gold and the dollar’s negative correlation is as high as 80% or even more. So if the dollar’s long-term trend goes high, the gold prices will unlikely go high.

What’s more, compared with other countries, China’s gold reserves account for a very low proportion, which is about 1.6%, according to the World Gold Council. I think China will increase its gold reserves in order for the future competition for gold pricing because more holdings of gold reserves will provide RMB internationalization of weight and help disperse the foreign exchange risk. Also, holdings of gold reserves will increase investor confidence and expand the flow capacity of the China’s currency yuan. Thus I believe increasing the gold reserves is an important step for RMB internationalization.

China’s Central Bank releases the new regulations that the domestic mining companies who have overseas assets can directly import gold. However, there were only 15 banks can import gold before this policy released in China. The new regulations will help expand the gold market in China and the domestic price of gold will drop. Therefore, the fall of the gold prices will increase the purchasing power and people will be encouraged to buy more gold. When people or merchandises have more gold in their hands, the imports will increase and the turnover for the RMB will increase significantly. And all of these will be paving for the RMB internationalization.

Why Does U.S. Participate In Russian Military Parade

Thesis: President Obama decides to send officers to participate in Russian military parade because he might want to find opportunities to ease the relationship between Russia and U.S. and seek helps from Russia to fight against Islamic State. I believe Russia will finally help U.S.

On April 6th, Acting spokesperson Marie Harf mentions that someone will go to Moscow for the 70th anniversary of the victory of the end of World War in Europe. Initially I thought U.S. would not participate in this event because of the relationship between the two countries. However, there are two reasons that make U.S. participate in Russian military parade.

The first one is Czech President Milos Zeman said the U.S. ambassador is unwelcome at his office because of the diplomat’s recent doubts about whether the president’s participation in Russia’s event. In his way, the participation is only to honor the Russian military for its role in the victory over Nazi Germany in World War II. There is nothing about supporting Russian President Putin’s policy. For honoring the people who lost their lives during the war, there is no reason for U.S. not participating.

The second reason is because it is a chance to seek helps from Russia to fight against Islamic State and ease the relationship between U.S. and Russia.

It is known that Russia thinks U.S. is weak on land warfare and Russian military is much better. Since U.S. has stopped the sanctions to Iran in order to get helps to fight against Islamic State, it can use the same way to Russia. More importantly, fight against Islamic State will build positive reputation for Russia. If both of them get benefits from each other, I believe the relationship between the two countries will get better.

In my opinions, I believe Russia will consider the benefit and decide to fight against Islamic State. Although the relationship between Ukraine and Russia is stable right now, and because of the rise of oil price, the economy of Russia starts reviving a little bit. However, I believe it is going to be very slow because of the sanctions. Overall, I could say U.S. fails to rectify Russia. And now U.S. wants to grab a chance to ease their relationship, if the sanctions can be lifted for a while, there is no way for Russia to reject. If Russia decides to fight against Islamic State, the lifting of sanctions will bring a huge growth of its economy and the world will support Russia and its positive reputation will bring more benefits. Therefore I think Russia will help U.S. to fight against Islamic State.

Iran Nuclear Deal Changes The World

Thesis: Since the sanctions to Iran are stopped for a short period, the outcome of Iran nuclear talk will affect the world by balancing the power between Saudi Arabia and Iran and the power between China and U.S.

The decision of Iran nuclear talk finally comes out of the surface. In order to get Iran to stop its nuclear development in return, the decision of Iran nuclear talk is to lift the sanctions to Iran. However, it is contemporary and the final official deal is at the end of June. I believe there are few evidences show that the Iran nuclear deal will change the world by balancing the power between Saudi Arabia and Iran.

Recent years Saudi Arabia has more influences in Mideast than Iran. Because both of them are oil rich countries, the benefit from oil development makes the adversarial relationship. Thus, Saudi Arabia does not want to see the sanctions to Iran are stopped. I remember last year Saudi Arabia mentioned they could afford the global oil demand if Western countries sanction to Iran. However, there is no more sanction now. The export of oil will increase and it is expected to bring Iran $1.6 billion a month in oil income alone. Half year will be around $10 billion. With this money Iran can invest and develop many things to make the country grow stronger. All of these are not what Saudi Arabia wants to see. What’s more, Iran will cut its centrifuges down to around 6104 from 19,000 and there are about 5000 will be operable in the first decade. This means Iran is still able to develop nuclear energy. The power between Saudi Arabia and Iran will be balanced because of the lifting of sanctions.

It is also true that U.S. has more influences than China. The lifting of sanctions will benefit China because China can have more imports and exports with Iran. Without sanctions, Iran will export more oil and the oil price will decrease. Therefore, China will import cheaper oil. The fall of oil price will be a bad news for U.S. In my opinion, if the oil price is in a low level, the price of gas will be low. This will give negative effect on shale oil. Possibly this is not good for U.S. banks because they might have more loan defaults on shale oil. Moreover, does U.S. truly earn its “reputation” back from Islamic State attacks? I think the answer is no. Since there is no reaction from U.S. after several attacks by Islamic State in Europe, U.S. has lost its “reputation”. U.S. wants Iran to help to fight against Islamic State. However, Iran has no reaction on this. Iran will not fight against Islamic State. Thus, U.S. actually does not get anything from the nuclear talk and Iran gets what they want. Therefore, I believe Iran will affect the world after the sanctions are stopped.

Gold And RMB (China’s Yuan) Internationalization

Thesis: Since the price of U.S. dollar increases, the price of gold will decrease. The expansion of the gold market in China will finally increase the purchase power of the gold. Thus it will push forward the RMB (China’s Yuan) internationalization.

Both the price of gold and China’s currency, RMB (Yuan), are affected by the price of U.S. dollars. As we know the economy of U.S. is recovering, the time for increasing the interest rate is coming soon. Federal Reserve Bank of Kansas City President Esther George mentioned that given the improvements in growth and what appear to be relatively stable prices, it is entirely appropriate to talk about raising rates. She also said, “I am not bothered by where we see inflation today”. The official believes that it would rise back to the 2% target over time. I can say Ms. George truly thinks the economy is getting better from every aspect.

It is true that economy begins to recover since 2009. The U.S. government estimates the economic expansion will last for six years. I agree with that and I think the price of U.S. dollars will keep increasing as the economy grows. Since the price of gold has negative relationship to the price of U.S. dollars. Thus I think the price of gold will still decrease.

The decrease of the price of gold will eventually affect the gold market in China. The trade report from the Shanghai Gold Exchange (SGE) shows that year to date withdrawals from the vaults have reached a staggering 561 tons, up 7.3% from 2014, up 33% from 2013. What’s more, China’s Central Bank releases the new policy that the domestic miners who have overseas assets can directly import gold. However, there were only 15 banks can import gold before this policy released in China. Because of the fall of the price of gold, I believe there will be more import and export of gold in the future.

Such a policy clearly shows that China has opened the restriction for importing gold. Moreover, this policy will also expanse the gold market. The price of the gold will drop again in China. Thus people will start purchasing the gold to possess. So I do believe when people or merchandises have more gold in their hands, the imports will increase and the turnover for the RMB (China’s Yuan) will increase significantly. And all of these will be the steps for the RMB internationalization in the future.

U.S. And Iran Nuclear Talks: What Does Each Want To Do?

Thesis: Iran will lose nothing from the nuclear talks with U.S. The U.S. truly needs the help from Iran to fight against IS (Islamic State). Moreover, Iran wants to get economic benefit from the nuclear talks.

The sanctions to Iran’s nuclear development have been 12 years. After Hasan Rouhani became the president of Iran, his goal is trying to build a bridge between U.S. and Iran. He wants to mitigate the sanction by slowing down the nuclear development. However, U.S. did not take any actions. Right now, the reputation of the U.S. has been ruined by the different attacks from Islamic State. In order to fight against Islamic State, the U.S. government needs the helps from Iran. So it forces U.S. to have a nuclear talk with Iran. I believe the outcome of the talk will benefit Iran and there will be no bridge between the two countries.

In Mideast, Iran has become one of the biggest countries. The country has the influences to other countries such as Lebanon, Syria, Afghan, and Iraq. The only thing need for the country is a growth of its economy. So the country wants to lift the sanctions from U.S. and other countries.

U.S. plans to stop the sanctions by different steps in six months. I do not think this plan will work because the economy of Iran will stay as same if sanctions are still there. Also, this oil-rich country has a good economy as usual. Thus, I don’t think the plan will work and I believe the nuclear talk for Iran is kind of indifferent.

What’s more, House Speaker John Boehner says Congress will move to impose new sanctions if they could not make the deal. Again, I believe this kind of threat will not work because U.S. truly needs the help from Iran and there is no other choice to fight against Islamic State. The threat will only break the relationship between the two.

Overall, I do believe U.S. will finally lift the sanctions for six months in order to fight against Islamic State. During the six months, Iran will import more products so that the inflation rate will decrease. More exports will bring the country foreign exchange. Also, Iran will get more money from U.S. to help them to fight against Islamic State. Therefore, if the six months deal is agreed from both sides, Iran will have more capital against U.S. In my opinions, I believe Iran will lose nothing from the nuclear talk and U.S. will still stick the nuclear problem with Iran in the future.

Revised 4: China’s Next Marvelous Market: Transportation WIFI Industry

Thesis: The Transportation WIFI will become a huge market in China in the future.

As the WIFI technology grows rapidly, we might notice that everyone around us is using WIFI. In China, the data shows Chinese netizens are more than 6 hundreds million of people and mobile phone netizens are more than 5 hundreds million of people. There is about 28.6% of mobile phone users use public WIFI to surf on the Internet. I have to say it is really addictive when people use WIFI. Since public WIFI is totally free, I believe that there will be a huge profit opportunity behind the market especially for transportation WIFI. For example, merchandise could add different advertisements on transportation such as WIFI TV on buses, taxies, and subway.

Nowadays the demand of wireless Internet for people is still increasing. More and more merchandises keep going into this commercial WIFI market. I remembered that I could use WIFI while I was on the bus when I was in China last year. It is true that people could do many things by using WIFI. Years ago you can only read news paper on the subway and buses. Now you can have an online chat with your friends anywhere. Lot of people have WIFI mini TVs with them so that they can watch live shows anywhere. Assume you see a WIFI TV on the bus, what do you think? You will be attracted by that thing. There will be battles for them in the future when the transportation WIFI is everywhere in China.

Early this month China’s Premier Li Keqiang brought an idea of “Internet Plus” plan for China.The idea clearly shows that the most important direction of Chinese development will be the technology, especially the Internet. Instead of “Internet Plus” plan, I would say the plan is more like ”Plus Internet” because everything is trying to connect with the Internet.

Evidence shows that the transportation WIFI industry is growing in China. For example, recent years people started using mobile phone apps such as DiDi taxi, an app that has operation just like Uber. People just use their mobile phones with Internet to find the nearest taxi driver to give you a ride. Thus you don’t have to waste your time to call for your taxi and line up on the phone. This is just a start. Obviously this type of money making opportunity will change the taxi system tremendously.

I believe the public transportation plus Internet will make marvelous profits. The data shows that more than 3 hundreds million of people use public buses and subway daily in China. And only Beijing and Shanghai started using the public transportation WIFI. I cannot imagine that what will happen if all cities’ public transportations are using WIFI. What is advertisement? It is designed for attracting more people. A good advertisement could make people remember the product for a long time. Now 3 hundreds million of people watch those advertisements daily. Indeed there is a huge profit opportunity behind the screen. However, there are couple problems that need the government to solve in order to achieve the goal. First is the law enforcement varies by provinces. So the regulation is going to be hard. Second is the fake WIFI. Some of the merchandises use fake WIFI to make black money. People use their mobile phone to connect the WIFI and notice that their bank account number has been stolen. I believe if that still happens, people will avoid connecting any WIFI in public. Therefore, transportation plus Internet will never be effective. So it still needs time for the government to create a safety and effective commercial WIFI market.