As you know, for the last four years we have been researching China’s state-sponsored theft of crown-jewel intellectual property, through our INVNT/IP Consortium. That work has gone a long way toward educating business and government leaders on the economic model behind this practice, which we have named InfoMercantilism.
What you don’t know, and what we are announcing today: we have also spent the last year in an intensive research project, the purpose of which has been to describe, for the first time, the internal workings of the Chinese national business model. This work has already received praise from leaders in business and government, and we will be making this information available to SNS members soon, but not today.
I am writing to you now because of the extreme instability of the Chinese equity markets, and the apparent lack of understanding in the West of what this may mean for China and the rest of the world.
All of you are aware that the Chinese equity markets, supported by many new entrants who often use margin lending to buy stocks, had risen by as much as 150% in the last year. More recently, these markets are down about 30% since early June. The government has done exactly the opposite of what modern central bankers would recommend, by: a) taking a bubble made larger by margin lending, and increasing such lending; b) shutting off IPOs, c) pressuring individuals and corporations to buy more stocks; and other desperate measures.
The business press seems to be taking two non-exclusive views of all this: one, that what goes up must come down (true), and, two, that this is just one sector in the overall economy, with the other sectors (banking, manufacturing, technology, etc.) quite healthy – so don’t worry.
We have the opposite view. Based on our work, the core Chinese economy is more than fragile, based essentially on non-market, often fraudulent practices and structures, all in a top-down, command-driven context which prevents free markets and trading, rather than enabling them.
From the highest perspective, we call this national model S.A.D., an acronym depicting Steal (IP), Amplify (it domestically), and Dominate (global markets). A second, deeper description is contained in the acronym I.C.B.M., depicting which things are NOT as they seem in the national economy: Innovation is not innovation (it’s theft), Companies are not companies (90% are state-owned, with the rest state-influenced), Banks are not banks (the top ten are state-owned or controlled, and act as politically-driven cash distribution pipelines, with no accountability); and money is not money (the currency is government-manipulated in value).
We don’t intend the use of these acronyms to imply that any of these practices are cute or funny; they represent illegal and illicit financial behaviors which threaten the global economy.
For these, then, and related reasons, we believe that publications such as the Wall St. Journal have exactly the wrong “take” on the current status of China. While the markets are in horrible shape, the other core economic sectors are, too. We suspect that this is exactly why the government has done the opposite of what other central bankers would do: the government knows how fraught the core economic sectors are, and needs not only to avoid relying on their strength in the case of a market collapse but needs the market “goosing” provided by more fake money and bad lending practices to keep the machine going.
Indeed, at a time when the core sectors appear to be collapsing under the weight of too many years of fraud, the past year of rocketing equity markets has seemed to be the sole source of good news and energy in the Chinese economy. Too bad that it, too, by being margin-driven and without real regulatory oversight, is a fake.
In summary, the Chinese markets are not a sole threat, or even the main threat, to the global economy; rather, they are just another sector based on poor accounting and questionable business practices.
If this is true, the world has much more to fear from the overall Chinese economic meltdown, than from its latest equity market gyrations. Since foreign investors have been allowed to hold only about 4% of equities traded (another problem), the effect of this market circus will be almost zero in the sense of foreign investments lost. But to the degree that Chinese investors have come into foreign markets, and Chinese firms listed (often through reverse shell mergers) on foreign markets, the effects could be much larger.
If and when China panics, their investors and companies will panic, and this could result in at least minor bumps in equity markets in the US, Australia, Japan, and the EU. It’s doubtful these would be more than short-term blips.
But the big question, and the one indirectly raised by Chinese equity market performance this week, is now before the world: can fraudulent and illegal business practices at China’s scale damage the global economy?
The answer is certainly, yes.
Does this have anything to do with today’s NYSE interruption? Probably not.
[View Chinese and US Markets I]
[View Chinese and US Markets II]
[View Chinese and US Markets III]