Can the gig economy be considered a “winner” from a strictly economic perspective in the context of the 2020 pandemic?

The sector as a whole most definitely outperformed compare to quite a few other sectors over the past few months but on the other hand, it is imperative to analyze the phenomenon at a more granular level as well before setting a verdict in stone. Let us leave the sector as a whole aside and analyze the gig economy from the perspective of the average individual so as to answer one important question: does it represent the Holy Grail of employment in light of 2020’s developments?

The answer, unfortunately, is a resounding “no” for the simple reason that we get stuck right from the very articulation of the question: what employment, exactly?

The overwhelming majority of gig economy opportunities revolve around the individual being an independent contractor rather than an employee and while things may very well look better when it comes to a strictly revenue-oriented perspective, there is more to a person’s career than revenue, for example:

1. Various benefits such as medical insurance are frequently left to the individual. When things are going well, the fact that one doesn’t have stellar medical insurance may not seem like that significant of a deal-breaker. Many gig economy enthusiasts are more than happy to lock in additional revenue and simply shrug insurance-related concerns off but unfortunately, they risk being only one debilitating accident away from a most unfortunate game-changer
2. Job security being oftentimes precarious and with various moving parts involved. From being banned from one platform or another due to various glitches or growing pains of the company in question to not being able to adapt to gig economy dynamics and standing by as your performance as well as ultimately revenue plummet
3. The situation of many platforms being shaky at best from a legislative perspective and as such, independent contractors (without being the least bit to blame) find themselves one legislative “paradigm shift” away from losing it all. An eloquent example to that effect is represented by ride sharing platforms such as Uber and the constant war they are in with taxi drivers, who were forced to comply with various regulations so as to conduct business and expect independent contractors who work with Uber and other platforms to be on the receiving end of the same treatment
4. Even leaving the legislative volatility dimension aside, “platform security” represents a major factor that generates concern among independent contractors due to the fact that company-specific changes can turn a previously profitable (for the independent contractor) platform into one that is no longer worth it. As such, independent contractors find themselves forced to diversify in many cases (for example switching to newer platforms that entice them with perks such as guaranteed hourly revenue) and while it sounds simple enough in theory, it can turn into a nightmare practically speaking and the overall climate is not necessarily conducive to peace of mind

These are just four examples of aspects that make it clear it is anything but sunshine and rainbows in the gig economy world. On the other hand, it is true that various platforms are trying to make improvements on these fronts by embracing a wide range of solutions, for example offering various deals on necessities such as medical insurance so as to make up for the lack of benefits discussed when mentioning issue #1.

Still, this much is certain: the gig economy is most certainly not for everyone and the limitations of various platforms become more than apparent upon closer reflection. While issues such as the ones we have mentioned are not necessarily deal-breakers for young and flexible individuals, the same cannot be stated about for example someone nearing retirement, someone with pre-existing medical conditions and the list could continue indefinitely.

Is the gig economy scalable?

It depends on how we define “scalable” in the first place.

If the definition is to simply encompass a business model that can end up working for millions upon millions of individuals, the answer is yes. On the other hand, those who state that the gig economy will turn “employment 1.0” into a relic of the past are being over-optimistic… to put it mildly.

This is especially obvious in countries with stark divides between social classes such as China, where there is a world of difference between highly-educated urban citizens who are both willing and able to adapt to the needs of the gig economy on the one hand and on the other hand, an equally significant segment of the population that is barely literate or even functionally illiterate and as such, does not possess the minimum skill set required for gig economy-related opportunities to make sense.

Is the gig economy an excellent option in China as well as elsewhere?

For a certain segment of the population, most definitely but certainly not for everyone due to reasons such as the ones outlined throughout this article and… at the end of the say, simple logic and common sense.

Land doesn’t “disrupt” and there aren’t exactly all that many fancy buzz word-laden presentations involving this asset class, so it seemed that land investments had lost their luster in China and beyond. Fast-forward to the hash realities revealed by the 2020 pandemic-generated economic as well as financial crisis and it has become apparent that from many perspectives, the proverbial emperor had no clothes.

Never before had so much time passed between recessions as after the Great Recession and until the 2020 economic crisis (with a recession pretty much inevitable, with some observers even using the term “depression” due to the aggressive GDP contraction and unemployment combination in certain jurisdictions, including the United States) and as such, decision-makers from all around the world were continuously suggesting that the world was in a “new paradigm” situation, with all of the problems which had made the Great Recession possible in the first place fixed and society ready to move on to its glorious future, a future involving anything from autonomous electric vehicles to space travel.

If anything, 2020 has proven that it might be wise to tone our perception of reality down a notch or two because as all intellectually honest market observers were able to find out, the COVID-19 pandemic revealed that the world’s most developed nations (which were on the front line in light of being densely populated and representing major travel hubs, for obvious reasons) ended up failing miserably on the medical front not due to Earth-shattering high-tech issues but rather due to a severe shortage of the most basic supplies: masks, medical gowns and even essential medicine.

Again, most likely the number one “the emperor has no clothes” moment of the 21st century in terms of severity and needless to say, these developments made investors second-guess many other assumptions that were considered quasi-axiomatic. If the world’s most highly-developed medical systems were caught completely off-guard by the COVID-19 pandemic and so many issues were caused due to shortages which could have easily been avoided, what else is it about society as we know it that we thought ran very smoothly but actually doesn’t?

As such, it was only a matter of time until the economy in general and especially the financial system in particular entered the spotlight. All of a sudden, it seemed that many of the companies which were perceived as being on a surefire way to success no longer looked all that glamorous and the same way, especially in light of the unprecedented monetary as well as fiscal stimulus measures that were taken, asset classes which seemed to have lost their luster all of a sudden became interesting again.

Among them… of course, land.

As trillions upon trillions of dollars were injected into the financial systems as well as “real” economies of country after country, market participants came to a realization that is ultimately a matter of common sense, yet had been all but ignored for years: while central banks can print unlimited quantities of fiat currency, there is no such thing as an entity that can “print” millions of acres of land, for example. Therefore, investor after investor ended up realizing that perhaps gaining at the very least a bit of exposure to this asset class might not be the worst idea in the world.

This, however, is a very slow process.

Expecting land prices to soar after these realizations would be nothing short of naïve, especially given the severely deflationary forces that are in play in light of the fact that economies were forced to essentially shut down for unprecedentedly long periods of time. If anything, threats pertaining to the risk that existing land investors end up being forced to liquidate to cover various expenses outweigh threats pertaining to the risk that there will be a sudden rush to buy land… that is most definitely not how things work.

No matter how logical a certain investment option may seem given a certain context, in our example land in the context of unprecedented monetary as well as fiscal stimulus, it oftentimes takes a fair bit of time until the market catches up. A textbook recent example to that effect was represented by precious metal prices in the immediate aftermath of the Great Recession. Initially, despite the fact that all of the conditions necessary for precious metals to thrive seemed there, prices initially corrected right alongside stock prices until finally heading north, with all-time highs being reached back in 2011.

Why?

Simply because immediately after a financial panic, the market enters full-on survival or deleveraging mode and as such, cash becomes king for a while, with most of the other assets seemingly correlated, as investors are forced to liquidate in a desperate attempt to seek refuge in cash positions. As time passes and the dust settles, with the world gradually wrapping its head around what happened and what the longer-term implications are, things change.

We believe the exact same principle will be valid when it comes to land prices and as such, there is no time like the present to position yourself accordingly by deciding what kind of exposure to this asset class it makes sense to seek and putting together a battle plan. While the ChinaFund.com team specializes in Chinese assets and primarily caters to the needs of clients in this direction, we will happily help with pretty much anything else pertaining to wealth management and should you be in need of assistance, we are only an email or a message away.

Why?

Simply because:

1. When times are good, large corporations are far better positioned than their smaller counterparts with respect to proverbially playing the system so as to maximize rewards. As such, the year 2010 for example (despite not that long having passed since the Great Recession, where corporations have branded themselves as innocent damsels in distress that needed to be saved to survive) brought about records in terms of executive pay and bonuses. The same way, large corporations have been more than happy to use easily obtainable capital so as to engage in share buybacks, with the net result being an increase in share prices that also helped top executives, many of whom are major holders
2. On the tax front, many of the large companies that are seeking bailouts today have been engaging in extreme tax optimization schemes, to the point that let’s say many cruise operators were sailing under the flags of nations such as Lebanon for this very reason. In stark contrast, small businesses cannot exactly afford to hire an army of lawyers/accountants and as such, are left with a comparatively higher tax burden
3. When times are bad, systemically relevant large corporations inevitably end up in the spotlight, with politicians rushing to their rescue for a wide range of reasons, from the lobbying capabilities of said corporations to the fact that a large number of jobs are on the line. Once again in stark contrast, smaller businesses don’t have nearly as large of a presence to end up on the radar of governments and central banks to as great of a degree. Of course, various bailout packages and central banking policies do mention small and medium-sized businesses as well, but how much of that is plain rhetoric and how much actual deployable money on the table?

Needless to say, this status quo is anything but sustainable because it brings about an extreme concentration of anything from market share to wealth. We therefore end up in ironical situations, for example the fact that the Great Recession was to a more than decent extent caused by large banking institutions, yet the policies which followed enabled precisely those large institutions to gobble up smaller ones and end up even more systemically risky.

Leaving mergers and acquisitions aside, there is also the ideological component or, if you will, the fact that “corporatism” as it is called (an environment where large corporations are on the receiving end of a wide range of unfair advantages) attacks the very core of capitalism by leading to a system where entrepreneurship on a granular level is inhibited dramatically. As such, the proverbial dream transitions from becoming a small business owner who starts from scratch and ultimately makes it to becoming a high-paid executive. Furthermore, any failures of this system are quickly labeled failures of capitalism despite the fact that, again, “corporatism” is indeed a better-suited term.

This status quo inevitably leads to significant build-ups of tensions and in the aftermath of the 2020 pandemic, they became more than obvious on two fronts. On the one hand, small businesses demanded to be included in the trillion-dollar bailout programs that emerged all over the world, from China to the European Union and United States. On the other hand, the average individual demanded the same treatment, which led to Universal Basic Income-like programs being implemented, which manifested themselves in the form of $1,200 being granted to eligible individuals in the United States and similar initiatives elsewhere.

The more time passes, the less other players are willing to accept the limitations of corporatism and therefore, the authorities find themselves in yet another binomial predicament. On the one hand, they can decide to turn governments and central banks into perpetual ATMs which stimulate all economic actors on the fiscal side (infrastructure investments, loan guarantees and even money deposited directly into people’s bank accounts) but risk bringing about a generalized loss of confidence in the worldwide currency system altogether, as more and more “printed” money finds its way to the real economy and leads not just to asset price inflation such as the post-Great-Recession injections but consumer price inflation this time around as well. On the other hand, they can decide to do the exact opposite by stepping back and letting the market sort itself out, knowing that they risk about bringing about another 1929-style Great Depression.

This much is certain: in pretty much all jurisdictions, small and medium-sized businesses as well as the average individual are making it clear that the Great Recession approach (heavily favoring large corporations) will no longer be tolerated. Therefore, stimulus programs from all around the world carry much greater weight in this direction and it remains to be seen what the long-term consequences will ultimately be.

For the time being, it is not difficult to observer that the “universal ATM” approach is chosen all over the world. As the dust settles, it once again remains to be seen what the consequences (if any) in terms of confidence loss in the worldwide currency system will be. Ask a libertarian and he will state that the system is doomed. Ask a Keynesian and he is likely to state that the status quo is not at risk. Ask the ChinaFund.com team and we will quickly provide the only honest answer in this context: we don’t know, neither does anyone else and for this reason, the only approach that makes sense revolves around keeping our ear to the ground and reacting to the events which unfold as quickly as possible, with us of course keeping readers and especially clients posted.

Unfortunately, images of Western doctors who were equipped in a manner one would expect from 3rd world doctors abounded, with elite ultra-trained doctors literally using garbage bags sealed with duct tape on top of their footwear, instructed by the CDC to use bandanas and various workarounds in the absence of masks and the list could go on and on.

On the opposite end of the spectrum, Asian healthcare systems were widely praised, from South Korea and Singapore (two very wealthy nations on a per capita basis and as such, it came as no surprise that their healthcare systems fared well), to… you’ve guessed it, China. Unlike the two previously mentioned examples, the Chinese healthcare system isn’t necessarily considered what one would call cutting edge… on the contrary. In fact, there is a ChinaFund.com article which has been dedicated exclusively to analyzing the Chinese healthcare system in a brutally honest manner, from pros which revolve around acknowledging that it has come a long way to cons which make it clear that it still has severe limitations.

However, as always, our team would strongly recommend exercising restraint and understanding that there is a serious propaganda dimension associated with praising China after the COVID-19 episode. Does this mean there aren’t praiseworthy elements involved? Of course not, it simply means reality tends to be more let’s say nuanced, for reasons such as:

1. The fact that many of the problems which popped up across Western healthcare systems were directly related to China and represented supply chain issues rather than anything else. To put it differently, the previously mentioned scenes which described desperate doctors who were adapting to scarcity-oriented realities as best they could were caused by two problems: on the one hand, the fact that the countries in question did not have adequate enough reserves of key essentials (masks, ventilators, protective equipment, etc.) or if you will mistakes made by those in charge in those countries but on the other hand, the fact that affected nations were overly-dependent on Chinese imports (either products or key components) and China failed to deliver at scale… if you will, mistakes made by the countries in question as well as China, which risk costing China quite a bit down the road due to the supply chain complexity reduction trend that risks emerging
2. The fact that some of China’s methods with respect to treating COVID-19 patients were questionable at best from a scientific method perspective, for example the fact that Traditional Chinese Medicine or TCM was widely used despite there not being enough in the way of scientific evidence for that approach to make sense. For more information on why China is aggressively “selling” TCM, we would strongly recommend reading the article we have dedicated to Traditional Chinese Medicine by clicking HERE
3. The fact that Chinese medical products/solutions have proven to be sub-par in many cases, with vast quantities of anything from masks to testing kits being recalled in jurisdictions such as the European Union due to not being of high enough quality when it comes to protective equipment or accuracy when it comes to tests
4. The fact that China’s good results as far as the virus spread containment dimension is concerned are more a function of the aggressive to the point of draconian measures which were imposed (severe lockdowns) than strictly something the healthcare system deserves praise for. To put it differently, China did a remarkable job containing the spread of the virus or preventing rather than having to cure (a highly recommended approach but one which makes it clear that the issue is nuanced)
5. The fact that many observers have raised a proverbial eyebrow when reading the numbers provided by Beijing or, to be more blunt, let’s just say the West has taken these numbers with a grain of salt right from the beginning and as time passed and the intelligence services of various nations stepped in, their research process revealed that indeed, it is very likely that China under-stated its numbers for propaganda purposes
6. The fact that while China did help other nations with anything from expertise to goodwill packages, it was mostly done for propaganda purposes rather than in an effort to provide consistent aid. For example, despite massive propaganda coming from Beijing about how China has helped Italy, European Union nations have provided much more in the way of aid

Please note that the reasons above are not meant to somehow prove that the healthcare system of China has done a disastrous job, not at all. Our goal was simply making it clear that on the one hand, there are still many areas of concern when it comes to Chinese healthcare and on the other hand, that to a more than significant degree, Chinese COVID-19 success stories revolve around containment more so than the healthcare system, around keeping the spread of the virus in check through unprecedentedly aggressive measures or, if you will, around preventing more so than curing.

It remains to be seen what the future will hold in terms of conclusions. For now, this much is certain: when analyzing the extremely complex implications of the COVID-19 pandemic, there is little room for cheerleading and emotion, brutal honesty combined with reason must prevail because otherwise, we end up with political bias that does little more than cloud our judgment and numb our critical thinking capabilities.

Social media companies can grow extremely quickly, bring massive groups of people together and also wield enormous power. Let’s take a quick look at some of the United States’ top social media companies and their relationship with China.

Facebook

About:

When it comes to social media companies, Facebook is the undisputed leader in terms of sheer size and numbers. Facebook currently has about 2.5 billion active members worldwide (as a quick reminder, the global population is just under 8 billion). This means that over 25% of the world is on Facebook. This percentage is probably even larger when you consider the fact that not every person in the world has access to the internet.

Facebook was founded by Mark Zuckerberg while he was at Harvard and he is still very much involved in running the company as well as the (key) decision-making process. Today, they are the center of quite a few political conflicts in the U.S. and have been accused of influencing presidential elections as well as promoting fake news articles.

Facebook and China

Facebook is currently banned in China due to the country’s strict guidelines with respect to controlling what can or can’t be viewed on the internet. China prohibits all content that is not perceived as being in the best interests of the state. Their internet security is so broad (considered to be the most intense in the world) that is has been dubbed “The Great Firewall”.

Facebook was blocked in 2009 after being used for communication by protesters in western China.

It’s not that China has a specific vendetta against Facebook. The Great Firewall prevents quite a few technology companies from operating in China and also prevents their citizens from accessing foreign news sites such as the BBC, The New York Times, and The Wall Street Journal.

Some of the other major technology companies that are banned in China include:

● Google (this includes YouTube, Gmail, Google Play, Google Maps, Google Drive, Hangouts, Blogger, etc.).
● Dropbox
● Slack
● Quora
● Wikipedia
● Vimeo
● Flickr
● Soundcloud

Despite being banned in China, Facebook still makes quite a bit of money from Chinese-based companies. For example, they saw approximately $5 billion in ad revenue from Chinese-based companies in 2018, which would make the country Facebook’s second-largest ad market. If Facebook were to ever bypass the ban by the Chinese government, there is no doubt that their company would thrive.

In 2018, Facebook also attempted to establish a $30 million subsidiary in Hangzhou to incubate start-ups and give advice to local businesses. However, permission to run this start-up was quickly withdrawn.

Instagram

Instagram falls under the umbrella of Facebook-owned companies and is also banned in China. Instagram was blocked in September 2014 during pro-democracy protests in Hong Kong. The main reason cited for the ban was that images of protests in Hong Kong might inspire those in mainland China to engage in similar movements.

Since Instagram is owned by Facebook, they will probably gain access to China at the same time Facebook does (if they’re ever given the green light, that is).

WhatsApp

WhatsApp is another popular Facebook-owned company, although WhatsApp is more of a global app (available in 180 countries). WhatsApp is no small fry itself, even when compared to the Goliath Facebook. They boast that over 1.6 million users log in each month to access their messaging app.

WhatsApp is available in 180 countries but China is not one of them. WhatsApp was blocked from China in September 2017 and is also blocked in Cuba, Syria, Iran, the UAE, North Korea and Qatar. However, some of these bans are applied to Voice Over Internet Protocol services as a whole. This means that the WhatsApp messaging service is allowed, just not their voice calling or video calling.

WhatsApp (and many other social sites) can still be used by the ambitious user who purchases a VPN. A VPN is a virtual private network that allows the user to bypass certain firewall restrictions and access public connections as though they were private.

Twitter

Twitter is also banned in China. Shortly after the anniversary of the Tiananmen Square Protest, Twitter received the ban in June 2009. Twitter, even more than other social media companies, is one that can quickly corral people and get voices heard. This is what the Chinese government wants to avoid.

Despite the ban, Twitter still has an estimated 10 million active users in China, who use VPNs to circumvent the ban. This number is a rough estimate because, due to the private nature of VPNs, it is very hard to track and monitor such activity.

The ban on Twitter includes Twitter-owned Periscope as well.

Snapchat

Continuing the trend, Snapchat is also banned in China. It’s unclear when Snapchat was initially banned in China. However, Snapchat does have a small research and development office in the country to work on Spectacles. These are Snap’s camera-equipped smart sunglasses.

This move was most likely made because the Spectacles are already produced there and the office only has about 20 people.

Reddit

Reddit was also blocked by China in August 2018. Due to the nature of some threads to be politically charged or discuss taboo topics (such as censorship), many Reddit users were surprised that the site hadn’t been banned earlier.

Tumblr

Tumblr was also blocked from China in May 2016, although pages containing politically charged content have been heavily censored in China before then.

Pinterest

Pinterest was blocked in China in March 2017, around the time when China was hosting its annual “Two Sessions” political gathering.

TikTok

It’s worth noting that Chinese companies have had their fair struggle of gaining access to American markets. TikTok is owned by China-based Bytedance and is quickly becoming one of the most popular social media apps in the United States. It is estimated that they currently have about 70 million users there. However, TikTok has been drawing more and more scrutiny from the U.S. government for passing data to the Chinese government. They are now under formal investigation by the FBI and many politicians have manifested their intention of banning them. Although not a social media company, Donald Trump has also barred U.S. companies from working with Huawei through 2021.

Who Isn’t Banned?

Clearly, The Great Firewall does a very effective job of keeping out foreign internet companies. Not only that but it was estimated by Harvard University that as many as 488 million social media posts are fabricated by the Chinese government each year. These posts are pushed out by government employees on Chinese social networking sites in an attempt to divert attention away from sensitive issues (such as political protests in other parts of the country). This shows just how far the government is willing to go to control what is being communicated online.

This leads us to a fairly obvious question: what do Chinese citizens use for social networking and the internet?

The answer is that, because China has stifled so many foreign companies, Chinese-owned companies have been able to thrive. For example:

➢ eCommerce retailers such as Alibaba and JD.com have been able to thrive in the absence of Amazon or eBay

➢ For searching, Chinese internet users turn to Baidu instead of Google

➢ Instead of WhatsApp or Facebook, the apps Tencent, QQ or WeChat allow citizens to connect with each other.

➢ Since Google and YouTube are both banned, Chinese citizens turn to Tudou and Youku

Moving forward, it will be interesting to see if The Great Firewall is ever repealed. If that ever happens, it is sure to have global repercussions, as technology companies will stumble over each other in an attempt to enter the market.

When it comes to social media companies, the total number of users generally drives their profitability and power. The larger the network, the more the company can make from selling ads. Also, due to the social nature of people, the more people that use a platform, the more other people are going to join. People want to do what their friends are doing, in other words.

Due to this, China wields a tremendous amount of potential power (considering the size of the Chinese population). When you take a look at the following picture, we are convinced that U.S. social media companies are chomping at the bit to get into the Chinese market:

We hope that you’ve found this article valuable when it comes to gaining information about social media giants in the United States and their relationship with China. If you’re interested in reading more, please visit the ChinaFund.com blog as well as the “New Here?” section of our website and for a more personalized experience, our consulting services are at your disposal.

They forged online sales through their mobile app to make investors believe that they were more popular than they actually were. We wanted to take a deeper look at what happened in this scandal, how it can impact investors like yourself and how things re likely to unfold moving forward.

Without further ado, let us take a look at Luckin Coffee and what happened when it comes to their recent scandal.

What Is Luckin Coffee?

Luckin Coffee was one of the top coffee brands in China and was drawing comparisons to the global coffee giant Starbucks, with “selling points” such as the fact that:

➢ As of early 2020, the company had about 4,506 stores
➢ They opened their first store in 2017
➢ They are headquartered in Beijing
➢ As of late 2019, they had approximately 8,485 full-time employees and 8,160 part-time employees
➢ Their highest valuation was $2.9 billion (although that has plummeted significantly)

What Happened?

Luckin Coffee was being hailed as the Starbucks of China (a major comparison considering Starbucks has a market cap of about $86 billion, compared to Luckin’s highest valuation of $2.9 billion). They went public last year on the NASDAQ and their shares were surging due to what appeared to be strong sales growth:

➢ They raised almost $600 million through their IPO
➢ They raised another $800 million in January 2020
➢ In April, they announced that $310 million of their sales (about half) for the final three quarters of 2019 were faked
➢ An independent investment firm apparently discovered this by sending 1,500 people to sit in stores and count transactions. Luckin was forced to come forward after this

Apparently, a lot of their orders were taken online via their mobile app, and the company considered technology to be at the core of their business. Luckin had claimed to be disrupting the coffee industry using “artificial intelligence and big data analytics”. These were some of the claims that inspired investors to believe that they could take on a company such as Starbucks on a global scale.

Since the company placed such a high emphasis on technology and most of their sales were going through their mobile app, it was relatively easy for the business to inflate them. However, this scam fell flat after the previously mentioned private investment firm sent people to sit in stores. After that, it became clear that not nearly as many people were coming into stores to pick up orders as Luckin was making it seem.

Directly after the news, the stock plunged 80% and is down nearly 93% for the year 2020. Shortly after the announcement, the Nasdaq decided to delist the company.

What Has Luckin Done?

As this scandal was disclosed in April of 2020, it’s already been several months since the news broke to investors. Since then, Luckin has taken measures to protect their employees, investors and business as a whole. Two of those steps are:

1. Removing CEO Jenny Zhiya Qian and Chief Operating Officer Jian Liu from the company and naming a new CEO (Jinyi Guo). This move is not exactly surprising, as a new face to the company will help with the short-term public relations equation
2. Contemplating liquidation – Liquidation is just the process of pulling the proverbial plug and selling everything possible to cover all debts and repayments to lenders and investors

Right now, there is a lot of damage done to the Luckin Coffee brand and it is still uncertain whether they will continue operating at all. Their shares have been delisted from the NASDAQ and were halted for over a month. They are also facing investigations from several different regulatory bodies in both the U.S. and China.

It’s no understatement to say that the company is in a heap of trouble. However, they were also a fairly large company (despite the fake revenues) and bankruptcy could put almost 16,000 people out of work. This situation will most likely take a while to straighten out and for leadership to determine the best path of action

What Can We Learn From This?

From the perspective of an investor, this is a great example that you always need to be highly critical when examining businesses. It’s not enough to simply read a prospectus or annual report and take it at face value. It’s important to remember that the people who put together investor relations documents have a vested interest in making themselves look as good as possible.

Here are a few good things you can keep in mind when making investment decisions:

1. Perspective – Does what the company says make sense when compared to other companies in their industry? It’s easy to get caught up in investor hype around certain companies but also important to stay grounded and make sure euphoria doesn’t take over
2. Trustworthiness – Do you trust the people who are leading the company? Do they have a track record of dependability?
3. Reason – Is the company shooting too high? Do they have growth projections that are realistic? Or are they wearing rose-colored glasses? In Luckin’s case, they were projecting to open more stores in 2 years than Starbucks has in two decades

Anne Stevenson-Young from J Capital research stated on CNBC that, “It’s a great morality tale. It seems to me that those of us who spent time in China could see from very early on that Luckin was inflating its numbers. Luckin was a company that was terribly interested in memberships and in tokens, and in the visible growth of foot traffic to the stores — but not in actual revenue,”

This is also a good example of how it can pay to take on the advice of experts. If you’re just a standalone investor, you might not have the time or resources to get critical insight into businesses like Luckin Coffee. On the surface, it might seem like a great investment at the time. However, to the insider’s eye, there might be several red flags.

Consulting with an industry professional can save you a lot of time, stress and (most importantly) money. If you have any specific questions regarding investing in China, please don’t hesitate to reach out to our team via email or phone.

Looking Forward

Scandals like what happened with Luckin Coffee are an investor’s worst nightmare. It’s also even worse that it came from a country such as China, where transparency is already questionable. It is widely believed that, in China, the government influences private companies to bend their behavior to the whim of the government. The government has also been known to not be 100% transparent with the rest of the world either.

One example involving a lack of transparency is represented by the recent coronavirus situation, where most scientists believe that China was not fulling releasing the data that they had available.

It also came at a non-ideal time considering the rising tensions between China and the U.S. in regards to the current trade war. Business people on both sides want to engage in trade, as there are plenty of opportunities. However, situations such as the Luckin Coffee debacle destroy trust on both sides and will unfortunately lead to a less open investing environment.

However, there is a bright side to what happened. Now that a scandal like this has occurred on a U.S. exchange, there is a much stronger push for foreign companies to be fully audited before being able to list their shares to the American public. Hopefully, this means that these scandals will become less and less likely. In 5-10 years, a situation like what happened with Luckin Coffee might be considered laughable. To that effect, measures are already being taken.

In fact, the Securities and Exchange Commission is contemplating banning all Chinese companies from listing on U.S. exchanges altogether. This bill received bipartisan support in the Senate and would make it even harder for U.S. investors to get access to Chinese companies. However, it would also protect U.S. investors from being exposed to fraud.

A move like this could also be seen as a win for the Hong Kong stock exchange. Since Chinese companies will no longer be allowed to leave for the larger U.S. exchanges, more will be listed on the Hong Kong exchange. In the short-term, this will be bad for Chinese companies because they won’t be able to raise as much capital during their IPOs. However, in the long-term, this will help Chinese exchanges catch up in size to those in the United States. This will just create an even more bullish investing environment in China.

We hope that you’ve found this article valuable when it comes to understanding what happened with Luckin Coffee and how things might change moving forward. If you’re interested in reading more articles related to China, please visit our blog and/or the “New Here?” section of ChinaFund.com.

And among medical experts, there was a quasi-consensus that social distancing needs to be a universally chosen solution, not the only one of course but let’s call it one of the select few core variables. Our team most definitely agrees with the fact that social distancing is a “necessary evil” and therefore, we would never suggest disregarding the status quo medical advice dimension.

With that stated, we have the less than pleasant task of informing readers as well as clients that as far as the economic dimension is concerned (the one we do specialize in), it matters little whether or not social distancing was medically justified or not. To put it in plain terms, the economy simply does not care about this aspect at all, the only thing it “notices” is that economic activity was essentially shut down globally when it comes to a wide range of key sectors, in a manner which can be considered unprecedented in a globalization context.

Therefore, medically justified or not, the consequences will be the same.

As time passes and the dust settles, the attention of the average citizen inevitably switches from the medical emergency dimension (physical survival, if you will) to the economic one (financial survival), as the general public realizes that once the medical problem has been taken care of (or is on at least on a somewhat predictable/controlled path), it’s time to focus on saving as much as possible economically-speaking.

And, unfortunately, the economic effects are nothing short of devastating.

In a nutshell, many companies which were experiencing an excellent year had no choice but to stand by and notice that economic activity ceased altogether when referring to sectors such as the airline or cruise industry and even if that was not the case, local as well as global supply chain disruptions became a major issue.

Let us imagine a utopic autarky scenario, one which revolves around each nation being able to sustain itself economically without relying in imports for key products/services. Again, this is a utopic scenario and in the real world, things stand quite a bit differently… but for the sake of this example, let us envision the scenario in question.

In such a scenario, for better or worse, recovering after a major economic shutdown situation would be far more straightforward, with the various endogenous factors of production simply switching back to “business mode” after the social distancing measures become thing of the past, in a synchronized effort which leads to a relatively predictable recovery.

But what if the exact opposite is true?

What if, in our current globalization paradigm with extremely complex supply chains, companies from Country A depend on raw materials from Country B, key components from Country C and services from Country D?

As a more practical example, China was the first nation to experience an economic shutdown (especially the Wuhan region) and as economic activity was halted in certain key sectors, businesses from other countries that were dependent on Chinese imports had no choice but to accept the fact that their activity is disrupted as well.

That perhaps only one component they were dependent on China for was, in many cases, enough to make delivering the final product impossible. To make matters worse, perhaps a company from yet another country depends on the final product in question for the production of another good. Needless to say, effects keep reverberating in this manner and to sum it all up, when a major exporter coughs, the entire planet catches a cold.

Adding even more gasoline to an already problematic fire, the other countries themselves ended up experiencing COVID-19 problems of their own, in many cases far worse than those experienced by China (analyzing the reasons behind this is beyond the scope of this article, however) and needless to say, the worldwide economy experienced a shock it was in no way ready for.

The long-term effects of this state of affairs will be keeping economists busy for quite a while and, again: when it comes to the economic implication analysis, medical dimension-related reasoning tops being important altogether. Why or how things unfolded from a medical perspective is of little importance to economists who are analyzing the economic effects of it all because as stated on numerous occasions here at ChinaFund.com: the market is amoral rather than immoral.

To put it differently, the marker is neither inherently good nor bad. Not ethical but not unethical either. Not reasonable but not unreasonable either and the list could go on and on. As such, to be blunt, it simply does not care whether or not extreme measures were necessary from a medical perspective (for what it’s worth, we believe they were)… the consequences are what they are.

And, broadly speaking, these consequences paint the picture of precisely the nightmare scenario our globalized and over-leveraged world would have wanted to avoid. A worldwide economic system which needs perpetual and inevitably credit-fueled growth to maintain the status quo is not exactly “designed” to withstand shocks which lead to a serious cessation of economic activity altogether.

What would happen in the event of an extremely violent global recession or perhaps even depression? Unfortunately, nobody knows and history books offer little in the way of “clues” in light of the fact that never before have conditions similar to today’s presented themselves. As such, while there are without a doubt charlatans who claim they can predict the future, the only thing reasonable and intellectually honest market observers can do is keep their ear to the ground and adapt based on the information the market will continuously provide. Here at ChinaFund.com, we help readers and especially (potential) clients do just that.

This is because banking (loans and credit) is one of the main drivers for economic growth. Additionally, a country’s central bank is usually responsible for monitoring things like the money supply and rates of interest. How a country handles its banking can have repercussions throughout its economy.

In this article, we will dwell a little bit on how the banking system in China works as well as analyze the reforms they’re planning on implementing.

How Central Banking Works

If you’re not familiar, a central bank is defined as a financial institution given privileged control over the production as well as distribution of money and credit for a nation or a group of nations. This essentially means that the central bank is in charge of printing money for a country. They can either add more money to a country’s money supply or take money out of it.

Just like commercial banks lend money to consumers so they can get access to the capital they need, central banks lend money to entire countries or governments. In this way, the policies that a central bank implements can have a ripple effect throughout the country.

1. A central bank is different from regular banks because they alone have the ability to print money. Regular banks are only able to issue liabilities, such as checking deposits. When governments want to start new projects or implement changes, they will often call on the central bank to print the money necessary (this is usually a popular alternative to raising taxes)
2. Another feature of a central bank is its ability to control the country’s interest rate. The national interest rate is the rate at which banks can borrow money from each other. Central banks also influence consumer interest rates. For example, policies that the central bank implements will impact whether you’re able to get a reasonable mortgage on a house

The lower the interest rate, the easier it is for people to receive loans.

Commercial banks (like the one that you use) are responsible for making loans to citizens.

Central banks are responsible for making loans to commercial banks and even governments (although this is just one of their responsibilities).

Let’s take a look at how the United States handles their central banking.

What the U.S. Does

In the United States, the central bank is called the Federal Reserve. The Federal Reserve, despite the official-sounding name, is not actually a government agency and is comprised of 12 regional banks. One of the main reasons that you should be aware of the Federal Reserve and their actions is because they directly impact the interest rate in the United States.

1. When the Federal Reserve lowers interest rates, it can lead to more opportunities for investors because lowering the interest rates makes it easier to get access to a loan. A drop in the interest rate is usually followed by a spike in stock prices
2. However, when the Federal Reserve decides to raise the interest rate, it makes it harder to get access to financing. This will generally lead to slower economic growth
3. As an investor, it’s important to be aware of what the current interest rate is (approximately) and what the Fed’s plans for the future are. This can give you an advantage over other investors

Apart from just controlling the interest rate, the Federal Reserve is responsible for the rate of inflation in the United States. Inflation is the steady increase in the price of goods over time. Essentially, it is the reason that a hamburger in 1950 only cost 20 cents but today, that same hamburger costs $16. As an investor, it’s important to be aware of the inflation rate and always make sure that you are hedging properly so as to protect yourself.

If you were to just keep your cash in a bank account (or, worse yet, stuffed under your mattress) for too long, then your dollars will lose purchasing power. If you’re not careful, inflation can drastically decrease your net worth over time.

Let us now examine China’s central banking system and potential reforms that they might implement.

China’s Banking Reform Explained

China’s central bank is called the People’s Bank Of China. It’s currently one of the largest central banks in the world, with over $3 trillion in foreign exchange reserves. The PBOC was established in 1948, following the communists’ party’s dominance in China. The PBOC is currently responsible for funding public companies along with setting interest rates, regulating financial markets, issuing the Renminbi currency for circulation, regulating interbank lending and monitoring foreign currency exchange.

If you’ve frequented this blog before, then you probably know that the Chinese economy has been growing at breakneck speed over the past 40 years. In 1978, China implemented changes to their economy that allowed it to transition to more of a free market structure. This transition has led to amazing economic growth. However, their banking sector has not had the proper regulations to keep pace. This is important because the banking sector and the economy go hand in hand. Here are just a few manners in which this tends to occur:

➢ The banking sector is responsible for granting loans to consumers to assist them with large purchases (auto loans, mortgages, etc.)

➢ Banks are in charge of lending credit which, above all else, helps grow the economy. Credit is vital because it gives entrepreneurs the resources that they need to create new businesses. Once they’ve built a new business, they have created industries, profits and jobs were there previously was… well, nothing. None of this is possible without the credit offered by the banks to get the ball rolling

➢ Banking, when done irresponsibly, has the capacity to crash other industries. For example, subprime mortgage lending is what led to the 2008 Financial Crisis in the United States

Recently, China’s banking industry was combined into 4 commercial banks which controlled approximately 50% of China’s lending:

1. The Industrial and Commercial Bank of China
2. The Bank of China
3. The Agricultural Bank of China
4. China Construction Bank

Having the industry consolidated into just 4 banks that dominate has stifled competition, which leads to less efficiency and effectiveness. It also means that it’s tougher for smaller and mid-sized companies to get loans because the Big Four banks focus mainly on large state-run organizations.

At the same time that these 4 commercial banks were created, three state-owned policy banks were instituted:

1. Agricultural Development Bank of China (ADBC)
2. China Development Bank (CDB)
3. Export-Import Bank of China (EIBC).

Since 1994, these policy banks functioned with the purpose of handling policy-related lending pertaining to central government plans and each of the three state-owned policy banks has a distinct mission.

Economists have been urging China to reform their banking sector for years now and are afraid that it is a ticking time bomb. The Chinese leadership has pledged that reforms are on the way. Mainly, they agreed that they will be opening up the Chinese banking industry for foreign financial institutions and improving the investment climate.

Coronavirus Updates

The Brookings Institue believes that COVID-19 context represents the perfect time to accelerate China’s transition toward open financial markets.

Now that the majority of China’s citizens are middle-income earners, they will need to depend less on investment and more on innovation and productivity growth. As the pandemic rages through the country, China will inevitably borrow whatever is needed to stave off depression. However, once they’ve weathered the storm, there will be even more of an incentive to institute reforms because risks will increase during this stimulus-heavy time.

A few manners in which China could implement reform would be to:

1. Carefully introduce more flexibility into interest rates and the exchange rate
2. Encourage the creation of more private financial institutions (foreign and domestic) to help diversify lending
3. Turn to capital account liberalization last because this represents the most difficult dimension

It will be interesting to see if and how China reforms their banking infrastructure. It’s an important topic to stay up-to-date on because any potential reforms have the capacity to increase or decrease the investment-related potential of the country.

We hope that you’ve found this article valuable when it comes to understanding the most recent banking reform initiatives associated with this jurisdictions and for further clarifications, our team of experts is at your disposal.

As the crisis spread to other nations, the exact same principle was valid.

In the United States, the Federal Reserve very quickly lowered rates back to zero, ensured that the financial system has more than adequate liquidity (unprecedented repo operations, for example), eliminated reserve requirements and essentially embarked on a journey of Quantitative Easing. Furthermore, in light of the fact that the market was not satisfied with monetary stimulus alone, a lot was done on the fiscal side as well, including yet another record-breaker: $2 trillion in fiscal stimulus, anything from bailing out airline companies to sending the average citizen a $1,200 check.

In the European Union, it is worth noting that as disaster struck, interest rates were already in negative territory but still, the European Central Bank did its best to assure markets that it also plans to be aggressive, with measures including an additional 750 billion EUR in bond purchases. Unfortunately, when it comes to the EU, the fiscal stimulus dimension (and to a lesser extent the monetary one) tend to be trickier in light of the fact that political consensus which is extremely difficult to achieve is required. More often than not, creditor nations such as Germany and the Netherlands are less than eager to contribute to the bailouts that need to take place in debtor nations and as such, just like in the context of the sovereign default fears that took center stage a few years ago, a frustratingly bureaucratic back and forth dance ends up taking place.

But still, even in more complex (in terms of consensus) jurisdictions such as the European Union, nobody dares question the idea that bailouts and unprecedented action are a necessity in light of the fact that, in an effort to combat the COVID-19 spread, drastic containment measures have been implemented, with the end result being that when it comes to a wide range of industries, economic activity essentially ground to a halt.

An important question arises, however: what happens next?

Time and time again, the ChinaFund.com team has made it clear that there is no such thing as an expert who can predict the future and those who claim otherwise are either ignorant or downright charlatans. The best our team or any other team of experts can do is take several steps back and with a cool head, try to assess a wide range of possibilities in a probabilistic manner: instead of trying to determine what WILL happen, the name of the game is trying to figure out what is more LIKELY to happen or, in other words, what the most probable outcome is (with there being no guarantees whatsoever that even highly probable events will unfold).

Right off the bat, we want to make it clear that we are dealing with a deflationary force that can be considered nothing short of crippling. Compared to the economic activity shutdown situation of 2020, the Great Recession seems like a walk in the park and precisely therein lies the problem: the worldwide economy can most definitely not “afford” an extremely severe recession. The Great Recession alone risked crippling the financial system and as such, the authorities in pretty much all jurisdictions do not want to take any chances with the 2020 situation, which risk being quite a bit worse.

Therefore, from bailouts to ultra-dovish monetary policy, all countries are throwing the proverbial kitchen sink at this problem, especially in light of the fact that most economic thinkers with decision-making power tend to lean strongly Keynesian at this point in time. And in terms of prescriptions, Keynesianism makes it rather clear that when economic activity takes a hit, the authorities need to step in so as to create demand.

In our case, this is done by essentially flooding the system with liquidity, to the point of… yes, essentially “printing” the money that is used to bail out companies, help households and generally speaking try to re-ignite the economy. It has been done to combat the Great Recession and inflation has been anything but problematic (on the contrary, it was consistently lower than the authorities had hoped), so what could possibly go wrong?

In our opinion… a lot.

The main difference, this time around, lies in what happens with the money that is “printed” or in other words, whether or not it finds its way to the “real” economy to enough of a degree to generate inflation problems. After the Great Recession, while it is true that trillions were indeed created, a lot of that currency ended up “stuck” as banking system reserves or, at best, found its way to various assets and generated asset price rather than consumer price inflation.

At this point in time, however, “Main Street” demands a much larger piece of the stimulus pie and more likely than not, it’s going to get it. From China to the United States and even European Union, we are and will continue to be dealing with unprecedented injections of liquidity pretty much everywhere: from the banking system to the rest of the financial sector, from ultra-large corporations which will bailed out to households that now demand the same treatment.

As such, much to the surprise of many colleagues who are stuck in a “deflation-only” mindset, the ChinaFund.com team would like to end this article by asking a rhetorical question: does it not make sense, this time around, to dust off our inflation books as well?

As such, China’s decision of banning exports when it came to products such as masks was hardly criticized internationally due to a combination between insufficient demand to cause enough ruckus and… well, human nature, understanding that when a country is in dire straits as was the case with China, it makes sense to prioritize internal consumption.

Unfortunately, a supply chain disaster was looming in light of the fact that while China can produce enough masks to satisfy even ultra-increased internal demand in an epidemic situation (please note that the WHO hadn’t issued the pandemic alert at that point in time), the same cannot be said about pretty much any other country.

Why?

Simply because when it came to their supply chains for this particular merchandise, an important variable was… of course, China. Therefore, companies that sold vital equipment in other nations either imported said equipment from China altogether and even if some were capable of setting up production lines, they still relied on China for essential components. Needless to say, the companies in question ultimately found themselves unable to set things in motion in light of the fact that the supply chain equation was too complex as well as China-dependent.

“Fortunately” (for lack of a better term), China managed to bring its crisis under control by the time case growth in other nations became exponential and at that point, China found itself in a bit of a not just humanitarian but also economic predicament: should it continue banning exports so as to beef up its domestic reserves in the perspective of a second wave of infections or should it do the exact opposite and allow companies to ship to now-desperate foreign customers?

Why is this an economic predicament as well?

Simply because the role of an economist revolves around trying to think not one or two but multiple steps ahead. As the dust starts to settle in other nations as well (most likely in a less straightforward manner than in China, unfortunately, in light of the fact that few other countries can “get away with” imposing risk mitigation measures as strict as the Wuhan ones), pretty much all stakeholders will start thinking about what happened in 2020 with a clear head and especially about the lessons which need to be learned.

What does this have to do with China?

Well… everything, sing arguably the number one lesson will most likely be related to the fact that the proverbial West is excessively dependent on imports from China, at least when it comes to items relevant to national security. To put it differently, wealthy Western nations found themselves with record-breaking amounts of relief mitigation funds at their disposal but not enough supplies to spend the money in question on in light of the fact that there was a major bottleneck issue in China.

As such, a potential decision involving initiatives that have to do with moving away from China when it comes to at least essential products would be strategic more so than political… a matter of common sense, at the end of the day, especially after the harsh lessons 2020 has taught the world. Simply put, for strategic national security reasons, there would be tremendous (no Donald Trump pun intended) pressure on companies all over the world to switch to a more sustainable and especially scalable supply chain model, which:

1. Relies more on domestic raw materials, even if they are more expensive
2. Relies more on domestic manufacturing, even if it is more expensive
3. Revolves to a greater degree on scalability, even if it is a more expensive route compared to the ultra-optimization many companies have engaged in to cut costs, an ultra-optimization model which even generated bottleneck issues in China

Needless to say, China finds itself in a very sensitive situation.

To minimize damage, it has no choice but to try and make it clear that even in extreme scenarios such as the 2020 one, China can manage to export enough in terms of volume to satisfy the ever-increasing international demand for medical supplies (in this particular case). With “try” being the operative word because as empirically proven, this endeavor became pretty much impossible.

As such, willing buyers (even at high prices) found themselves realizing that there were shortages for “the best of the best” in terms of equipment (FFP3 standard masks, for example, which were all but impossible to secure in bulk) and even when it came to more common ones (for example KN95 in China, which can be considered an equivalent to N95 and FFP2, although the medical dimension tends to involve a lot of nuances), there were oftentimes unacceptable bottleneck-generated delays involved. More specifically, medical systems from all around the world weren’t anywhere near prepared enough in terms of the very basics such as masks (more specifically respirators) and protective equipment, let us not even mention more advanced products of which there were shortages, most notably ventilators due to the nature of the disease brought about by this particular virus and theories pertaining to ventilator shortages (which, fortunately, did not pan out, at least thus far).

All in all, despite its best efforts, China found itself unable to scale properly and quickly enough in the context of an avalanche in terms of international demand and applying the precautionary principle at home, given the risk of a second wave of infections. To put it differently, China found itself fighting a battle it is impossible to “win” on all fronts logistically and it will take years for the long-term consequences for 2020’s realities/implications to become apparent. As always, the ChinaFund.com team will follow these developments closely and continue putting its expertise at the disposal of both readers and especially clients.