We will pay especially close attention to the “paper wealth” dimension because the proverbial West has had to learn the hard way that no, money cannot buy anything. The problem with the West’s handling of the COVID-19 pandemic was most definitely not one of improper financing. On the contrary, wealthy entities such as the United States and European Union countries had all of the “fiat currency” in the world at their disposal and have manifested a clear desire to throw as much money as necessary at the problem. What they didn’t have was masks, medical equipment and other “real world” goods that all of a sudden became unavailable.

Money buys everything… until it doesn’t.

Until enough of a game-changer occurs for major supply chain disruptions to occur, to put it differently.

In our case, these disruptions involved exporters of much-needed medical equipment such as China and India deciding to disallow exports temporarily for national security reasons (in order to satisfy their internal needs) and once exports were eventually allowed, it was too late on the one hand (with the peak being close in many Western nations) and on the other hand, bottleneck issues emerged as soon as exports were back on the table (too much demand, not enough supply nor adequate enough scaling options).

The COVID-19 situation was enough to expose the many fundamental weaknesses of our economic status quo: supply chain complexity issues, inadequate resilience and, we might add, an improper understanding of what “wealth” truly means. In our increasingly complex economic and financial landscape, the basics tend to be buried under ever-increasing layers of complex products.

To illustrate this, let us assume that we have a Chinese factory that produces precisely what we have discussed: medical equipment. This can be considered let’s say a primary form of wealth: a company that has the ability to produce essential equipment.

Things are going reasonably well and it gets listed on a US exchange, with US investors buying shares because they believe in the business model of the company in question. There we have it, a new form of wealth is created on top of primary wealth, let’s call these shares a form of secondary wealth.

It does not end here, however. US investors are not content with simply buying and selling these shares in traditional fashion. As such, ultra-complex derivatives are created on top of these shares, through which “investors” essentially bet on a wide range of different outcomes, with options being the most obvious examples.

Once again, however… there’s more.

We also have hedging requirements, with even more sophisticated investors being interested in “insurance policies” that are created on top of tertiary wealth, insurance options through which they can hedge accordingly. We will, of course, call this quaternary wealth.

As can be seen and as crazy as it may seem, a LOT of let us call it “paper wealth” has been created on top of the “real world” Chinese factory we have mentioned and when times are good, all stakeholders seem content. The factory in question is chugging along nicely, shareholders are happy, derivatives speculators are also content with the wide range of options they have at their disposal and sophisticated hedging enthusiasts share their excitement.

Then a crisis such as the COVID-19 one comes along and all parties involved end up understanding all too well that there is a deep disconnect between primary wealth and the various other forms of wealth that exist. To put it differently, what would US shareholders have done when exports were disallowed in China so as to get much-needed equipment to the US? What about those who traded options associated with the shares in question or hedging enthusiasts?

The short answer is this: absolutely nothing.

The same principle is valid when it comes to other examples of primary wealth, anything from arable land to commodities.

This brings us to the elephant in the room in terms of questions: are those who have their net worth tied up exclusively in secondary wealth actually… well, wealthy? What about tertiary or quaternary wealth holders?

In our view, the key to tackling these questions lies in a meaningful understanding of “realized” as opposed to “unrealized” gains. Imagine that you are currently holding a trading position, for example longing Asset X. The position in question may currently be very profitable but until you close it and book profits, the numbers you see on the screen can be misleading. For example, Asset X can be only one crash away from wiping out all of your unrealized gains.

The same principle is valid when it comes to our discussion surrounding the many different forms of wealth. As such, the ChinaFund.com team would strongly recommend never forgetting the importance of also acquiring primary wealth every now and then, even if only in an effort to “book” profits or if you will, transition from “paper” wealth to “real world” wealth.

No matter what your investing or trading strategies may be and no matter which asset(s) you specialize in, it ultimately all boils down to one word time and time again: diversification. Therein lies the essence of the conclusion we are trying to articulate: please do not make the mistake of considering primary wealth too “old school” for your strategy because we can all but assure you that you will end up regretting the attitude in question down the road. By all means, take advantage of all the other forms of wealth that are available to the best of your ability but never underestimate the importance of “booking” profits in terms of primary wealth. The ChinaFund.com team will, of course, gladly provide assistance with just that.

From China to the United States and from Japan to the EU, “more of the same” is being prescribed with each financial/economic calamity that emerges: lower and lower interest rates, direct injections of liquidity into the financial system (monetary easing) and (especially as of 2020) also direct injections of liquidity into the real economy.

Imagine a house of cards and think of the various developments which have taken place over the years as additional cards being added, with the elephant in the room being represented by the fact that sooner or later, the entire structure will most likely collapse. Will the post-2020 measures end up facilitating just that? Realistically speaking, as any intellectually honest economist can confirm, nobody knows and it ultimately depends on whether or not the market keeps accepting the status quo by maintaining its confidence in today’s currency framework.

After the Dot-Com Bubble burst, the market accepted the then-unprecedented measures implemented by central banking decision makers such as Fed Chairman Alan Greenspan, who lowered interest rates all the way down to 1% in the United States. The same way, markets accepted the even higher dose of “medicine” prescribed in the aftermath of the Great Recession, with interest rates further reduced (even into negative territory in some cases) and furthermore, a new central banking weapon added to the arsenal: direct injections of liquidity into the financial system.

Fast-forward to 2020 and once again, the market seems to be demanding an even more aggressive dose of medicine. Lowering interest rates is no longer enough and the same principle is valid with respect to injections of capital into the financial system… in 2020 and beyond, Main Street (small business owners, the average employee, etc.) wants a piece of the pie as well and governments along with central banks are left with no choice but to comply.

How have they done that? Through measures which result in not just the financial system but also the “real” economy receiving ample liquidity, from small business loan guarantees in the hundreds upon hundreds of billions of dollars to (arguably) the beginnings of Universal Basic Income for the average person, with individuals receiving cash payments over in the United States in an effort to help them cope with the economic consequences of the very aggressive quarantine measures which have been implemented, measures which essentially resulted in a complete shutdown when it comes to various key sectors.

An important question arises: will the market be satisfied with the post-2020 status quo?

Pretty much everything depends on the answer to this question because if the market will decide that no, it has nothing against these measures, we are good to go for yet another cycle. At the end of the day, whether we are referring to anything from currencies to society as we know it, far more than meets the eye revolves around one key term: confidence.

As long as confidence in the status quo remains intact and individuals keep being content with the idea of being paid for their time, products and/or services through the current monetary vehicles, absolutely nothing has to change. But what if, eventually, the market decides that enough is enough? That so much money keeps being thrown at whichever problems pop up that it is time to think about just how sustainable this modus operandi is?

In such situations, aggressive “paradigm shifts” are to be expected, with investment trends being quickly altered. To understand these trends, it is important not to allow yourself to be so caught up with whichever bias fuels your current narrative that you miss the big picture that is right in front of you. For example, like a gold investor who believes the end of fiat currencies is near and that the only asset that can protect them is gold… that is most definitely not true.

It’s not that gold isn’t a logical hedge in such situations but rather the fact that by choosing to be a one-trick pony, you are missing the big picture, which is not the allure of gold but rather the fact that fiat currencies have lost their luster. Pun intended. As such, investors quickly flock toward… well, anything else, especially assets that are considered scarce. Gold is indeed such an example but let us not forget about anything from real estate to bitcoin.

While individuals who invest exclusively in gold will most likely do considerably better than those who remain passive, they tend to under-perform in the long run compared to genuinely diversified market participants. There is a reason why we dig so deep here at ChinaFund.com and that reason does not revolve around us loving to hear ourselves speak or see ourselves type. Instead, the name of the game is meaningfully “getting” the realities that are shaping up so that you can be not one but multiple steps ahead of other investors. Predicting the future is impossible, as we keep explaining time and time again, but being prepared is anything but. Not only is preparing through a smart diversification strategy possible, it is downright mandatory, especially in key situations which risk bringing about one of the greatest transfers of wealth in the history of mankind. For reasons that pertain to pragmatism more so than hyperbole, the 2020 scenario might indeed facilitate just that… ignore this threat at your peril.

A lot of investors who live by leverage… well, die by leverage.

More specifically, leverage comes with its share of trade-offs, with them for the most part revolving around the idea that while profits are or better stated can be amplified via leverage, the exact same principle is valid with respect to losses. The icing on the cake, in the most negative sense imaginable, is the fact that unlike with simply buying and holding, leveraged trading comes with the very real and palpable risk of liquidation.

Let us assume an investor buys one of the several NASDAQ-listed Chinese company shares without leverage. Is losing everything he invested possible in the scenario in question? Yes, but it represents a remarkably low-probability event. Of course it can happen if let’s say the company in question goes bankrupt but in the absence of a genuinely “end of the world as we know it” scenario for the company in question, losing it all is quite unlikely.

This leads to many “rags to riches” success stories. For example, back in the day, Amazon shares went from $100 during the peak of the Dot-Com Bubble to around $7 each after it burst. In other words, an investor who bought at the absolute worst possible moment during the bubble and was equally unlucky when selling would have only received 7% of the money he allocated back. Those who didn’t sell because they believed in the long-term potential of the company, however, didn’t realize any losses and on the contrary, even the unluckiest of investors when it came to the acquisition timing dimension (buying during the top of the Dot-Com Bubble, for example) did remarkably well if they held up until this point.

That changes dramatically when using leverage.

To remain in Amazon territory, the person in our example, who bought shares at the worst possible time, would have been liquidated even with ultra-low 2x leverage well before the $7 price was hit. Let’s not even talk about those who engage in leveraged trading we can consider in gambling territory and who are liquidated by movements in the opposite direction of even 1% or less.

Isn’t it true that those who backed up the truck and bought at $7 were on the receiving end of novel-worthy gains? Of course, just like those who bought bitcoin for literally pennies ended up becoming extremely wealthy or just like those who “invested” in a lottery ticket and won did the same. But such scenarios are such extreme low-probability events that taking them into consideration when making choices that pertain to your career as a trader is anything but recommended. To put it differently, examples involving individuals who “invested” their one-month earnings in lottery tickets or equivalents and won surely exist. Does that mean investing your one-month earnings that way represents a strategy worth taking into consideration? Of course not.

How much leverage, if any, you use should depend on the volatility of the asset in question. Those who trade “boring” forex pairs are far safer when using leverage than those trading let’s say cryptocurrencies. For example, even the proverbial king of cryptocurrencies, bitcoin, ended up going up by 40% within roughly 24 hours as of the 27th of October 2019. The same way, it collapsed by more than 50% within the same 24-hour period as of the 20th of March 2020. Needless to say, using serious leverage when trading even the “safest” of cryptocurrencies tends to be closer to gambling than investing.

The volatility differences from asset class to asset class and asset to asset can be so wild that the ChinaFund.com team can most definitely not provide a “one size fits all” answer with respect to questions involving how much leverage should be used or even if leverage should be used at all. It ultimately all depends on the nature of the asset(s) you are interested in trading as well as on your risk appetite as a trader.

Are Chinese assets volatile?

Once again, the answer is that… well, it depends.

First and foremost, it depends on which Chinese asset you are referring to, as they tend to let’s say come in all shapes and sizes. As such, a Chinese asset that trades on a legitimate exchange such as the NASDAQ will likely be less volatile than one you buy/sell via obscure OTC exchanges. Furthermore, a lot also depends on your frame of reference or, if you will, what you are comparing the Chinese asset you are interested in to. Compare the overwhelming majority of Chinese assets to one of the literally thousands upon thousands of random low-liquidity altcoins (bitcoin alternatives, as the name suggests) that exist and the Chinese assets in question will most likely seem like the epitome of safety. Compare them to “the best of the best” in terms of US safe haven assets and the exact opposite conclusion will be drawn. Again, it all depends on your frame of reference.

As a conclusion, leverage is yet another example of something that is neither good nor bad, just like a knife isn’t inherently good/bad either. It is simply a tool and as such, it all depends on how it is used. A knife can be used by a surgeon to save a life or by a criminal to take one and the exact principle is valid with respect to leverage. Is it worth having in your arsenal as a Chinese asset trader? Most definitely but “prudence” is the operative word!

If everyone else follows suit, would we not risk ending up with a fairly ironic status quo, a status quo which revolves around there being more capitalism in China than in the West? In other words, socialism with Chinese characteristics might no longer seem all that much like socialism when compared to what is shaping up to be a new paradigm among Western nations… is this not a distinct possibility?

As far as both questions are concerned, the answer is a nuanced yes.

Nuanced because China itself is most definitely no stranger to the idea of aggressive monetary as well as fiscal policy. As the first country hit by what ended up being a COVID-19 pandemic, the Chinese authorities did not hesitate when it came to providing adequate liquidity on all fronts. As such, it would be a bit hypocritical to paint a picture of China somehow being this ultra-conservative (from a monetary/fiscal policy perspective) entity, in contrast to the “economically decadent” West that is in the middle of an unprecedented (in terms of scale) currency debasement scenario.

That is most definitely not the case.

In fact, pretty much all countries have embarked on a journey involving what used to be considered ultra-aggressive monetary policy several years ago and in the aftermath of the 2020 pandemic, the market demanded strong fiscal stimulus as well. How did it demand this? Simply by not adequately responding to “central banking only” solutions such as lowering interest rates and monetary easing or, if you will, making it clear that stronger medicine than what was prescribed after the Great Recession would be necessary this time around.

Therefore, the correct question is most definitely not “Which countries are more responsible?” but rather “Which countries are less responsible than others?“ because therein lies the previously mentioned nuance: figuring out what the lesser of all evils is in an unprecedented scenario involving what used to be considered nothing short of monetary as well as fiscal recklessness.

Taking a few steps back and referring to one of the US policy choices, more specifically the idea of mailing $1,200 checks to the average individual in an effort to help people get through tough times and the cessation of economic activity when it comes to a wide range of sectors, it is time to spot the elephant in the room: the fact that the first steps toward a type of Universal Basic Income are being made.

Of course, the idea behind the UBI concept revolves around giving citizens a “bare minimum” amount of money each month without asking for anything in return, with the main hope being that if we as a society enable the average individual to stop worrying about meeting basic necessities, we empower people and encourage them to channel energies toward more and more positive rather than strictly subsistence-oriented activities.

Again: the main idea revolves around not just a “one-off” check being sent to everyone but rather about making this habit a permanent policy choice. We are most definitely not there yet but at this point in time, pretty much any reasonable market observer can notice a pattern. For example, here is the US one: lowering interest rates to 1% to combat the effects of the Dot-Com Bubble bursting, lowering interest rates to zero and injecting as much as $85 billion per month into the financial sector to combat the effects of the Great Recession and at this point, lowering interest rates to zero and injecting liquidity in the financial sector as well as “real” economy to combat the effects of the 2020 pandemic.

In the European Union and Japan, interest rates even went negative after the Great Recession but despite country-to-country differences in terms of manifestation, the overall trend should be crystal-clear: with each economic calamity, the market demands an ever-increasing “dose” of stimulus and therefore, a more than compelling case could be made that it is only a matter of time until UBI-like measures become the norm.

It remains to be seen what the implications will be as far as China is concerned.

On the one hand, it can choose to join the proverbial party of countries out-bidding one another in terms of aggressive policy choices in light of the fact that there is ample “everyone is doing it” as well as “we didn’t start it” justification to go around. On the other hand, it can also attempt to brand itself as the lesser of all evils, not necessarily by implementing hawkish policies (it is very unlikely that countries would risk embarking on such a contrarian journey) but rather by attempting to always be one step behind in terms of aggressiveness.

Needless to say, we are living in unprecedented times. Had an economist even suggested the idea that an UBI-like measure would be implemented by the right-leaning Donald Trump Republican administration, the person in question would have risked nothing short of public ridicule. Yet here we are in 2020, with the unprecedented being essentially embraced as status quo and fear determining everyone from Keynesians to libertarians to look toward the authorities for salvation. To put it differently, measures consistent with the Bernie Sanders or AOC manner of seeing things a couple of years ago are considered mainstream in the Republican camp and for this reason only if nothing else, perhaps the most common sense conclusion would be this: in 2020 and beyond, it might not be the worst idea in the world to expect the unexpected and hedge accordingly, as complex as the endeavor may seem. Of course and as always, the ChinaFund.com team is here to help with just that.

While few market observers are surprised that the authorities are doing “more of the same” (monetary and fiscal stimulus) but in stronger doses and from Keynesian to even libertarian thinkers, most economists are encouraging stimulus at this point in time, there is a looming question which cannot and should not be ignored: are we not transitioning to an age of so-called corporate socialism?

In other words, is this not an extreme form of moral hazard (a topic which has been covered through a dedicated article, one we encourage you to read by clicking HERE)?

First of all, it makes sense to explain the concept of corporate socialism and to put it in plastic terms, think of it as essentially a system that enables corporations and those that run them to take advantage of the best of both worlds: when times are good, they take advantage of capitalism and reap impressive rewards and when things turn sour, “socialism for corporations” takes over and they are rescued. The privatization of profits and socialization of losses, in other words.

A popular counter-argument tends to be this: but aren’t households bailed out as well?

While it is true that for example the $2 trillion US bipartisan fiscal stimulus package also includes assistance to the average person, with the government even mailing checks of $1,200 per citizen, a valid case could be made that such “individual-level bailouts” are more of a short-term buffer until economic activity resumes than an actual bailout, especially in light of the fact that the average US citizen tends to be too indebted to withstand even short-term status quo shocks.

The same cannot be stated about corporate bailouts.

To illustrate this and why “corporate socialism” tends to be extremely frustrating to come to terms with for the average citizen, let us see things from the perspective of a top executive. When the economy was going well, these companies invested copious amounts of capital in share buybacks, with the end result being impressive share price growth. Needless to say, executives who usually sit on a fair number of shares themselves were significant beneficiaries of this state of affairs. Add impressive salaries and remarkably high bonuses to the mix and we have a scenario which revolves around the enrichment of a select few despite them not having enough skin in the game.

The “not enough skin in the game” component becomes obvious when we move on to the post-pandemic measures, which involve the same executives begging for bailouts and governments all around the world complying. Did these bailouts come with strings attached? Yes, but only marginally so, for example corporate pay/bonus caps which lead to scenarios which (at best) involved the executives in question earning slightly less than before, with them keeping absolutely everything they accumulated when times were good and many being “in the know” to enough of a degree to have sold their shares prior to the crash.

Needless to say, things seem anything but directly proportionate when comparing the effects of bailouts on the average individual and on the proverbial one percent. During times of crisis, few people pay enough attention to this dimension in light of the fact that the average market participant tends to be in survival rather than contemplation mode.

After the dust settles, however, frustrations inevitably build up.

In the aftermath of the Great Recession, these frustrations led to movements such as the “Occupy Wall Street” one but which eventually fizzled out. However, lingering anger remained, anger which led to increased polarization across the board. In the United States for example, this anger led to the ascension to the spotlight of populist candidates on the right (Donald Trump, who became the President of the United States in 2016 and is up for re-election in 2020) as well as left (Bernie Sanders, who ultimately lost the internal competition to Hillary Clinton in 2016 and to Joe Biden in 2020).

Make no mistake: more or less unintended consequences abound.

The post-Great-Recession measures ultimately benefited wealthy asset-rich individuals much more so than the average household and in the post-2020 framework, the same principle will most likely continue being valid and even exacerbated.

Will there be another but this time more robust “Occupy Wall Street” movement in the US and equivalents elsewhere?

Most likely.

We are already seeing examples to this effect, with widespread protests despite the anything but under control COVID-19 situation in the United States.

Will politicians on the even more populist side emerge?

Perhaps.

As always, the ChinaFund.com team never tries to predict the future and on the contrary, makes it clear time and time again that human beings tend to be remarkably terrible at that. Instead, we firmly believe in being thorough on a risk factor to risk factor basis. In other words, unlike many of our colleagues, we choose not to remain stuck in short-term narratives and on the contrary, always try to analyze current events with the big picture in mind.

This tends to be a very difficult endeavor when the entire world is in full-on panic mode but for those interested in not just wealth preservation but also wealth enhancement, there is simply no other way. In our opinion, those who underestimate the seriousness of the corporate socialism situation we find ourselves in and the severity of its long(er)-term manifestations are making a grave risk management mistake. In the spirit of helping (potential) clients avoid just that, the ChinaFund.com team is only a quick message or email away and will gladly do its best to be of assistance with respect to putting together a robust risk analysis as well as management framework.

How countries handled (or are handling) the outbreak of this pandemic will pave the way for their economies for the next few decades. Some countries have performed better and have already been able to open up, while others are still counting cases. If you’re an investor, you’re probably wondering how this virus is impacting the potential to invest in a country in the years ahead.

This is our coronavirus economic prediction for China and what it will mean for their country for years to come.

Wuhan, China

Before we get started, it’s important to note that the coronavirus poses two threats to countries. First, there is the public health threat that people will get sick from a disease which could potentially be fatal if they don’t receive the proper treatment. Second, there is the economic threat that is brought on by orders from the government for citizens to stay at home and for businesses to shut down (temporarily). These measures were put in place to slow the spread of the virus.

If the health crisis isn’t dealt with effectively, then it could have lasting effects on the economy of a country. However, the longer that people are forced to quarantine and stay home, the more monetary assistance they will need. This is the dilemma that most countries are dealing with. Let’s take a look at the place where the virus is widely considered to have started: Wuhan, China.

Being ground zero for a disease that turned into a global pandemic is never a good thing. The fact that the virus started in China is not a very good sign for their economic recovery because it means that the virus is very prevalent there. This could potentially mean more people infected and longer recovery times. However, at this stage in the spread of the virus, it’s almost irrelevant where the virus started because it’s so widespread and has reached almost all edges of the map.

While China being ground zero isn’t a good thing by any means, at this point it probably doesn’t really matter.

Let us now take a look at what China has reported about the virus up to this point (this article was written on July 6th) and try to put the data under the proverbial microscope.

What China Has Reported

According to the most recent data, China has reported:

➢ 83,557 cases
➢ 4,634 deaths
➢ 78, 518 recoveries

However, the main thinking is that China has not been 100% transparent in their data related to the coronavirus and may have either fabricated or omitted key numbers. One of the main reasons for the skepticism is that the numbers and statistics reported fall outside recognized and accepted medical norms.

There were simply too many cases reported at once and the drop off was too sudden to be believable. They have drawn criticism from the WHO as well as other countries for not releasing pressing information related to the virus. Donald Trump, in particular, has been vocal that China suppressed data which could have helped the U.S. better prepare to fight the pandemic.

The following graph from Google shows the reported stats from China:

The WHO (World Health Organization) has also claimed that they had difficulty getting information from China. At first, it seemed as though China was doing a good job of handling the virus, but later they mentioned that they felt like they were getting critical information just 15 minutes before that same information was appearing on public television in China. Considering the fact that they were trying to alert other countries of the most recent information on the virus and create a global awareness and response plan, they felt that they should have received this information sooner. It was almost as though China waited until the last possible moment to release valuable information and, instead, chose to sit on this information for up to a week at a time.

Refused to Release an Economic Prediction

Recently, China shocked the economic and business world by refusing to release an economic prediction for 2020. This broke a precedent that has been around for years and is a sign that they are having more trouble jumpstarting their economy than they might be letting on. This doesn’t exactly mesh with their reports that they have done an outstanding job containing the virus.

There are two ways to interpret this, from the eyes of a foreign investor:

1. Uncertainty – The leadership in China is just very, very uncertain as to how things are going to play out in terms of their economic response to the coronavirus. This also implies that things are still “playing out”, meaning that they aren’t out of the woods yet and there is still a risk of a second wave of the virus
2. They’re hiding something – Either China’s leadership is truly uncertain about how things will go and doesn’t want to speak too soon OR they already have their own predictions on how bad it will be and simply don’t want to share them with the world. If this is the case, then foreign investors can take this lack of news as very bad news… no news is bad news, in other words

One thing is certain: China’s refusal to release an economic prediction for 2020 is definitely not good news. If they were really feeling confident in where they were in terms of handling the virus, then they would be eager to share that information with the world. Instead, they are essentially dodging the question and trying to change the subject.

Here’s our interpretation of what’s probably going on with China.

How We Can Interpret This

First, here are a few of the things that the Chinese government is doing to help the country rebound. They were cautious of just writing checks to their citizens (as was done in the United States and other countries) and instead have opted for these measures:

➢ The government has decided to cut the cost of Internet this year by 15%

➢ The government will increase its subsidies for basic medical insurance for some residents but only by a little over $4 a year per person

➢ They’re going to stick by their initiative to eradicate rural poverty by the end of the year, which is very reassuring news

➢ They reassured domestic and foreign investors that China is still committed to shifting away from central planning toward a greater reliance on free markets

➢ They reaffirmed China’s commitment to the phase 1 trade agreement with the United States.

Here’s what we think: China is still China. They’re on pace to be the world’s largest economy by 2030 and although the coronavirus is definitely causing them more trouble than they’re letting on, eventually they will rebound. It’s a little bit like a massive steam engine that gets caught in a snowstorm. They might get slowed up a little bit with all of the snow on the tracks but eventually, they will be out of the storm and back to full speed. It’s really just a matter of when they will return to full speed, not if.

The measures listed above (specifically the fact that they emphasized that they will still be trending towards free markets as well as honoring Phase One of the trade deal) are very reassuring. However, just like the lack of transparency they showed when reporting coronavirus stats, China has a history of always putting their best interests first. We wouldn’t be surprised if they said what people wanted to hear at the moment, only to change direction later on.

That being stated, we are still very bullish on the direction the Chinese economy is heading toward. The coronavirus presents a disruptive development that nobody saw coming. However, by 2025-2030, the coronavirus will likely be a distant memory instead of something that still threatens to shut down businesses. It’s also worth mentioning that other countries still have to deal with the virus as well. Particularly, the United States is still struggling to contain the spread of COVID-19. Going forward, this is something that will be present for all countries, not just a China-specific problem.

If you’re an investor who is getting skittish about investing in China, we’d recommend the age-old investing advice to “focus on the long-term”. Don’t think about China’s growth over the next few months. Instead, focus on where they’re (still) projected to be in the next 10 years, which is the world’s #1 economy.

We hope that you found this article valuable when it comes to understanding how China’s economy might fare in the wake of the coronavirus. Please bear in mind that this is just our analysis and should not be taken as hard fact. If you’re interested in reading more, please follow our blog and visit the “New Here?” section of ChinaFund.com for a well-structured perspective on our work.

Time and time again, the authorities find themselves in this predicament, with industries they are not necessarily thrilled about generating so much revenue and being on such an impressive upward path that they have no choice but to find some kind of a compromise solution rather than miss out on extremely useful economic activity.

The exact same principle is valid when it comes to a sub-category of gaming: esports or in other words, those who turn gaming into a career. As of February 2019, the authorities essentially had no choice but to formalize the reality that this career exists, with “esports professionals” as well as “esports operators” becoming official job titles.

To take things even further, majors pertaining to esports have even been added to various national colleges and, again, this is primarily a function of supply and demand or in our case, impressive demand for esports-related opportunities in the context of sub-optimal supply. To understand just how much demand, let’s just say that China is poised to become the world’s number two esports force (after the United States, with them surpassing South Korea), with compound growth rates expected to be in the 21% zone up until 2023.

It remains to be seen how the COVID-19 situation will impact these developments, with there being compelling cases in favor of both outcomes: on the one hand, the fact that the COVID-19 calamity made it clear to a significant section of the population that there can be tremendous value associated with working from home (with esports enabling individuals to do just that) but on the other hand, the fact that deflationary forces may very well affect the esports space as well.

We simply do not know at this point.

What we do know is that for 2019, we are looking at $210 million in terms of esports revenue over in China (approximately 862 million yuan), a little over half the United States value of $409 million (approximately 1.6 billion yuan). While not an Earth-shattering amount nominally speaking, it represents an impressive feat in light of the growth rates involved as well as the fact that esports-related career choices are poised to grow exponentially.

As always, China is doing its part when it comes to arguably its favorite approach: infrastructure investments. As such, almost $300 million were invested back in late 2017 so as to create a so-called esports town in Hangzhou, with the same city manifesting interest in spending over $2 billion over the next two years so as to build a grand total of 14 facilities (it is worth noting that the 2022 Asian Games will be hosted by Hangzhou). Other extremely active Chinese cities on the esports front include Chongqing, Xian, Haikou, Sanya and Shanghai.

At the end of the day, there is a fair bit of tax revenue potential involved, with for example Hangzhou alone predicting that once its goals have been reached, $140 million in tax revenue are on the table. However, as mentioned rather obsessively, the authorities are playing a remarkably pragmatic game when it comes to esports in particular and gaming in general.

This reality tends to inhibit private sector investments which would have otherwise most likely been at ultra-high levels. For example, an entrepreneur who invests in the esports space needs to come to terms with the fact that he or she can be only one legislative turn of events away from ruin. For example, China (in)famously banned console games for a period of 15 years, from the year 2000 up until 2015. Needless to say, those who invested heavily in industries that would have been on the receiving end of a potential console boom ended up bitterly disappointed but it is equally true that as gamers transitioned to PC and mobile games en masse, other opportunities emerged.

Think of it as “doing business in China 101” or in other words, understanding that if you expect generation-defining opportunities and predictability, you will be quite disappointed when it comes to the latter. Time and time again, entrepreneurs as well as investors who do not understand the oftentimes frustratingly unpredictable legislative landscape in China and up losing money as well as interest in pursuing other opportunities in China. They pack their proverbial bags, leave with a bitter taste in their mouth and write off this jurisdiction completely.

The ChinaFund.com team strongly advises against such an approach.

Instead, we would strongly recommend a modus operandi with reserved optimism in the spotlight, as we like to call it. Reserved optimism which revolves around understanding that opportunities abound in China but that this is most definitely not a jurisdiction for those who expect complete predictability and are not willing to do their own due diligence.

Should you or your organization be in need of assistance when it comes to the latter, our team of experts has over 13 years of “ground level” (brick and mortar dimension included) experience which it will happily put at the disposal of interested parties. Unlike other consultants who see nothing but dollar signs when looking at Western clients, “pragmatism” and “brutal honesty” are the operative terms as far as our approach is concerned. For more information about what we can do for our clients, visit the Consulting section of our website and to get in touch right away, use the Contact section of ChinaFund.com.

To help give you a few potential starting points, we’ve gone ahead and selected our three favorite Chinese investments as well as a few reasons why we like them. Each investment will feature a few qualitative reasons why we like them (such as industry or consumer trends) as well as quantitative reasons (numbers pulled from their annual reports).

Without further ado, let us move on to our three favorite Chinese investments.

NOTE: This article is for informational purposes only and is not meant to act as financial advice.

JD.Com

It’s no secret that the world has been transitioning toward eCommerce for years now.

First, there is a very well documented decline when it comes to traditional retail businesses (formally known as the retail-pocalypse). While not all of these bankruptcies are 100% attributable to the rise of eCommerce, that has definitely played a major role. By “retail-pocalpyse” we just mean that consumers have been shifting toward online shopping. They like to buy products from the same store online or from a site like Amazon as opposed to actually going to the physical location and buying things.

Companies that don’t have a seamless online shopping experience have been falling behind or closing up shop altogether.

Some of the most recent store closures have been from:

➢ Neiman Marcus
➢ Diesel
➢ Toys R Us
➢ Forever 21
➢ J Crew

Click here to read a more exhaustive list.

An important question arises: if most or even all of the retail businesses are (eventually) closing, does that mean that people aren’t buying as much stuff anymore? Or does it mean that people are still buying stuff, just that they’re buying it online?

As common sense most likely dictates, people are still buying (at least) the same amount of goods, they’ve just been transitioning to eCommerce for the bulk of their purchases. Some people have even started to order things like their weekly groceries online and get them delivered straight to their homes.

Let’s take a look at a few stats behind eCommerce:

1. The global eCommerce rate for 2020 is expected to come in at 19%, to bring total eCommerce sales to around $4.206 trillion globally
2. ECommerce market share of total retail transactions is expected to double from 10.4% in 2017 to 20% in 2023
3. Over 15% of all sales are expected to take place online over the next year

Not only are these numbers impressive from a global standpoint but the best part is that Asia-Pacific is by far the largest region for eCommerce (according to Oberlo.com).

If you think eCommerce is popular in the U.S., it should represent great news for you that it’s far more popular in Asian countries.

Additionally, with the introduction of the Coronavirus earlier this year, this trend toward online buying/selling will only be accelerated over the coming years. People are being forced to stay home and quarantine themselves while businesses (which aren’t considered essential) are forced to shut their doors down. This means that for lots of people and businesses, there is no alternative except resorting to doing things online! It’s the only way that they’ll be able to continue functioning.

Companies that have been holding out on transitioning to eCommerce will be forced to adapt in order to stay relevant.

For just these reasons alone, any company that dominates in eCommerce could be considered a solid investment. With that being stated, let’s take a look at one of the top players in China when it comes to eCommerce: JD.com.

JD.com is a leading technology-driven e-commerce company that wants to become the number one supply chain based technology and service provider. They’re the second-largest eCommerce company in China (after Alibaba) and pride themselves on their cutting-edge retail infrastructure that offers what they call Retail-as-a-Service (offering to let other companies use their platform to sell products). They’re currently the largest retailer in China and a member of the NASDAQ100 as well as Fortune Global 500.

After taking a quick look at their 2019 Annual Report:

➢ Net revenues have been steadily increasing since 2015
➢ 2019 was the first year that they operated at a profit
➢ They’ve been investing heavily in research and development

At a glance, JD.com is a company that could be poised to drastically grow their business over the coming decade. They’ve been making more and more money each year, have the capacity to earn a profit and are investing money back into their business.

Our next company is another eCommerce player:

Pinduoduo

We feel so strongly about the rise of eCommerce that our second company is another eCommerce sector entity. The reason why we have decided to put two companies in the same industry in the spotlight primarily revolves around the coronavirus. Over the next couple of months/years, late adopters of eCommerce will be forced to make the jump. This will be good for companies such Pinduoduo which help other companies sell online.

The same information from the previous section is going to apply to this one.

However, Pinduoduo has a distinct advantage built into their platform, which is why we like them as opposed to other companies.

Competitive Advantage: Pinduoduo’s platform encourages users to invite their friends to purchase the same products. In this sense, they encourage “group buying”. This is a huge advantage when it comes to driving growth because people want to do what their friends are doing. This same mentality is what helped companies like Facebook and TikTok achieve their amazing growth.

Let’s take a look at their 2019 annual report.

Key takeaways:

➢ Their revenues are growing exponentially (growing by 6 times in just 4 years)
➢ Their top expense by far is marketing. This is a good thing because they’re putting a lot of money into gaining customers over competitors and this expense can be cut at any time

Additionally, highlighted in their annual report were the following advantages:

➢ The ability to attract and retain merchants
➢ The ability to seamlessly connect with social media networks
➢ The fun and interactive shopping experience of their platform

Just like JD.com, Pinduoduo is an exciting company in a rising industry that is poised to take advantage of what should be a fruitful decade for their company. We wouldn’t be surprised if they dethrone Alibaba or JD.com to become the region’s top eCommerce player over the next few years.

iQiyi

IQiyi is a leader in streaming content online and has often been referred to as “the Netflix of China”. They’re poised to take advantage of the growing trend among consumers to stream content from home as opposed to going out to theaters. This is another trend that will likely be accelerated because of the closing down of traditional theaters due to the coronavirus.

Although this trend is already pretty mature in the United States, it still stands to grow because people are being forced to stay home due to the pandemic. This could lead to more people picking up streaming when they were previously holding out.

In fact, you could argue that streaming was already becoming more popular over the past couple of years with companies such as Disney and Amazon launching their own services fairly recently. Media companies have seen how popular it has become and want to lure users to their own platform. What we are seeing now is a battle for popular content.

We took a look at their annual report from 2019 and here are a few takeaways:

➢ 100.5 million users
➢ $1.1 billion in revenue
➢ Membership increased 21% year over year
➢ Looking to expand out over SE Asia

IQiyi is currently operating at a loss but much of that is attributable to its expenses in creating new content and attracting new users. Creating new content, just like the current streaming wars in the United States, will ultimately be one of the deciding factors of who succeeds in this market. Netflix realized this early on when Disney reported that they will be launching their own streaming service (and taking content/users away from Netflix). IQiyi seems to be doing the same thing.

In Summary

If you’re looking to invest in China but aren’t sure where to start, a good starting point is to pick industries that you’re already familiar with. ECommerce and streaming are two of the fastest-growing industries in the United States, so it makes sense that they would be growing in China as well. Additionally, these industries will not be negatively impacted by the effects of COVID-19 and, if anything, their businesses will be better off.

We’ve looked at 3 stocks:

1. JD.com – The 2nd largest eCommerce platform in China
2. Pinduoduo – One of the stickiest eCommerce platforms in China
3. IQiyi – One of the fastest-growing streaming services in China

Your investment decisions are your own but if you need a good jumping-off point, we’d recommend taking a closer look at these three companies!

We hope that you’ve found this article valuable when it comes to understanding 3 Chinese investments that you could potentially take advantage of. If you’re interested in reading more, please check out our blog as well as the “New Here” section of ChinaFund.com.

In this article, we’ll take a look at:

● Dealing with the Chinese government
● Chinese business practices
● Cultural expectations

Here is our list of important things to know before doing business in China:

Government Intervention

In the United States, the government and private enterprises are kept pretty separate from each other (and that’s the way that people like it). Obviously, there are still regulatory bodies (the Internal Revenue Service, the Securities and Exchange Commission and the Federal Trade Commission to name a few) as well as different licenses or permits you’ll need to acquire as a business owner.

In this sense, businesses operate independently from the government but still need to play by the rules that the government sets.

On the other hand, in China, the government and the private business sector are essentially one and the same. There is quite a bit of overlap between the two and the government has a lot more power over what private businesses can or can’t do. This means that if you plan on doing business in China, you can expect to be doing business with the government as well.

Here are a few manners in which the government encroaches on private enterprise in China, a situation that is remarkably different compared to the United States:

➢ Putting government officials on the board at companies – This initiative was recently announced and was “sold” as an effort to transform the country’s economy to catch up to rivals in high-value industries such as robotics and aerospace. Government officials will be placed on the boards of Alibaba, Greely Holdings and Wahaha but a full list was not disclosed. Although the primary claim was that this move was purely for economic innovation, it does raise security concerns. That’s because Chinese companies are required by law to hand over data that the government requests

➢ Accessing proprietary files – The Chinese government is legally allowed to request data from companies (and companies are obligated to provide it). This is one of the main reasons why there is such a backlash against microchip company Huawei and the 5G network. Other countries are concerned that if Huawei gets access to a global 5G network, it will hand over personal data of other countries’ citizens to the Chinese government

➢ Requesting that private companies do favors for the government – Although you are starting to see more of this in the United States (with Donald Trump’s attacks at Twitter and Facebook), it is much more commonplace in China. Companies in China are required by law to follow government orders. The same expectations exist for American companies doing business in China and it’s one of the reasons why so few companies have entered the market (especially in the technology industry). For example, a company such as Netflix would be in a bind if the Chinese government suddenly demanded that they hand over information on their viewers, because their customers in the United States wouldn’t like this very much

The main takeaway from this is that if you’re planning on doing business in China, expect the government to be holding your hand along every step. If you were to refuse to comply with a governmental order, it would have widespread consequences and wouldn’t be easily resolved in a court setting.

This is especially true if you’re a businessperson from the United States.

Common Business Practices

For the most part, every different country is going to have slightly different business practices. Even different states within the United States have slightly different business practices and expectations. That being mentioned, you’ll want to make sure that you have a good idea of what the expectations will be from you before walking into a meeting with Chinese businessmen. Let’s take a look at what some of the most common business practices are in China:

➢ Business mentality – When you show up for a meeting, the Chinese will expect you to be fully prepared. When it’s time for business, it’s time for business. This means having an adequate number of copies of your report ready to hand out. It’s generally safer to have the report in black and white, as opposed to color. On the other hand, when meetings are broken and you’re at dinner, it’s considered rude to keep discussing business. Another thing to note is that China places a big emphasis on hierarchical order. This means that the first person of a group to enter a room is considered the most important. They will expect that the same is true of your group

➢ Relationships – Relationships play a critical part in Chinese business and are a major part of building trust (more on that in a moment). The Chinese prefer to do business with people whom they have a favorable relationship with and more often than not, this can represent the difference between winning business or falling short. Because of the need to build a strong relationship, deals and negotiations can take longer to materialize and close

➢ Trust – Trust is one of the building blocks of a successful business relationship. Trust is acquired in many ways. Doing the proper research beforehand, always being polite, and showing that you’ve made an effort to adapt to their culture are all ways to earn trust. Surprisingly, another good way to earn trust is to engage with drinks over dinner (while also avoiding talking business). Drinking is a big part of Chinese culture and it’s considered rude to deny a drink

➢ Indifference towards deadlines – When doing business with the Chinese, expect deadlines to come and go with little fanfare. In the United States, there is a strict emphasis on deadlines and people scramble to get projects or deals closed by a predetermined time. This attitude is not reflected by the Chinese. In fact, it can be considered pushy and rude to force deadlines in China. This is mainly due to the need to build a trusting relationship before putting pen to paper. Don’t put too much weight on specific deadlines and factor this into your own personal plans

➢ Business attire – When in doubt, it’s better to dress conservatively. Wearing neutral colors and a traditional suit is always a safer option over something flashy. Wearing flashy attire can be seen as an attempt to belittle or brag

These are just a few of the more common business practices in China. If you’re interested in reading a more complete list, click here. Don’t worry about memorizing every little detail, sometimes just making an effort is all that matters. You just want to make sure you’re not insulting the other party without realizing it.

Now let’s take a look at what some of the cultural expectations are in China as a whole:

Cultural Expectations

Cultural expectations are a little bit different from common business practices. For example, knowing to show up prepared to business meetings so as to not waste time is a business practice. Knowing that small talk is an important part of doing business is a cultural expectation.

Having a firm grasp on the cultural expectations of doing business in China will not only help make you a successful businessperson, but it will also help make you popular in China in general! It’s important to be aware that what is acceptable and commonplace in the United States might be considered rude in China.

Let’s a take a look at some of the more pressing cultural expectations:

➢ Small talk – Small talk is considered an important part of the relationship-building process (see section #2). Launching right into a business conversation can be considered hasty and rude. It would also be a good idea to learn a few Chinese phrases for the small talk (this type of gesture is always appreciated)

➢ Handshakes – Handshakes are common in China but it’s always smart to let the other party initiate the shake

➢ Negative answers – A firm, negative answer (even a simple “no”) can be considered rude. It’s always better to try and frame answers as positively as possible, even when the answer is a simple no. For example, instead of “no” you might say “I’ll think about it”, “maybe”, or “we’ll see”

➢ Body language – It’s always best to appear calm and professional. Using too much emotion during the meeting can negatively impact your business relationship

➢ Do not bring gifts – Although this seems like a polite and innocent gesture in general when doing business, it can seem as though you’re trying to offer them a bribe (which is illegal). Offering a gift can make them uncomfortable and question your morals

Again, these are just a few of the cultural expectations that should be expected when doing business in China. Depending on the scope of your business, we’d recommend doing a little more research before the meeting. Additionally, just like most things, practice will make perfect. The more meetings you take part in, the easier it will be for you to remember certain things.

We hope that you’ve found this article valuable when it comes to understanding what to know before doing business in China. If you’re interested in reading more, please visit our New Here section and for more personalized tips, our team of consultants is at your disposal.

That being stated, there are quite a few other reasons to start investing in China other than their growth rate. Whether you’re looking to open up a physical business or invest some money in Chinese companies, there are a lot of reasons to get started. Let’s take a look at a few of them.

5. Population Size

Right alongside their economic growth, China has had an explosion in population size. China currently has the world’s largest population, sitting at 1.4 billion people. India is close behind with 1.3 billion and the United States in third with 330 million. This means that despite being roughly the same size in terms of land, China’s population is roughly 3 times the size of the U.S. population.

If you’re an outside investor, this is good for a few reasons.

1. Customer base – If you’re planning on opening your own business in China, there is no shortage of potential customers to buy your product. If you’re investing in a Chinese company, the same logic applies
2. Labor – China has plenty of people available to help with production. This is one of the reasons why so many companies are opening up factories in China

Most investors will look at an opportunity for growth within a given industry or country over a longer period of time. The sheer size of China’s population means that it should grow across the board in terms of different industry sectors. For every one student that America has right now, China has 3, all of whom will grow up and contribute to the economy.

NOTE: Population size isn’t really meant to be a competition between countries. However, it can still play an important factor when making decisions and we have dedicated an entire article to explaining why.

4. Diversification

There is always a significant emphasis on diversifying when investing. You want to spread your money across different asset classes to make sure that you are protected. For example, if you put all of your money into one stock and that stock performs poorly, then you’re at risk of losing all of your money. However, if you spread your money out over 30 different stocks then you’ll be protected if one stock performs poorly because the other 29 might perform better.

Two concepts worth keeping in mind:

Diversifiable risk – This is risk that can be controlled by making sure your investments are adequately diversified

Non-diversifiable risk – This is risk from things that are outside of the investor’s control (like a war or a famine)

When it comes to your personal portfolio, your diversifiable risk can be reduced by investing in foreign countries and foreign currencies. Non-diversifiable risk would be something like Donald Trump’s trade war with China, which individual investors have no control over. The key is to minimize your diversifiable risk as much as possible.

So what does this have to do with investing in China?

Well, by investing in China you’ll be further diversifying your portfolio by having investments in a different country and exposure to a different currency. This means that if something terrible were to happen in the U.S. or with U.S. stock exchanges, then you’ll still have some money safely invested in another country.

By investing in a different currency (the renminbi), you’ll also be able to take advantage of potential fluctuations in currency values. For example, say that the Chinese currency experiences a positive trend in the currency appreciation market. If this happens, then the Chinese currency will be stronger during an inflationary cycle in comparison to the dollar and can offer better chances of survival to an investor investing in this market.

3. It’s Becoming More Mainstream

China has been viewed historically as the boogeyman over in the United States. Some investors are hesitant to invest money because they either see China as a direct threat to U.S. dominance or do not trust the communist government. However, in recent years, investing in China has become more and more popular. As that happens, there will be more transparency between Chinese companies and American companies.

Unfortunately, there have still been a few present-day instances of Chinese companies not being fully transparent. The most recent example happened with Luckin Coffee. Earlier this year, Luckin Coffee admitted that a good portion of their 2019 sales were fabricated through their online app. They artificially boosted sales through their mobile app to make it look as though they were more profitable than they were. When it came out that the sales were made up, the stock collapsed by about 75% before being halted on April 6th, 2020.

Situations such as this one are what make U.S. investors tentative to buy shares in foreign companies. Luckily, stories like these are becoming rarer and rarer. As investing in Chinese companies becomes more and more mainstream, there will undoubtedly be a more robust call for transparency from these companies. A move towards transparency will be better for everyone involved.

2. Government Incentives

China has long been known for the overarching reach of their government. It is not uncommon for the government to put officials on the boards of public companies or force companies to make decisions that are in the best interest of the country. Generally speaking, government intervention and entrepreneurship don’t go hand in hand. However, China actually has quite a few incentives to encourage people to open up new businesses.

If you’re a foreign investor, you might be well poised to take advantage of some of these incentives.

Here are a few:

• If you have a company or project that is focused on technology development, conservation of the environment, energy conservation or the discovery of new energy types, then you are likely to receive different types of tax incentives
• If you reinvest your profits in China, you’re likely to receive tax deductions
• Certain industries are exempt from paying business taxes. For example technology transfer, technology development and related services won’t need to pay as much in taxes
• Taxes on income earned by foreign enterprises though gains on stocks, interest, retirement pay, online work, and capital gains have recently been reduced from 20% to 10%
• To encourage small businesses and startups, the tax rate for small-sized businesses and new technology companies is just 20% instead of the standard 25%

Although some of these incentives don’t seem like the biggest deal breaker when it comes to starting a business, the fact that they were all implemented fairly recently is a good sign. Hopefully, due to their past success, China will continue to implement incentives for new entrepreneurs.

1. China Is Getting Back to Work

It wouldn’t be right if we ended this entire article without mentioning the coronavirus. As you have most likely heard, the coronavirus began in Wuhan, China and promptly raced through the population before going out into the rest of the world. However, at the time that this was written, it appears as though China has a good handle on the virus outbreak:

There are two things that come to mind when looking at this graph.

1. China may not be disclosing all of their data about the virus. There is a WSJ article which argues something similar. Just by looking at the graph, it’s suspicious to have such a spike and dip so quickly for something like cases in a pandemic
2. China did a particularly effective job of handling the virus outbreak

Most reports that have come out seem to point out that the truth is somewhere in the middle. Since China is a communist country, the government has much more power to enforce stay-at-home orders. Compare this to the U.S., where quarantine orders were treated as a suggestion until businesses were actually forced to close.

However, it does appear as though China is getting back to work. Following those strict quarantine measures, the coronavirus appears to be more or less contained in China. Most of their larger companies and around two-thirds of its small- to medium-size companies have gone back to work (according to China’s Ministry of Industry and Information Technology). It’s also a very good sign that the quarantine has been lifted in Wuhan (the place responsible for the outbreak in the first place).

The quick return to work will be good for China’s domestic economy and for local consumer confidence. The quicker the spread of the virus can be curbed, the sooner everyone can return to work. The U.S., on the other hand, recently reported a record-breaking number of new cases.

We hope that you’ve found this article valuable when it comes to understanding a few reasons to invest in China besides their amazing growth. To read more, we would strongly recommend visiting our “New Here” section and to get in touch with our team of experts for consulting-related requests, our Contact section can be used.