The Crash On Wall Street

A summary of Prof Wen Zhao’s analysis:

The Dow Jones crashed more than 2,000 points on Monday 9 March 2020. Trading had to be suspended for 15 minutes to calm sentiments and also to rule out computer glitches. The obvious explanation for this crash is the coronavirus fear reaching a peak as Europe and America grapples with the pandemic. Reports that China may be beating COVID-19 fell on deaf ears as few investors trust China’s data. We’ll come to that in a moment.

Prof Wen Zhao believes that this crash is due more to the crash in oil prices than fears over the pandemic. The short term trend for the market is downwards. How does a crash in oil prices affect China? For this we need to go back to Phase One of the trade deal between the US and China.

The deal takes steps to root out several practices that irked the White House and bipartisan members of Congress, including intellectual property theft and forced technology transfers, in exchange for Chinese market access, according to text released by the White House. It also details a $200 billion increase in Chinese purchases of US goods over two years — a priority for Trump. What is the most valuable commodity that China buys from the US that can balance the trade deficit? Oil. But if China buys oil from the US, Russia is going to suffer.

Some background info from The New York Times 9 March 2020

For the last three years, two factors have been hugely influential in the oil markets. The first has been the surge of shale oil production in the United States, which has turned the country from a large oil importer to an increasingly important exporter. The second is the alliance between Saudi Arabia and Russia, which recently have cooperated in trimming production to try to counter shale’s impact.

Now that cooperation between two of the world’s three largest oil producers — the third is the United States — appears to be at an end. Saudi Arabia, as the dominant member of the Organization of the Petroleum Exporting Countries, last week proposed production cuts to offset the collapse in demand from the spreading coronavirus outbreak. Russia, which is not an OPEC member, refused to go along. And the impasse has turned into open hostilities.

The standoff was ominous for the industry. Not only had OPEC and a wider group of producers — together known as OPEC plus — failed to agree on new cuts, but they had also failed to sign off on the extension of 2.1 million barrels a day in previous trims that would expire at the end of March. That created the danger of a tremendous flow of oil coming onto a market that was already hugely oversupplied and experiencing a steep slump in demand.

The natural gas pipeline from Russia to China was only opened in December 2019. Only a few months after operation, China is going to buy oil and gas from the US instead. Understandably, Putin is enraged. One retaliative strategy the Russians could adopt to prevent a wastage of their natural gas pipeline is to destroy the market for oil by increasing output. On 11 March 2020, Saudi played the same game and increased their output to 13 million tonnes a day. They are even offering a discount to their regular customers. With this latest move, the price of oil may dip below $30 a barrel.

Of course, slashing prices won’t benefit any of the producers. The Saudis are hoping to squeeze Russia’s profits and bring them back to the negotiating table so they could set a new price for oil. Meanwhile, it has been estimated that if oil price drops below $58 a barrel, Saudi would be in deficit. The Russian economy, on the other hand, is less dependent on oil. Even at $30 a barrel, it would still be pretty much business as usual in Russia. But Saudi has an edge over Russia in another area. It has more customers.

As neither country stands to gain from this price war and the US is likely to suffer quite badly, there is a chance that they will come to an agreement. As for oil producers in the US, they have the advantage of low cost extraction technology. During the last crash in 2014, most US oil companies were able to hang on for at least 2 years. Nevertheless, Trump has every reason to pressure China into buying close to $200 billion worth of oil from the US.

Still, Xi Jinping is caught between a rock and a hard place. He could either offend Russia, its political ally or offend the US, its economic ally. Stocks, like water, will find their own level. They will eventually bottom out. Low oil price supports the US economy, lowering production costs. As companies move back to the US from China, some US industries stand to gain from low oil prices. Prof Wen Zhao believes that money that has been drained out of Wall Street will eventually return to Wall Street because there is no better place in the world to park it.

This is evidenced in the aftermath of the 2008 subprime mortgage crisis. Money that have fled from Wall Street ended up in even less reliable markets like European and emerging markets like China. That was when China took bold steps to compete with America for world leadership. China was very attractive till 2015 when it overstretched itself. It’s now a ticking time bomb.

In bear market now, Prof Wen Zhao estimates that Wall Street may show signs of recovery from May. As for China, resuming production may not help much in its recovery as overseas orders are few at this time and may get even fewer.

In recent days, communist cheerleaders appear to be gloating as the pandemic spreads like wild fire in Europe and America. The long term outlook for the American economy, however, is good. China’s economy, on the other hand, is unlikely to recover any time soon. Going back to Phase One of the trade deal, the agreement may have been inked, but it’s not known when China could import that $200 billion worth of goods from the US. It’s an important lesson for Trump. Agreements with China don’t count and in recent weeks, they have taken a step in the direction of recognising Taiwan even if it means offending China.

The US House of Representatives on 4 March 2020 unanimously passed the Taiwan Allies International Protection and Enhancement Initiative Act (TAIPEI Act). The lightly revised TAIPEI Act was passed with a unanimous vote of 415 to zero. The bill aims to discourage Taiwan’s diplomatic allies from cutting ties with the island country due to pressure from Beijing.

Taiwan may be the place to watch in the coming months.

Face Mask Diplomacy

Things are often not what they seem. That’s the case with Thailand. That’s the case with China as well. On the surface, a gift of 1 million surgical masks seems like simply a very kind gesture. A Singaporean academic (screenshot above) even referred to Jack Ma as a “private citizen”, again showing how cloistered and simplistic our population is.

On 2 March 2020, former Alibaba CEO Jack Ma announced on US media that he would donate 1 million surgical masks to Covid-19 stricken Japan. He included the message 青山一道,同担风雨 (same path, weather the storm together)。It’s a reply to the Japanese government whose earlier gift of 1 million face masks to China was accompanied by the message 山川异域, 风月同天 (different land, same world under the sky)。I’m not sure if there’s anything to read between the lines.

On the next day, 3 March 2020, Jack Ma’s donation arrived in Japan. The aid was not handed over to incumbent Prime Minister Shinzo Abe, but to Japanese politician and former minister Toshihiro Nikai (二阶俊博). Why Nikai? He is known to have close ties with Chinese leaders. How close? Well, he had tried to build a statue of Jiang Zemin in his district.

It was not lost on astute Japanese netizens that CCP member Jack Ma was not acting in his capacity as a private individual. What is the real deal behind this to and fro? Japanese social media was abuzz with discussions. The vast majority of Japanese people had mixed feelings about all this. The most common stand is that Japanese people should be thankful towards China and put aside differences and work together with China to combat this pandemic, but to trust the CCP? No way. A few netizens were not so positive. They feel that there would have been no shortage of masks in Japan if the Chinese residents had not already been sending loads of masks back to China.

Fortunately, Japan realised early in this epidemic that they could not be dependent on China for masks. That’s why many electronics manufacturers in Japan had refitted their factories into surgical mask production lines. It has been estimated that by mid March, Japan should be able to produce 15 million masks a week. The ultimate target is 100 million a week.

Looks like China is still not ready to bury the hatchet. Anti-Japanese propaganda films are likely to resume soon.

宁为玉碎, 不为瓦全

25-year-old Li Ze Hua 李泽华 used to be a compliant TV host with official media CCTV7.

After the coronavirus outbreak, he quit his job and descended on Wuhan to report on actual happenings at ground zero. He was chased by an unmarked vehicle after visiting the P4 lab and disappeared on 26/02/20.

Someone like Li must have been thoroughly screened, trained and familiar with media regulations, censorship and the art of propaganda. What made him suddenly get off his safe and comfortable seat only and throw his whole life away fighting a battle he can never win? This is what we call 宁为玉碎,不为瓦全.

Historical perspective

In 550 AD, Emperor Xiaojing of the Eastern Wei Dynasty was forced to surrender his throne to the imperious prime minister Gao Yang. The following year, the ruthless Gao Yang poisoned Emperor Xiao Jing and his three sons to eradicate any potential threat to his throne.

On the day of Gao Yang’s coronation, an eclipse occurred. He was worried that it was a bad omen and was worried that the throne he had usurped could not be held on for long.

He consulted a trusted friend: “Wang Mang seized control of the empire of the Liu family at the end of the Western Han Dynasty. How did Emperor Guangwu, Liu Xiu manage to regain the control of his empire?”

Gao Yang’s friend replied: ” Your Majesty, it’s Wang Mang mistake that he did not wipe out every single member of the Liu family.”

Gao Yang was a cruel as he was cowardly. He immediately ordered the execution of more than 700 people from 44 close relatives of the Eastern Wei Clan. Even babies were not spared.

News of Gao Yang’s decree spread. The Eastern Wei Dynasty clan was apprehensive, fearing that the executioner would come knocking on their doors soon. They held a meeting to come up with a survival plan. A county magistrate named Yuan Jingan had a suggestion. The only way to get Gao to pardon them was to appeal to his ego. The could change their surname to Gao and be a part of his family from them on.

Yuan Jingan’s cousin Yuan Jing Hao was firmly opposed to this approach. He said: “大丈夫宁可做玉器被打碎,不愿做陶器得保全。我宁愿死而保持气节,不愿为了活命而忍受屈辱!I would rather die and maintain my integrity than to survive and endure humiliation! “

In order to save his own life, the despicable Yuan Jingan reported his cousin’s words to Gao Yang. Gao Yang immediately arrested Yuan Jing Hao and executed him. The cowardly Yuan Jingan changed his surname to Gao and was duly promoted.

How do we explain Li Ze Hua’s behaviour? 宁为玉碎,不为瓦全.

Mass Shooting In China

Owing to strict gun laws, there are very few mass shooting incidents in China. As such, they are particularly noteworthy. One such incident occurred on 20 September 1994. The official version of events reported in the Chinese press described the perpetrator as a hot-tempered man who went on a shooting spree after having his gifts rejected by the political commissar .

Wikipedia:

Tian Mingjian (born in 1964) was a first lieutenant stationed at an army base in Tongxian County, a suburb of Beijing. He had been in the military for over ten years, originally as a sharpshooter and was highly skilled in the military technology field. He was once promoted to regimental staff officer for military affairs but due to his bad temper and irritability was eventually demoted to acting company commander. At the time of the shooting he served in this position in the 12th Regiment of the Third Guards Division of the Beijing Garrison Command. He was said to have violated discipline by beating other soldiers and had a grievance against his superiors for being reprimanded about this.

Tian was married but due to his demotion, his wife was not allowed to live with him at the base. He sent gifts to the regimental political commissar, who then promised to help him in this matter, but two days prior to the shooting the commissar returned the gifts and hinted that he would punish Tian. It was also reported that Tian had a quarrel with his superiors because they had forced his wife to have an abortion when she was pregnant with their second child, in accordance with China’s One-child policy. Tian already had a daughter, but he came from the rural area in Henan Province, where strong traditional values emphasize siring a male child. Thus Tian secretly planned on having a son until someone in the army revealed his plan and the birth control officer forced his wife to have an abortion. By this time his wife was already seven months pregnant and died during the operation along with the unborn fetus (later discovered to be a boy).

On 20 September Tian armed himself with a Type 81 assault rifle and killed the regimental political commissar on the drill ground. He also killed three other military officials who were trying to stop him and injured at least ten more before fleeing the military base. While his fellow soldiers were ordered to change into civilian clothing in order to not disturb the public when searching for the deserter, Tian hijacked a jeep and headed towards Beijing.

At 7:20 a.m., when approaching a red light in Jianguomen, the driver crashed his vehicle into a tree and tried to escape. Tian killed him, jumped out of the car and started to shoot people at random while making his way towards the embassy district. He thus killed 17 civilians, including Iranian diplomat Yousef Mohammadi Pishknari and his 9-year-old son, while another of Pishknari’s sons and his daughter were wounded.

By then thousands of police were rushing to the scene and desperately tried to apprehend the gunman, but were unable to do so, since Tian was an experienced and excellent marksman. Police finally besieged Tian at Yabao Road and engaged in a gun battle with him, in which 7 policemen were killed. A bus was caught in the line of fire, when the driver in panic stopped his vehicle. Eventually, heavy police fire forced Tian to flee into a dead end where he was killed by a sniper.

The exact number of casualties remains unknown, though in the immediate aftermath 14 people were reported dead, and 72 others wounded, many of them so severely that doctors expected the death toll to rise to 40 or 50. The newspaper Lien Ho Pao reported on 7 December the same year that 15 people were killed, among them six servicemen, and 60 others were wounded.

Below is a video telling the story from Lieutenant Tian’s point of view. The Third Guard’s Division 警卫三师 had been the most trusted military unit of the CCP.

Introduction to 三十六计

The Chinese people have been around for thousands of years and throughout their recorded history, they would fall back on the experience of their ancestors to find ways out of a difficult or dangerous situation. When they have lofty plans, they look to history for a clever strategy to defeat a stronger opponent.

三十六计 – most often translated as the “36 Strategems”, is actually a compilation of 36 classical tricks and ploys. They have been identified mostly from military tactics and political maneuvers. It should be noted that 36 is just a convenient number. There is a considerable amount of overlap between the various tricks.

For the longest time, 三十六计 has been read and studied purely for entertainment. But with the rise of China and a growing interest in Chinese culture, translators and editors got to work on 三十六计, resulting in a myriad of titles which expand on the original ideas. As with Sunzi Art of War, publishers have marketed these books on the same theme; as educational manuals for managers and businessmen, equating war situations with various scenarios in the business environment.

Of course, one has to admit that there are some similarities between war and business, but readers also need to realize that 三十六计 was never meant to be a business manual. But for marketing purposes, even the modern Chinese versions of 三十六计 have distorted the original meanings to suit the target audience.

Suffice to say that a lot of the advice given in books which claim to be 三十六计 come from the authors’ own beliefs and philosophies and have very little to do with the original meaning of 三十六计.

To be fair, 三十六计does have modern applications, but make no mistake, these are tricks and ploys. Applying them would require at least some suppression of one’s conscience, leading to acts which may prove cruel, unethical or even unlawful.

Regardless of whether you find these books useful to the management of your business, 三十六计 in its true and original form are best described as dirty tricks. They may or may not be applicable to businesses, but their application almost always causes someone to suffer.

My version of 三十六计 36 Dirty Tricks From Ancient China adheres to the original meaning of this compilation. I can’t guarantee that you’ll gain anything you can apply to your business, but it is quite likely to entertain you and may even help you improve your EQ in spotting and managing some of the assholes in Chinese society.

Chan Joon Yee

Singapore 2019