Opening Shot: Debts and Nation
New year new places. For 2016, I will move away from the more impulsive online activities like posting random pictures, and sharing someone else’s articles on Facebook. Instead, I will write one incomplete, but hopefully self-consistent article a month on Medium, which may cost me more time in the long run. Who knows. It’s an experiment.
Well, January 2016 has been pretty exciting if you were into the stock market (or depressing if the glass is decidedly half empty). As the story goes, the news from China was driving all the volatility. For those who does not follow financial news for rather good reasons, this is the low-down. China has longed to be treated as one of the shot-callers in the world of international finance for a while now. The club is obviously exclusive: only countries with an insurmountable pile of debt and matched confidence to pay them all back are allowed. China is getting the first part down pad. 2008 was perhaps the watershed moment for China when the rest of world felt like Armageddon. At the 11th hour, China stood up and put her hat in the ring, joined the fight and saved the world… by taking on the burden of debt, an extraordinary amount of debt. China has deep pockets, but there are also sink holes. Old debts beget new debts and bad debts are patched over by more debts because debt leverage creates increased output and increased output can be measured in GDP growth. The world is obsessed with this magic number. Debt-driven growth is like crack and there is no clinical solution to wean it. The irony is, of course, a country will only be treated as equals if she’s ways over her head in debt. Just like in a club, to be cool, you need to imbibe and debt is the only cocktail they serve.
Long story short, China has no problem in getting world’s attention by taking on the worthy amount of debt. Now the second part was not so straightforward for China. Continuing with the analogy of a club scene, to be cool, you need to imbibe and put on a sober face. And China would be nothing if not about saving face. Fortunately, there is a pill for this and that is to float the currency. To let your own currency float, knowing that capital will most likely flow out of the country, is the litmus test for sobriety (I know, it sounds insane but the world of international finance is supposed to be upside down). Alas, China is not ready to take the pill, in whole. China’s true-and-tried way of doing things is to chop up the pill into 100 pieces and hope that each tiny piece will not cause any allergic reaction. But that’s no way to show confidence and the market reacted. In the end of day, finance is a game of confidence. And confidence is precious commodity when it comes to China’s debt and economy.
Enough with the retrospection, it suffices to say that when China sneezes, everyone gets sick. The most affected victim seems to be commodities or any countries dependent on commodities export. But that’s last year’s news. The market that is most interesting to me is the venture capital market not least because as CEO of a fledgling startup, that should be the only market I worry about, but also because it is highly illiquid and often the most leveraged capital market, which makes for spectacular drama. For that, I will come back next month.