Chapter 2554: Subsequent Problems

"My personal suggestion, regarding this Paper Cotton event, the best handling is pretending not to see." Chu He said.

"?" Now Li Shan and Zou Biao were both shocked into widening eyes big. Such a big speculative event, financial disturbance, actually saying "Pretend not to see"?!

"This..." Li Shan said surprisedly, "Such a big matter."

"I am not making sensational statements; actually this is also the common view of our Finance and Financial circle." As Chu He spoke, Ren Youzi also nodded slightly.

"Cotton is people's livelihood material. This kind of behavior counts as hoarding for speculation, disrupting the market, right? Completely can be treated as economic crime..."

"Economic crime, this point is no problem. However, hoarding for speculation doesn't quite count." Chu He said, "Moreover, the risk is relatively not as big as you gentlemen think."

Paper Cotton wasn't hoarding for speculation; different from the "Two Whites and One Black" campaign in early Shanghai liberation. Market cotton spot circulation itself had no problem; just price expensive, cotton scarce, but hoarding didn't exist. Paper Cotton's main problem was disorderly speculation.

"Secondly, futures high risk key isn't selling pickup vouchers, but this pickup voucher is margin trading, which means allowing extremely high leverage multiples in trading center; current Guangzhou Paper Cotton didn't do this margin set, adopting mode of full cash buying and selling Warehouse Receipts, so high-risk leveraged trading problem doesn't exist; thirdly, generally contemporary futures operation actually allows risk hedging. You can't only buy high, must also allow buying short. Must have both bulls and bears to hedge..."

Seeing the two opposite had looks of bafflement, Chu He gave up further explanation, directly summarizing: "Anyway you just need to know this Paper Cotton won't cause serious financial crisis. Many people's wealth being washed by water is certain, but also limited to themselves and people around them only. It won't have big impact on financial market overall. On this point, have to say traditional strict borrowing system also limited expansion of crisis."

"You mean, this time won't cause turbulence?"

"Turbulence inevitably will exist, but won't be big. Won't affect social stability. On this point you can be greatly at ease." Chu He said, "According to our estimate, amount involved in this Paper Cotton speculation won't exceed one hundred fifty thousand yuan. Looking according to overall scale of entire cotton textile market, doesn't count as very big."

"One hundred fifty thousand yuan, this is already very astonishing!" Zou Biao said, "Many people's monthly income in this city is only two yuan!"

"People earning two yuan a month have no capital to join this kind of game. Those who can participate, at minimum occupy families able to take out over hundred yuan anytime—especially reaching recent month, a Warehouse Receipt rarely is lower than fifty yuan."

Fifty yuan, let alone ordinary Guangzhou citizens or villagers, even for medium Naturalized Citizen cadres, was not a small sum. The scale of this speculation actually counted as quite considerable.

"Although so, scale of this speculation is already not small. I feel we should establish National Reserve System in city, to reduce risk of such things happening in future..." Zou Biao said. In 18th century, cotton cloth definitely counted as strategic material; status probably only second to grain, but not inferior to coal and iron resources. Regarding abnormal price fluctuation of this kind of strategic material, state establishing strategic reserve is the most effective means. On one hand state itself has sufficient demand for strategic resources, can spread flat storage, labor, management costs of establishing National Reserve. Secondly maintaining strategic material price stability is also objective demand of maintaining social stability.

"...Establishing National Reserve is very reasonable whether in political account or economic account. Just saying this Paper Cotton storm, wait until market crashes, National Reserve taking action to acquire heavily is economically not losing either, because looking from long term cotton will still rise. National Reserve by then whether releasing to market with small premium or flat price is allowable."

Li Shan looked at Chu He and Ren Youzi's expressions. Two listened very attentively, occasionally nodding slightly, but looking from their subtle expressions, completely "disapproved" of Zou Biao's statement.

"Important material National Reserve System is of course very reasonable, but speaking honestly now, no such necessity, and also solves no problem." Chu He said, "Even might generate other problems."

"Why?!"

"First, this Paper Cotton crisis doesn't affect supply. This we already said just now: it is only a primitive rough futures; hoarding for speculation isn't the same thing. Establishing National Reserve is of course an effective means to regulate market order. But prerequisite is we must have source of goods. If source of goods just enough for production, how to reserve? so expanding cotton source of goods is much more important than storing cotton at present. Behind having stable source of goods, surviving cotton quantity in market can prop up reserve, only then is there National Reserve to talk about. Now Nanyang, India, Northeast Asia transport capacity is limited. Strictly speaking these places haven't formed later cotton professional planting either. Cotton planting area and yield are unknown numbers; stable cotton supplier doesn't exist either. So National Reserve is hard to take shape in short term. Moreover once National Reserve established, it is another huge team. Behind storage, inevitably implies huge loss, must establish a whole set of inventory checking system—forgive my straight talk, Senate's current state-owned grain reserve system is already power not catching up [struggling]. Let alone adding a cotton. Afraid on cotton and many bulk commodities, we can only follow market. After all, 17th century doesn't have big market, also lacks scaled economic crop plantations and mining industry."

Ren Youzi continued: "Why everything needs National Reserve? If factories sign long-term agreements or forward contracts directly with plantations, market fluctuations should have almost no impact. Economic rising period, some small enterprises falling has no impact; soon someone will take over the plate. If must give everyone a means of speculation and hedging, then still must walk road of formal futures contract. Honestly speaking, regarding current situation, even futures market can't talk about how much necessity."

Chu He supplemented: "Current stage wanting to do futures, main direction should still aim at Forwards Trading Price Agreement with purpose of physical delivery, rather than stepping onto Futures Trading Market at once—once leverage this thing goes up, it recognizes no six relations [ruthless]; steps too big easily tear the balls."

Li Shan and Zou Biao were completely made confused by the two's fervent assurance and discussion, but they couldn't think of any specific rebuttal either. After all, they didn't come to debate.

"Fine, you said so much. Then specifically how to not intervene?"

"First is prohibiting Paper Cotton trading. Then checking Warehouse Receipts currently on market. Those without shop entity or fundamentally not Patterned Cloth industry, purely belonging to empty issuance of Warehouse Receipts, this belongs to economic fraud. Handle according to economic fraud. Those who purchased this kind of Warehouse Receipt belong to victims. After criminal caught, recover loot, return amount by proportion. Of course, full return is unlikely; can only count as them buying a lesson."

Needless to say, let alone whether criminal can be caught, wanting full recovery of illicit money is even more illusory matter. Li Shan smiled bitterly: "This tuition fee is quite expensive!"

"Not expensive how can count as lesson?" Ren Youzi continued, "Indeed are Warehouse Receipts issued by Patterned Cloth Firms, no matter how final market is. They are final bowing [honoring] subjects. Must honor upon maturity. Those unable to honor, handle by bankruptcy. This belongs to economic dispute. Determine verdict according to corresponding laws. Of course we will give them a chance, that is conduct related negotiation with Warehouse Receipt holders, recycling Warehouse Receipts at certain price—this depends on how both sides discuss specifically."

"Finally is also completely empty," Li Shan continued, "Another tuition fee."

"This naturally, speculation originally has huge risk." Chu He said, "Paper Cotton actually has neither compliant issuing subject nor margin system ensuring delivery. Completely can determine as fraud. Just that this problem isn't a futures problem; actually it is serious lack of relevant laws and regulations in entire corporate governance system and financial system."

He had considered this problem for a long time; at this moment his topic was drawn out.

"For example big engagement in Company Registration now. Actually introduced contemporary Limited Liability Company system, but lacking relevant corporate governance requirements. Apparent Agency problem, Shareholder Rights problem, Bona Fide Third Party problem, Equity Trading problem. All are big pits."

"Actually no relationship with Paper Cotton itself. Mainly after financial risk started popping head here, I suddenly felt should reflect on current Guangzhou's Company Reform in good time."

"Current Company Reform, so-called Limited Liability Company and Consortium Legal Person, Religious Legal Person whatnot, actually are very dangerous reforms in current timeline."

"There are several fundamental problems burying huge risks."

"First is after large amount of commercial subjects become Legal Persons, especially introduction of 'Limited Liability,' where is the matching Bankruptcy Liquidation System? After multiple shareholding, under situation without perfect Commercial Registration and Data Accumulation, how to pierce equity, how to find Actual Controller? Risks of relevant money laundering, tax evasion, law breaking and discipline violating will rise linearly. Especially if bureaucrats set up few layers of White Gloves, through Insider Trading or simply Left Hand to Right Hand, changing public funds to private profit, will become very difficult to verify. All depend on Steamed Bun Bureau [Political Security Bureau] doing internal investigation?"

"Second, is lending risk. In timeline with unsound credit system, if there is collateral it is fine; if companies guarantee each other, doing Loan Fraud, what to do."

"Third, is Commercial Registration data impossible to interconnect. Basically out of Guangzhou can't query anymore. Then what about identity problem in commercial signing? How to solve Apparent Agency problem? You say recognize official seal recognize signature; this thing equals can be copied at will in Ming Dynasty; how to solve. Ancient times doing business recognized person; now after Legal Personization, how do you recognize clerk, how do you recognize account manager?"

(End of Chapter)