China Launches Official Investigation Into US Intellectual Property Practices

By Chris at www.CapitalistExploits.at

Last week, China bypassed the World Trade Organisation agreements and using an old law officially launched a probe into Americas intellectual property practices.

China"s foreign affairs minister, talking of America, stated that:

"We’ve come to the conclusion that they’re in an economic war and they’re crushing us.”

Reiterating this stance, a Chinese Communist Party spokesman went on to say:

“The economic war with America is everything and we have to be maniacally focused on that.”

 

“If we continue to lose it, we’re five years away, I think, 10 years at the most, of hitting an inflection point from which we’ll never be able to recover.”

China"s president Xi Jinping explained things further:

“It’s my duty and responsibility to protect the Chinese workers’ technology and industry from unfair and abusive actions.”  

“We will stand up to any country that unlawfully forces Chinese companies to transfer their valuable technology as a condition of market access. We will combat the counterfeiting and piracy that destroys Chinese jobs.”

Actually, none of that happened. At least not that way around.

Think about it for a minute. Put the shoe on the other foot and it seems outrageous... because, well, it is.

Ok now I"ve just three things to say about this.

1. Whenever a government - who we should remind ourselves is not a producer but rather a consumer of resources - states that they are having "their" intellectual property stolen, this should make the private individuals, corporations stakeholders, and employees of those companies stand up and say: "Whoah! Hang on a second... You don"t own that. I do. What the hell?"

It"s a strange situation where the guy who got a C average in his high school finals and never made it into university but actually runs a business dealing with China can see it makes no sense but a politician with a degree from Oxford cannot.

When some Chinese company copies the iPhone, it"s not Washington"s IP they"re stealing. It"s Apple"s. Nobody wants Washington"s IP because raw sewerage isn"t valuable. That Washington lays claim to the IP of all US businesses should scare the isht out of any US-based company.

Which brings me to my second point...

2. Imagine you"re a US company with most of your value in your business being in IP. Now, imagine further that Washington brings about a trade war. What happens next?

Well, your product has just been cut off from THE world"s fastest growing consumer market in the world, and the decision as to whether or not you would participate in that market was just taken away from you whether you like it or not.

That"s all dandy if you"re 4. Parents need to make those calls for you until you"re emancipated. But you"re a grown adult entirely capable of making that judgement call all by yourself.  

A US-led trade war vs. China would be disastrous for tech firms targeting the world"s fastest growing consumer market.

A couple of reminders are worth looking at...

When I was explaining how China is increasing political global power, I mentioned that China is:

• Asia’s largest trading partner


• US largest trading partner


• Germany’s largest trading partner


• Australia’s largest trading partner


• Russia’s second largest trading partner (after Germany)


• Africa’s largest trading partner


• South America’s largest trading partner

So you see the trend is most certainly established, and this trend is like a supertanker - difficult to turn around. It"s certainly a lot smarter to get on the right side of that trend than to fight it... which is impossible.

The other thing with IP is precisely what I was rabbiting on about in when discussing the coming financial disruption. You see, governments, and the nation state in particular, survives by commandeering assets. Don"t believe me? Stop paying your property tax and find out who exactly owns your house.

This sort of control is kinda easy when the assets are Billy"s steel factory but when it"s something like Vitalik Buterin"s Ethereum platform or Google or Baidu... or any number of the thousands of companies out there where IP forms the largest value component, then things get a wee bit trickier for the nation states.

Moving IP is really very easy. It involves cancelling your gym membership, downloading software onto an encrypted drive in the cloud, and booking a one-way ticket to someplace friendlier.

3. And the third thing... Ok, I lied. I"ve only 2 things to say, though I do think there"s a single reason for all this.

The Real Reason for This Stupidity

While it could backfire more spectacularly than a 50-year old Lada, it"s probably this:

Washington"s strategy to dealing with North Korea has been attempting to get Xi to do the dirty work on that snotty kid next door who"s making them look impotent. It"s silly as I mentioned last week when I explained how brain dead sanctions on young Kim really are, which is all the more reason why politicians will pursue it.

Let me make a suggestion, because let"s face it, I"m not here to do anything other than figure this stuff out and see where and why capital will flow in any particular direction.

Governments, most of them being more broke than Borris Becker after Forbes & Manhattan screwed him over, are coming for our assets. The toughest assets to actually seize are those that live in the "digital world"... which is to say their value is more often than not in intellectual property and as such they can "live" pretty much anywhere.

The Best Investment Tip You"ll Read All Year

If you"ve a business built on IP, then may I suggest that looking NOW, ahead of trouble, for the best domicile could well provide you with the best ROI you"ll ever get.

And I won"t charge you a cent for the advice, though you can send donations to Bitcoin Address: 1LNjVKrv8pT1n5SZxkhNpPN9JPWxMwnHmm

Seriously, though remember Zimbabwe, which I spoke about recently? Well, after Mugabe seized all the fixed assets, they found that without the intellect available (it"d fled) those assets became worthless. And while that"s the case the intellect has moved on. It now provides value in other countries, countries that are more receptive to value.

Question

Cast your vote here and also see what others think holds more value

- Chris

"If protection of intellectual property begins to disappear, creative companies will disappear or never get started." — Steve Jobs

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Liked this article? Then you"ll probably like my other missives on

this topic as well. Go here to access them (free, of course).

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The Real Threat Of Artificial Intelligence - Keynesian Dystopia

Authored by Kai-Fu Lee, originally posted at The New York Times,

What worries you about the coming world of artificial intelligence?

Too often the answer to this question resembles the plot of a sci-fi thriller. People worry that developments in A.I. will bring about the “singularity” — that point in history when A.I. surpasses human intelligence, leading to an unimaginable revolution in human affairs. Or they wonder whether instead of our controlling artificial intelligence, it will control us, turning us, in effect, into cyborgs.

These are interesting issues to contemplate, but they are not pressing. They concern situations that may not arise for hundreds of years, if ever. At the moment, there is no known path from our best A.I. tools (like the Google computer program that recently beat the world’s best player of the game of Go) to “general” A.I. — self-aware computer programs that can engage in common-sense reasoning, attain knowledge in multiple domains, feel, express and understand emotions and so on.

This doesn’t mean we have nothing to worry about. On the contrary, the A.I. products that now exist are improving faster than most people realize and promise to radically transform our world, not always for the better. They are only tools, not a competing form of intelligence. But they will reshape what work means and how wealth is created, leading to unprecedented economic inequalities and even altering the global balance of power.

It is imperative that we turn our attention to these imminent challenges.

What is artificial intelligence today? Roughly speaking, it’s technology that takes in huge amounts of information from a specific domain (say, loan repayment histories) and uses it to make a decision in a specific case (whether to give an individual a loan) in the service of a specified goal (maximizing profits for the lender). Think of a spreadsheet on steroids, trained on big data. These tools can outperform human beings at a given task.

This kind of A.I. is spreading to thousands of domains (not just loans), and as it does, it will eliminate many jobs. Bank tellers, customer service representatives, telemarketers, stock and bond traders, even paralegals and radiologists will gradually be replaced by such software. Over time this technology will come to control semiautonomous and autonomous hardware like self-driving cars and robots, displacing factory workers, construction workers, drivers, delivery workers and many others.

Unlike the Industrial Revolution and the computer revolution, the A.I. revolution is not taking certain jobs (artisans, personal assistants who use paper and typewriters) and replacing them with other jobs (assembly-line workers, personal assistants conversant with computers). Instead, it is poised to bring about a wide-scale decimation of jobs — mostly lower-paying jobs, but some higher-paying ones, too.

This transformation will result in enormous profits for the companies that develop A.I., as well as for the companies that adopt it. Imagine how much money a company like Uber would make if it used only robot drivers. Imagine the profits if Apple could manufacture its products without human labor. Imagine the gains to a loan company that could issue 30 million loans a year with virtually no human involvement. (As it happens, my venture capital firm has invested in just such a loan company.)

We are thus facing two developments that do not sit easily together: enormous wealth concentrated in relatively few hands and enormous numbers of people out of work. What is to be done?

Part of the answer will involve educating or retraining people in tasks A.I. tools aren’t good at. Artificial intelligence is poorly suited for jobs involving creativity, planning and “cross-domain” thinking — for example, the work of a trial lawyer. But these skills are typically required by high-paying jobs that may be hard to retrain displaced workers to do. More promising are lower-paying jobs involving the “people skills” that A.I. lacks: social workers, bartenders, concierges — professions requiring nuanced human interaction. But here, too, there is a problem: How many bartenders does a society really need?

The solution to the problem of mass unemployment, I suspect, will involve “service jobs of love.” These are jobs that A.I. cannot do, that society needs and that give people a sense of purpose. Examples include accompanying an older person to visit a doctor, mentoring at an orphanage and serving as a sponsor at Alcoholics Anonymous — or, potentially soon, Virtual Reality Anonymous (for those addicted to their parallel lives in computer-generated simulations). The volunteer service jobs of today, in other words, may turn into the real jobs of the future.

Other volunteer jobs may be higher-paying and professional, such as compassionate medical service providers who serve as the “human interface” for A.I. programs that diagnose cancer. In all cases, people will be able to choose to work fewer hours than they do now.

Who will pay for these jobs? Here is where the enormous wealth concentrated in relatively few hands comes in. It strikes me as unavoidable that large chunks of the money created by A.I. will have to be transferred to those whose jobs have been displaced. This seems feasible only through Keynesian policies of increased government spending, presumably raised through taxation on wealthy companies.

As for what form that social welfare would take, I would argue for a conditional universal basic income: welfare offered to those who have a financial need, on the condition they either show an effort to receive training that would make them employable or commit to a certain number of hours of “service of love” voluntarism.

To fund this, tax rates will have to be high. The government will not only have to subsidize most people’s lives and work; it will also have to compensate for the loss of individual tax revenue previously collected from employed individuals.

This leads to the final and perhaps most consequential challenge of A.I. The Keynesian approach I have sketched out may be feasible in the United States and China, which will have enough successful A.I. businesses to fund welfare initiatives via taxes. But what about other countries?

They face two insurmountable problems. First, most of the money being made from artificial intelligence will go to the United States and China. A.I. is an industry in which strength begets strength: The more data you have, the better your product; the better your product, the more data you can collect; the more data you can collect, the more talent you can attract; the more talent you can attract, the better your product. It’s a virtuous circle, and the United States and China have already amassed the talent, market share and data to set it in motion.

For example, the Chinese speech-recognition company iFlytek and several Chinese face-recognition companies such as Megvii and SenseTime have become industry leaders, as measured by market capitalization. The United States is spearheading the development of autonomous vehicles, led by companies like Google, Tesla and Uber. As for the consumer internet market, seven American or Chinese companies — Google, Facebook, Microsoft, Amazon, Baidu, Alibaba and Tencent — are making extensive use of A.I. and expanding operations to other countries, essentially owning those A.I. markets. It seems American businesses will dominate in developed markets and some developing markets, while Chinese companies will win in most developing markets.

The other challenge for many countries that are not China or the United States is that their populations are increasing, especially in the developing world. While a large, growing population can be an economic asset (as in China and India in recent decades), in the age of A.I. it will be an economic liability because it will comprise mostly displaced workers, not productive ones.

So if most countries will not be able to tax ultra-profitable A.I. companies to subsidize their workers, what options will they have? I foresee only one: Unless they wish to plunge their people into poverty, they will be forced to negotiate with whichever country supplies most of their A.I. software — China or the United States — to essentially become that country’s economic dependent, taking in welfare subsidies in exchange for letting the “parent” nation’s A.I. companies continue to profit from the dependent country’s users. Such economic arrangements would reshape today’s geopolitical alliances.

One way or another, we are going to have to start thinking about how to minimize the looming A.I.-fueled gap between the haves and the have-nots, both within and between nations. Or to put the matter more optimistically: A.I. is presenting us with an opportunity to rethink economic inequality on a global scale. These challenges are too far-ranging in their effects for any nation to isolate itself from the rest of the world.

As Mystery Of China's Multi-Billionaire Default Deepens, A New "Bond Scare" Emerges

Last week, in a largely "under the radar" event, one of China"s wealthiest billionaires (if only on paper), Wu Ruilin, chairman of the Guangdong based telecom company Cosun Group, and whose personal fortune of 98.2 billion yuan ($14 billion) makes him wealthier than Baidu founder Robin Li who is ranked 8th on the Hurun Rich List 2016, shocked Chinese bond market watchers when he defaulted on a paltry 100 million yuan ($14 million) in bonds sold to retail investors through an Alibaba-backed online wealth management platform, citing "tight cash flow."

Needless to say, many were stunned that a billionaire for whom $14 million is pocket change, blamed "tight cash flow" for defaulting on mom and pop investors. In any case, as South China Morning Post reported, despite the founder"s personal fortune, according to a notice put up by the Guangdong Equity Exchange on Tuesday, two subsidiaries of Cosun Group are each defaulting on seven batches of privately raised bonds they issued in 2014. According to the notice, “the issuer had sent over a notice on December 15, claiming not to be able to make the payments on the bonds on time, due to short-term capital crunch."

To be sure, yet another default in a Chinese landscape suddenly littered with bankrupting debt dominoes would have been the end of it, however this morning Reuters added to the mystery when it said that the fate of the defaulted $45 million Chinese corporate bond sold through an Alibaba-backed online wealth management platform was thrown into doubt on Monday, after a bank said letters of guarantee for the bonds were counterfeit.

Quoted by Reuters, China Guangfa Bank Co Ltd (CGB) said guarantee documents, official seals and personal seals presented by the insurer of the bonds "are all fake" and that it has reported the matter to the police.

The dispute highlights challenges in China"s loosely regulated online finance industry, where retail investors often buy high-yielding bonds and other assets, expecting them to be "risk-free" due to guarantees provided by various parties.

As first reported last Wednesday, at the center of the latest dispute are up to 312 million yuan ($45 million) worth of high-yielding bonds issued by southern Chinese phone maker Cosun Group that defaulted this month. The bonds were sold through Zhao Cai Bao, an online platform run by Ant Financial Services Group, the payment affiliate of e-commerce firm Alibaba Group Holding Ltd.

Ant Financial has asked Zheshang Property and Casualty Insurance Co Ltd, which wrote insurance on the bonds, to repay investors. On Sunday, Zheshang Insurance published two documents on its website that it said were from CGB carrying the bank"s official seals, and that guaranteed Zheshang Insurance policies for the Consun bonds. The letters were issued at CGB"s Huizhou branch in December 2014, when the Cosun bonds were sold, Zheshang Insurance said.

And yet, suggesting there is a massive landmine hiding just below the surface of China"s bond market, far worse than merely the consequences rising interest rates, on Monday, CGB said the documents were fake and that it had reported the incident to police as "suspected financial fraud."

While material misrepresentation of facts in Chinese finance is hardly new, the recent alleged violations usher in a whole new breed of fraud, one which is far less nuanced and far more simpllistic and includes outright forgeries of documents that backstop tens if not hundreds of billions in debt. The Cosun dispute follows similar instances of financial fraud this year including forged bond agreements that led to brokerage Sealand Securities sharing potential losses of up to $2.4 billion. In May, the government advised banks to be vigilant after several cases of bill fraud.

Ant Financial on Tuesday said Zheshang Insurance "hasn"t any reason to refuse repayment" which it was obliged to do "within three days" of default.

Making matters worse, the fraud has taken place in the context of a bond default that, according to an Ant Financial spokeswoman cited by Reuters, was a "a one in billions incident" on the platform.

Incidentally, Cosun"s bond issuance totals 1 billion yuan, according to Zheshang Insurance. The insurer"s total registered capital is 1.5 billion yuan.

Should more such "one in billions incidents" emerge, Chinese bond investors - already freaked out by the recent record plunge in Chinese govt bond futures, soaring overnight funding rates, and fears over Fed rate hikes - will rush for the exits just as China"s housing bubble is also popping as reported yesterday, leading to a rerun of the US 2006/2007 dual bursting of the housing/credit bubbles, only this time instead of an $8 trillion financial system, the world will have to backstop China... whose banking system at last check had over $30 trillion in liabilities.

Incidentally, we wonder if now that China"s bond insurers are also under the spotlight, if that means China"s very own MBIA/Ambac moments is imminent, as billions in bond insurance contracts are deemed "fake" by the insurers who would rather not pay up on what is set to be an avalanche of defaults.

* * *

Finally, for those interested in what Bloomberg last week dubbed the "latest China Finance Scare", namely outright forgeries in various debt products, mostly focusing on Entrusted Bonds, here is a useful primer courtesy of BBG:

There’s another Chinese financial practice that’s prompting high-decibel warnings. So-called entrusted bond holdings are a way for financial institutions to skirt rules on using borrowed money to invest in bonds. How? By getting a third party to buy the bonds and agreeing to purchase them at a later date. What could possibly go wrong? How about the worst rout in China’s bond market in a decade. That’s left regulators concerned about the prospect of investors failing to make good on such arrangements, estimated to involve at least $144 billion of bonds.

1. Why entrust us with this news only now?

Concerns about entrusted bond holdings have worsened the tumble in the debt market. Last week, Caixin cited market rumors when it reported a brokerage called Sealand Securities Co. had refused to take over bonds held by a counterparty. That got investors worried. Oversea-Chinese Banking Corp. then said in a note, citing media reports it didn’t identify, that the entrusted holding agreement may have been tied to alleged fraud by ex-staff. Sealand cleared the air when it said it would in fact fulfill the bond contracts that had been stamped with a forged seal. The whole incident was enough to frighten an already jittery market.

2. So why do investors use entrusted holding agreements?

Brokerages and other institutional investors ask counterparties to buy bonds from them when they need to circumvent internal rules on note holdings and leverage, according to Xu Hanfei, a bond analyst at Guotai Junan Securities Co. Or they can simply have third parties buy the notes directly from the market. The practice boosts leverage by effectively giving the financial institutions loans: As brokerages and institutional investors don’t carry the bonds on their books, they can use the funds freed up on paper to purchase more bonds, which can then be rolled into more such agreements. “Non-bank financial institutions, which emphasize returns, have more motivation to amplify leverage through entrusted holdings,” said Li Liuyang, a market analyst at Bank of Tokyo-Mitsubishi UFJ in Shanghai.

3. How widespread is the practice?

Outstanding entrusted holdings are "in the trillions of yuan," according to Guotai Junan’s Xu. That estimate is based on the bond holdings of the brokerages and smaller banks that are major participants in such transactions. That means the amount of money tied up in such deals is at least 5 percent of the 21 trillion yuan ($3 trillion) of outstanding corporate notes in China, according to data compiled by Bloomberg.

4. What broader risks does it pose to China’s financial markets?

A default in an entrusted holding could turn what otherwise might have been a problem with one company’s liquidity into a broader credit event, given that multiple parties may be involved, according to Li at Bank of Tokyo-Mitsubishi UFJ. Li says “everyone is worried about similar situations in their transactions with non-bank financial institutions.” OCBC said that things had got so bad that banks were reluctant to lend to non-bank institutions amid a breakdown in trust between investors.

5. What are regulators doing about it?

Authorities including the central bank and the China Securities Regulatory Commission are investigating some financial institutions’ entrusted bond holdings after the Sealand incident, people familiar with the matter said Tuesday. The holdings run contrary to the central bank’s push to trim investments made on borrowed money, according to China Merchants Bank Co. “It’s just a question of when Chinese regulators will clean up entrusted bond holdings,” said Liu Dongliang, a senior analyst at the bank. Tommy Xie, an economist in Singapore at OCBC, says China’s market rout may prompt regulators to strengthen rules on entrusted holdings. He describes them as "a common practice in the grey area of the bond market.”