life. money. probability.
MARCH 2020
Surveillance, Censorship & 5G: China Weaponizes Technology Genocide in China: The Uyghur Muslim Horror Chinese Stocks Ghost Cities Drunk in China
THE STEALTH WAR WITH CHINA 隐形战争
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march 2020
CHINA’S STEALTH WAR 14 The Dragon That Stalks the West
As democracies look the other way, China is exporting the surveillance, censorship, social control and genocide it perpetrates within its own borders.
18 The New Silk Road
Should the American public care about China’s Belt and Road Initiative when the U.S. isn’t among the participating countries?
20 The CCP Threat
Luckbox asks the experts if the Free World will awaken to the menace of China in this special roundtable.
22 Sino-Muslim Horror
Uyghurs in China have been targeted for ruthless indoctrination under the stiffing regimentation of the Chinese Communist Party.
p. 12 26 Huawei, 5G and the Tech War With China The U.S. government says a global 5G network controlled by Huawei poses serious threats.
29 Chinese Stocks: Caveat Emptor
A forensic accountant reveals how China has abused accounting standards to take advantage of American investors.
32 The Trade War & GDP Growth
Will the U.S.-China Trade War affect GDP growth? You can bet on it … literally.
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editor-in-chief ed mckinley managing editor yesenia duran assistant editor mike reddy technical editor mike rechenthin contributing editors vonetta logan, tom preston creative director jacqueline cantu contributing photographers garrett roodbergen, michael christopher brown muse pete santori China’s Ghost Cities
p. 35
trades
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OUTLIERS
BASIC
35 China’s Ghost Cities
CHERRY PICKS
49 Three Roads to China
comments & story ideas feedback@luckboxmagazine.com contributor’s guidelines, press releases & editorial inquiries editor@luckboxmagazine.com advertising inquiries advertise@luckboxmagazine.com
59 Chinese Stocks & ETFs to Trade
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38 Day Trading in China 40 Down on the Baijiu
50 Long & Short Sino Picks 53 US-China Trade Impacts Aussie Dollar
ARTS & MEDIA
42 One Child Nation & American Factory
60 China’s Neutral Price Action 61 Spreading for Risk Reduction
FUTURES
54 Currencies’ Future
63 The Rolling Defense
FINANCIAL FITNESS
43 Sweet & Sour Secrets
DO DILIGENCE
56 Diversifying With Alibaba & Baidu
POKER
44 Counting Outs
CHEAT SHEET
LUCKBOX OF THE MONTH
64 Rolex Roadshow
editorial offices: 312.761.4218 ISSN: 2689-5692 On the cover: Illustration by Brian Stauffer
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46 Meet Rob Hoffman CALENDAR
47 The Tides of March
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luckbox magazine content is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities and futures can involve high risk and the loss of any funds invested. luckbox magazine, a brand of tastytrade, Inc., does not provide investment or financial advice or make investment recommendations through its content, financial programming or otherwise. The information provided in luckbox magazine may not be appropriate for all individuals, and is provided without respect to any individual’s financial sophistication, financial situation, investing time horizon or risk tolerance. luckbox magazine and tastytrade are not in the business of executing securities or futures transactions, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. luckbox magazine and tastytrade are not licensed financial advisers, registered investment advisers, or registered broker-dealers. Options, futures and futures options are not suitable for all investors. Transaction costs (commissions and other fees) are important factors and should be considered when evaluating any securities or futures transaction or trade. For simplicity, the examples and illustrations in these articles may not include transaction costs. Nothing contained in this magazine constitutes a solicitation, recommendation, endorsement, promotion or offer by tastytrade, or any of its subsidiaries, affiliates or assigns. While luckbox magazine and tastytrade believe that the information contained in luckbox magazine is reliable and make efforts to assure its accuracy, the publisher disclaims responsibility for opinions and representation of facts contained herein. Active investing is not easy, so be careful out there!
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IT’S NEVER A BAD TIME TO CALL OUT BAD ACTORS A citizen blocks a column of Chinese tanks during the Tiananmen Square uprising in 1989.
Why don’t you ask the kids at Tiananmen Square? Was fashion the reason why they were there? They disguise it, Hypnotize it. Television made you buy it. —Hypnotize, System of a Down (2005) together the issue, we learned that the Chinese Communist Party intends to avenge the “Century of Humiliation” that China suffered at the hands of Western and Japanese imperialists—good reason for American policy makers to go on high alert. Our concern intensified when we found out China is exporting censorship and surveillance. In one infamous example, the NBA quickly acquiesced to China’s demands for censorship. Moreover, politicians as different from each other as Sen. Mitch McConnell, R-Tenn., and former Democratic Vice President Joe Biden both choose to downplay China’s menacing tendencies. The fear continued to build with a reading of Stealth War, How China Took Over While America’s Elite Slept. Yet the book inspired hope, too, by bringing to mind the iconic imagery of “Tank Man.” He was the Chinese student who stared down CCP tank crews 30 years ago in Tiananmen Square. That recollection, along with Stealth War, influenced the cover. Then the world changed. Cases of the coronavirus began multiplying, and we wondered if the issue’s poignant cover—along with stories about the CCP battling Western
democracies—would appear insensitive in the face of the epidemic threatening the lives of millions of Chinese people. At press time, the coronavirus had already claimed the lives of 213, with more than 10,000 infected in 23 countries. Airlines were canceling flights to and from China, Hong Kong closed its border with China, the World Health Organization declared a global health emergency, the Shanghai and Shenzhen stock exchanges suspended trading over fears of a crash, and tens of millions of Chinese citizens were quarantined in more than a dozen major cities. Probabilities favor that the situation will worsen. We decided to add the medical emergency to the ever-expanding list of stories breaking these days in China. With 1.4 billion people, it seems something good, bad, sad or frightening is always happening there. But headlines aside, the CCP is a bad actor, and it’s never a bad time to call out bad actors. Our thoughts are with the Chinese people. Ed McKinley editor in chief
Jeff Joseph editorial director
Thinking inside the Luckbox Luckbox is dedicated to helping hard-working, active investors achieve skill-derived, outlier results. How? 1 tune out the noise and false prophets in the investment world and take control
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2 probability is the key to improving outcomes in the markets and in life
3 timely investment themes, sectors and stocks matter only because they tend to produce greater volatility
4 greater volatility brings greater opportunity
5 options are the best vehicle to manage risk and exploit market volatility
6 don’t rely on luck—know your options—luck smiles upon the prepared
PHOTOGRAPH: REUTERS/ARTHUR TSANG DENG
Prompted by the trade war, we sat down a few months ago and began listing potential feature stories about the geopolitical, economic and cultural ramifications of America’s confrontational relationship with the Chinese Communist Party. Possible articles included the trade imbalance, high tariffs on American goods and intellectual property infringement. Security stories could address concerns about the TikTok social media app, skepticism of the Chinese mobile telecom giant Huawei and trepidation about the rollout of 5G. The list didn’t end there. China uses questionable accounting practices on U.S.-listed Chinese stocks. The country is expanding its influence through the multitrillion dollar Belt and Road Initiative. It indulges in mass incarceration and persecution of Uyghurs in “re-education camps.” It’s developing Orwellian “Social Scoring” to control the citizenry. It bankrolled a spy on the Harvard University faculty. We felt compelled to bring readers the perspectives of experts who chronicle the many threats China poses to its own citizens and to the rest of the world. Some of this is alarming. In putting
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Luckbox Reader Survey Turn of the Tide A decade ago, when the Pew Research Center conducted a global survey of attitudes toward China, more Americans viewed the nation favorably than unfavorably. In fact, nearly half, 49%, held favorable views. A lot’s changed since 2010. In the most recent version of the survey, conducted last spring, that 49% dwindled to 26%, and Americans holding unfavorable views nearly doubled from 36% in 2010 to 60% today. Luckbox readers have largely followed the national trend, with 23% viewing China favorably and 51% claiming unfavorable views. In both the Luckbox and Pew surveys, one message seemed abundantly clear: A tide in perspectives toward China has turned.
Who poses the greatest threat to the U.S.? 1. China 2. Iran 3. North Korea 4. Russia 5. Iraq Luckbox Reader Survey
Readers Weigh in on China
The U.S. has to realize that while it may be the hub of liquidity, have the most important currency and be the business center of the world, the once-underdog China is quickly catching up and is possibly poised to claim pole position. —Richard Lockyer, Portugal I think the Chinese can never be trusted. Communism is about power and making the many submit to the whims of the few under the guise of a greater good. Ask the Russians how it worked out. —Joe Todd, Charlotte, NC The Chinese government is a dictatorship that wants complete control over their own people and sees the U.S. as a threat to their
power. They will do anything to undermine the U.S.—take advantage of any weakness—and feel no obligation to abide by any agreement. The only real power to control how they interact involves blocking technology threats (e.g. Huawei) and controlling trade. —Joseph Genther, Beaumont, CA China plays by a different set of rules, yet the trade war has been a disaster. We are right to require changes from China to level the playing field, but I have been shocked at the positive reactions to the one-sided “Phase 1” agreement. China is held to no written milestones, and again we are just left with hollow assurances. —Matt Heid, New York, NY
I honestly believe the United States takes advantage of China. The narrative that’s being told now is a complete lie in my view. China loans us money to buy the things that they produce. Once China finally stops loaning us money year in and year out, they will be able to enjoy the fruits of their labor, their buying power will increase, and they’ll be able to enjoy the things they produce themselves. —Ben Krupa, Orem, UT
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Open Outcry I always appreciate the magazine. The Fake Issue tugged a little harder than other issues, though. Many of the consequences are so far above and beyond what we can even fathom right now. I was pleased to see that the “fake” condition ran the gamut—from fake news to fake shoes—and was especially surprised to see how it impacts my day-to-day activities as a trader and a business owner. Well done! —Robert Temple, Derby, KS
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SHORT INTEREST
CHINA’S STEALTH WAR
“Over the past 70 years, under the strong leadership of the Communist Party of China, the Chinese people, with great courage and relentless exploration, have caught up with the world in great strides. We are now marching forward at the forefront of the times with boundless energy!” —Chinese President Xi Jinping
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“Both the United States and China will have a more prosperous future if we can achieve a level economic playing field. Right now, unfortunately, it is a very one-sided and unfair one.” —President Donald Trump, 2017
“By introducing social credit scores, China now has, theoretically and logically, another lever to influence and control … nine million people with low scores have been blocked from buying domestic airplane tickets … dog owners with low scores have reportedly had their dogs taken away. This is a powerful social control lever, and there is no reason to think the CCP won’t use it to manipulate its citizens abroad.” —Stealth War: How China Took Over While America’s Elite Slept, retired USAF Brig. Gen. Robert Spalding (2019)
SEE PAGE 14
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“The evidence of mass internment, torture, and horrific sexual abuse—including forced abortions and forced sterilizations of Uyghur women and the re-housing of Chinese Han men to live with Uyghur women whose husbands are in prison—is reminiscent of Stalin’s Gulag ... This is the largest surveillance and internment of an ethnic minority since the Holocaust.” —Baroness Sayeeda Warsi, British lawyer, politician and member of the House of Lords
SEE PAGE 22
“Beijing has made technology central to its repression … the goal is to engineer a society free of dissent.” —World Report 2020, Human Rights Watch
“Anything connected to an unsecured 5G network will be a potential weapon that can be used to gain geopolitical influence and control. If China were to control a 5G SEE network, it would be able to weaponize the technology within entire cities—or PAGE 26 entire countries—served by that network and hold that city or state at its mercy.” —Stealth War: How China Took Over While America’s Elite Slept, retired USAF Brig. Gen. Robert Spalding (2019)
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the control freak's guide to life, money & probability
CHINA’S STEALTH WAR 12
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China is investing billions to hold sway in Third World countries, perfecting and exporting surveillance technology, and brutally persecuting its citizens at home and abroad—all in a bid to become the next global superpower. This special section of Luckbox explores the growing China threat.
When Deng Xiaoping rose to power in 1978, the Chinese Communist Party (CCP) recalibrated its attitude toward trade and capitalism. The country was open to receiving foreign investment and participated in the growing global market, but only on its terms. Foreign money could come into China but had to remain there; profits could not be transferred overseas without a great deal of difficulty. China also allowed its citizens to participate in certain Western practices: they could start businesses, create wealth, and wear baseball caps instead of Mao caps. But Beijing kept strict controls over everything else, creating in no uncertain terms a totalitarian state. There is only one political party with power in China: the CCP. It controls all facets of life in China. It says there shall be no free speech. No freedom of religion. No freedom of the press. Every business in China must, by law, have a member of the CCP on its board. In May 1989, there was a brief glimmer of hope that a significant segment of the Chinese population wanted democratic reforms. For three weeks, as many as one million people—students, workers, civil rights leaders—gathered to stage pro-democracy rallies in Beijing’s Tiananmen Square. On June 4, the military was called to silence the protesters. A massacre ensued. Reports of the number of
protesters slaughtered have varied, ranging from a few hundred, according to the CCP, to as many as ten thousand, per a British diplomatic cable. An estimated ten thousand were arrested. On June 5, one of the most dramatic moments of the late 20th century occurred: a man holding two shopping bags stood in front of an approaching Chinese tank, blocking its path in a life-ordeath game of chicken. The identity of the “tank man” remains a mystery. While millions watched this dramatic showdown all over the globe, to most Chinese citizens, the heroic incident itself remains unknown; images and references to it not only are banned in China but are actively hunted down by sophisticated algorithm-powered censors and thousands of social media monitors. The power of capital and free trade has made China rich. It has lifted hundreds of millions up from poverty. It has also made many investors and business owners outside China untold billions of dollars. But it hasn’t made China democratic or increased civil liberties. These foundational concepts of the United States and the West are regarded as an existential threat to the CCP—so much so that the party even put it in writing... “Western freedom, democracy, and human rights are universal and eternal”—is an attack on the foundations of the CCP (warning) against “Promoting Western Constitutional Democracy,” which it describes as “an attempt to undermine the current leadership and the socialism with Chinese characteristics system of governance. Stopping China’s unrestricted war will take single-minded focus across the United States, and with our allies across the globe—the future of freedom is at stake. —From Stealth War: How China Took Over While America’s Elite Slept, by Brig. Gen. Robert Spalding (U.S. Air Force, Retired), 2019
The Dragon That Stalks The West p. 14
The New Silk Road p. 18
The CCP Threat p. 20
Sino-Muslim Horror p. 22
Huawei, 5G & The Tech War With China p. 26
Chinese Stocks: Caveat Emptor p. 29
The Trade War & GDP Growth p. 32
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THE DRAGON THAT STALKS THE WEST As democracies look the other way, China is exporting the surveillance, censorship, social control and genocide it perpetrates within its own borders BY ED MCK I N L EY
An activity as mundane as an English class can arouse the suspicion of the Chinese Communist Party (CCP). That’s why the authorities routinely show up in classrooms to check students’ ID cards. Almost invariably, nothing’s amiss—but on a recent school visit police encountered something unexpected. An American researcher was sitting in on the lesson. The American feared the worst when he realized he’d left his passport at the hotel. But not to worry—a Chinese police officer already had the situation under control. He punched the foreign visitor’s name into a handheld device that immediately displayed his passport number, hotel reservation and who knows what other private, personal, sensitive information. It wasn’t an isolated incident. The People’s Republic of China is spinning a spider’s web of surveillance, censorship and authoritarianism to monitor and control a growing portion of its citizenry and its guests from other nations. The horror doesn’t stop at the borders because the CCP and its puppet corporations are exporting those evils to other dictatorships and even to democracies. It amounts to an undeclared cold war.
cameras, facial recognition, DNA samples, voice recognition and artificial intelligence. The CCP is using that integrated arsenal of low- and high-tech tools to reign in the freedom of a growing list of groups in China, says Sarah Cook, a senior research analyst at Freedom House, a New Yorkbased democracy watchdog. After the suppression of Uyghurs came the harassment of suspected drug addicts, former criminals, banned religious groups—such as Christians and Buddhists—and foreigners of every stripe, Cook notes. Compiling a DNA database of minority groups amounts to a latter-day version of the punch cards the Nazis used to track Jews in Germany, according to Sophal Ear, professor of diplomacy and world affairs at Occidental College in Los Angeles. For him, the injustice minorities suffer in China brings to
PHOTOGRAPH: REUTERS/STRINGER
CHINA’S STEALTH WAR
Surveillance cameras, like these near the headquarters of China’s Hikvision, are monitoring residents of countries across the globe.
Asserting more authority Arguably, China’s current push toward perfecting totalitarianism turned more serious in 2017 with the suppression of the Uyghurs, a Muslim ethnic minority targeted for assimilation into mainstream China. (See page 22.) The Uyghurs live under nearly constant scrutiny by the CCP, whose operatives employ long-established tools of social control, such as ID cards, checkpoints, interrogation, resettlement, torture, rape and murder. They combine those time-tested means of coercion with newer methods of intrusion that rely on video
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隐形战争
mind the ravages the Khmer Rouge inflicted in attempts at social engineering in his native Cambodia. Besides all-encompassing surveillance, China pursues social engineering by employing iron-clad censorship of ideas that conflict with the dictatorship’s goals, says Hong Kong-based James Griffiths, author of The Great Firewall of China: How to Build and Control an Alternative Version of the Internet. “The party realized pretty early on the danger of technology could pose in the form of encouraging dissidents,” he says. “They started baking in controls and propaganda.” The government and companies such as Weibo and WeChat collectively take online action that constitutes part of the Great Firewall, Griffiths continues. The combined entity inspects internet traffic entering or leaving China and blocks anything deemed objectionable, he
says. It began as little more than a porn filter but added sophisticated artificial intelligence and tens of thousands of human censors, growing into a key means of controlling China’s citizens, he contends. It’s also one of many tools that ensures the CCP’s s power over the Chinese people doesn’t slip away even when the country’s students, businesspeople, diplomats and refugees are living abroad, Ear suggests. —Sarah Cook, Relentless monitoring also makes Freedom House sure expatriates know that anything they do in any country can result in reprisals against friends and family members who have remained behind in China. Cook adds that researchers have found that 70% of Chinese students attending U.S. colleges and universities practice a cautious self-censorship. Griffiths says of students that “they are going abroad and kind of taking the Great Firewall with them on their phones.”
“If you’re investing in Tencent, you’re complicit in innocent people being put into jail or killed.”
Social Score: 1984 It’s no use monitoring the citizenry unless the resulting data serves some purpose. To that end, China is testing a Social Credit System that yields scores for good and bad behavior. Infractions that could lower a score and result in punishment include anything and everything from jaywalking or running a red light to eating on rapid transit or failing to show up for a restaurant reservation. In one example, anyone caught on camera failing to pick up after a dog could lose the right to own a pet. Chinese earn credits for good deeds, such as donating blood, giving to charity or volunteering for community service. They can offset the negatives accrued through misbehavior or wrongdoing, and it’s all considered official because artificial intelligence juggles the merits and demerits. China’s government is trying out variations on the system in different parts of the country and appears nearly ready to go national with a uniform approach. It could even rule the behavior of Chinese nationals when they’re abroad. Critics complain that China’s system of Social Credits possess dark, unprecedented power to control nearly every aspect of life, signaling the end of privacy, dignity, dissent and personal initiative.
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CHINA’S STEALTH WAR
Crowds offer no anonymity in China because the government combines facial recognition with surveillance cameras.
Biggest Contributors to the United Nation’s Budget in 2019 1st: U.S. $674 million (22%)
“Is it worth selling your soul by shutting your mouth about China’s misdeeds?” — Sophal Ear, Occidental College
Exporting misery But the Chinese aren’t alone in feeling the pain of the authoritarian practices that have arisen in their country, according to multiple sources. The Chinese government owns controlling interest in several companies—like Hikvision—that produce some of the world’s best surveillance hardware and software. By selling that equipment abroad, the CCP can profit financially and simultaneously spread tyranny, says Griffiths. “We’ve seen various places like Vietnam adopt a cyber security law which is very, very similar to China’s own, and it comes after
multiple meetings with officials in Beijing,” he notes. The resulting dependence on China for surveillance merchandise and surveillance training typifies the one-sided trade relationships China is forging to solidify its power around the world. When a country relies on commerce with China, its governments and businesspeople begin to practice self-censorship in the face of Chinese atrocities. It may not come as a shock that trade-related fears can make dictatorships in poor countries turn a blind eye toward China’s evils. China wields economic power in
the Third World by developing infrastructure that also serves strategic military goals for China, says Ear. (See page 18.) Besides the need for funding, authoritarians might even feel a kinship with China and its harsh policies, he says. But Western institutions fall victim to China’s temptations, too. For many businesses, the sheer size of the Chinese market can prove too much to ignore. Management learns to keep quiet because China displays almost zero tolerance for dissent, contradiction or criticism. Why make a movie that won’t be shown on China’s screens? Why miss
Don’t Poke the (Pooh) Bear A.A. Milne’s Winnie the Pooh, a seemingly unlikely candidate for censorship, was nonetheless banned in China following internet memes likening Chinese President Xi Jinping’s physique to that of the lovable, honey-eating bear. While the memes date back as far as 2013, when President Barack Obama was photographed walking alongside the Chinese leader at the Annenberg Retreat at Sunnylands in Rancho Mirage, Calif., the ban is believed to have been enacted officially in mid2017. But just how strong is the embargo on the bear? Apparently stringent enough to interfere with the release of the 2018 live-action film Christopher Robin.
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PHOTOGRAPH: (CROWD) FLICKR/ JACK ZALIUM
2nd: China $368 million (12%)
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PHOTOGRAPH: COMEDY CENTRAL
out on revenue from China’s NBA fans? Strong-arm tactics China’s not above flexing some muscle to get its way—even when it comes to policy-making in the United States. It didn’t work in 2012 when a Chinese diplomat journeyed from the consulate in San Francisco to convince the mayor of Corvallis, Ore., to force a merchant to remove an outdoor mural that advocated independence from China for Tibet and Taiwan, Cook says. But in 2017 the California legislature shelved a resolution condemning China’s persecution of the Falun Gong spiritual movement after receiving a letter from the Chinese consulate warning that the measure could harm relations, she notes. China sometimes steps beyond writing cautionary letters and instead takes retaliatory action that carries financial repercussions for investors, Cook continues. In 2012, when the New York Times published an unfavorable article on the family of China’s prime minister, China blocked its citizens’ access to the newspaper’s English-language website and its brand-new Chinese-language site. The paper’s stock declined 20% and recovered only slowly and its sales staff had to renegotiate advertising contracts because of the loss of readership, she says. The United Nations also provides China with a means of asserting power. As one of the five permanent members of the U.N. Security Council, China wields veto power over many of the body’s resolutions. Meanwhile, China being China, it simply packs the clout to influence much of what happens at the U.N., Cook asserts. It also doesn’t hurt that China makes the second-largest financial contribution—after the U.S.—to operating the U.N. last year, she adds.
Masking inner weakness The CCP’s desperate need to appear economically successful has led the National Bureau of Statistics of China to employ sketchy accounting practices that inflate sales volume for Chinese companies. (See page 29.) But such antics, even when backed by the CCP’s awesome displays of power, can never disguise the fragility at the heart of the dictatorship, Cook asserts. Dissent inevitably arises, she says, noting the example of police offer who can’t avoid becoming friends with a religious leader he’s supposed to monitor and suppress. There’d be no need for propaganda and censorship to prop up a government that the populace supports, she says. Luckbox readers should avoid the whole mess, Cook urges. “The real danger is complicity,” she maintains. “If you’re investing in Tencent, you’re complicit in innocent people being put into jail. People get killed because of information collected by these tech companies.” Inviting the CCP to come in from the cold won’t turn out well, Cook warns, providing the example of Chinese-made communications technology. “5G is a backdoor into our personal information,” she says. “Once (China) has that access, it’s only a matter of time before it’s detrimental to our civil liberties.” The cancer of surveillance and censorship spreads from China to other countries that are emboldened to adopt the Chinese model in part or in full, warns Griffiths. What’s more, the compromises companies make to operate in China don’t stay in China. After Google built Dragonfly—a censored search engine—for China, other authoritarian regimes wanted their own versions, he notes. Ear sums up the situation this way: “It’s sobering. America needs to wake up to the dangers. Is it worth selling your soul by shutting your mouth when see something?”
“Band in China” The creators of South Park love pushing boundaries and provoking controversy. Yet they produced the show for more than 20 years before it was banned in China. The Chinese Communist Party finally took offense to Episode 299, aptly titled “Band in China.” It came out in October and not only criticized the Chinese government for censorship but also the American entertainment industry for appeasing Chinese censors. After word of the ban reached South Park creators Matt Stone and Trey Parker, the duo issued a second jab in the form of a fake apology that said in part: “Like the NBA, we welcome the Chinese censors into our homes and into our hearts. We too love money more than freedom and democracy.”
A South Park depiction of Chinese authorities making a censorship arrest took aim at the regime and its American sycophants
Nothing to See Here Under the iron fist of the Chinese Communist Party, it’s easier to list what isn’t banned than what is. Just the same, here’s a (very) partial list of what the CCP has outlawed. Books: Alice’s Adventures in Wonderland, Green Eggs and Ham, and Lady Chatterley’s Lover Websites: YouTube, Facebook, Google (including Maps, Docs, Drives, Sites and Picasa), Twitter, Dropbox, Foursquare and Flickr Movies: The Dark Knight, Back to the Future, Dead Pool, Avatar, Who Framed Roger Rabbit, Ghostbusters, Star Wars, Noah, The Dark Knight and The Departed Television shows: Doctor Who, Bojack Horseman, Peppa Pig and South Park
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CHINA’S STEALTH WAR
THE NEW SILK ROAD China’s Belt and Road Initiative is financing major development projects throughout the world. Is hegemony the goal? BY M IK E R EDDY
When an economic superpower plans to invest trillions of dollars in other countries’ infrastructure in the name of regional connectivity and trade, one can’t help but wonder if its motivations are solely altruistic or if other factors are at play. “We should foster a new type of international relations featuring win-win cooperation; and we should forge partnerships of dialogue with no confrontation and of friendship rather than alliance.” Those words, delivered by Chinese President Xi Jinping during the open-
Loosening the Belt, Widening the Road $1–8 Trillion
China’s estimated BRI investment
$575 Billion
Estimated worth of BRI investment
World Bank Group, 2019
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3.4%
China’s expected increase in GDP from the BRI
ing ceremony of the Belt and Road Forum for International Cooperation in 2017, underscore a popular narrative surrounding one of China’s most ambitious international projects. Originally called “One Belt, One Road,” China’s Belt and Road Initiative, or BRI, is popularly understood as a large-scale trade, energy and infrastructure plan meant to “enhance regional connectivity and embrace a brighter future,” in the words of the Chinese government. Since it was announced in 2013, the initiative has appeared in headlines that much of public disregards. The United States isn’t among the more than 60 countries where China has launched infrastructure projects, and it’s unlikely to become one anytime soon. —Stealth War: How China Took This begs the question: Should the Over While America’s Elite Slept American public care about the BRI? by retired Brig. Gen. Robert “Yes, definitely,” says Nadège Spalding (2019) Rolland, a senior fellow at the National Bureau of Asian Research in Washington. “And not just the American public, but everyone more generally because this has the potential to impact our world.” Rolland has been researching to have some sort of influence everythe BRI since she began working where else in the world, therefore for the nonprofit Asian policy think reducing the American influence tank more than five years ago. She and power on the rest of the world.” told Luckbox she was drawn to In retired U.S. Air Force Brig. Gen. the subject because she wanted to Robert Spalding’s book, Stealth War, understand for herself—straight Rolland is quoted calling the BRI from the source—what the architects an “instrument of political warfare.” of the BRI were thinking. Political warfare, she said, is the use While infrastructure is a major of all the instruments a state can component of the initiative, Rolland muster, with the exception of milisaid less-talked-about layers include tary means, to achieve a geopolitical financial integration, unimpeded objective. That objective? Summontrade, strengthened political coopera- ing support to grow China’s power tion and people-to-people exchanges. and influence. To look at it only as an infrastruc“We thought for a long time that ture-building project is superficial, democracy was the key to peace and she said. Instead, it’s a vision for a prosperity,” Rolland said. “Beijing world with China at the helm. wants to demonstrate that you don’t “It’s sort of an inverted map of need democracy to be prosperous China versus American influence and to be stable.” and power,” Rolland said. “Implicitly But the BRI isn’t without chalit says to the U.S. that China wants lenges, not the least of which include
“The Belt and Road Initiative is not solely about free movement of goods and raising the standard of living—it is also about restricting the movement of ideas, constraining ideological freedom and removing opposition to the authority of the state.”
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Ancient history The Belt and Road Initiative is sometimes referred to as the “New Silk Road,” a nod to the ancient trade routes established during China’s Han Dynasty of 206 B.C. to 220 A.D. “Belt” refers to the initiative’s land routes, now in the form of roads and rails, whereas “Road” refers to sea routes, or the 21st Century Maritime Silk Road.
Akureyri Arkhangelsk
UK
London
Hamburg
Moscow
RUSSIA
Yekaterinburg
Krasnoyarsk
SPAIN
Marseille Madrid Malta
Casablanca
Dakar
Key
Astana KAZAKHSTAN
Bamako
Kaduna
Ulaanbatar Urumqi
Istanbul Tashkent
Piraeus
CHINA
Busan
Suez S. ARABIAIRAN Karachi EGYPT INDIA Abu Dhabi Mecca DJIBOUTI
Silk Road Economic Belt New Maritime Silk Road
Vladivostok
Projects subsumed under China’s Belt and Road initiative
Asian Infrastructure Investment Bank (AIIB) members
Gas pipelines Oil pipelines
Colombo
Existing railroads
SINGAPORE
Lagos Mombasa Dar es Salaam
Jakarta
Planned
INDONESIA
Proposed economic corridors
Darwin
Lobito Walvis Bay
Ports with Chinese engagement Maputo
Planned or under construction
AUSTRALIA
Newcastle Melbourne
GRAPHIC: REUTERS VIA MERCATOR INSTITUTE FOR CHINA STUDIES
NEW ZEALAND
navigating a storm of accusations that the initiative is a debt-trap diplomacy scheme, luring developing nations into borrowing money they can’t pay back. An often-cited example occurred in Sri Lanka, which in 2017 leased its second-largest port to China for 99 years in exchange for money to relieve debt owed to China. While Rolland said she hasn’t found any indication in her research that debt-trap diplomacy is behind the BRI, 2018 research from the Center for Global Development concluded that “eight countries are at particular risk of debt distress based on an identified pipeline of
project lending associated with BRI.” Much remains unknown about the BRI and the long-term expectations it’s setting on the global stage, partly because information coming out of China is selective and opaque. Regardless, Rolland said the West should pay attention to China’s soft connections instead of just its physical or hard ones. “I think many in the developing world really are welcoming and looking forward to partnering more closely with Beijing,” Rolland said. “In terms of impact this might have on the future world, I think we need to pay a lot of attention to that.”
“Beijing wants to demonstrate that you don’t need democracy to be prosperous and to be stable.” Nadège Rolland monitors China’s BRI.
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THE CCP THREAT Will the Free World awaken to the menace of China? Luckbox asks a group of experts in this special roundtable. The United States and other Western democracies have stood by passively as the Chinese Communist Party polishes and shares the instruments of authoritarianism. The party relies on surveillance, censorship and propaganda to control the populace—often with the help of Western companies that hunger for a piece of the gargantuan Chinese market.
Does China pose a threat to the United States? Sarah Cook: If you look at human
rights, democracy and internet freedom, China under the Chinese Communist Party certainly does pose a threat to fundamental American values and institutions. China engages in media control and other efforts to censor or downplay points of view they don’t like in the mainstream media and in business. Sophal Ear: The U.S. is still the world’s greatest economy, and it has the greatest military, but from the standpoint of sheer size, China has to become economically bigger at some point. The more people you have, the more human resources you have. In per capita output China may never equal the U.S., but it would be strange if it never surpasses the U.S. in total, just because of its huge population. Does Russia or China pose a greater threat to United States? Robert Spalding: The establishment
consensus is that Russia is more of a military threat to the United States—with the advance of its nuclear weapons, modernization of its nuclear arsenal and the development of hypersonic weapons. But the Chinese Communist Party represents the most significant existential threat since the Soviet Union, not just to the United States but to all democratic systems. China has insinuated itself into the institutions of liberal democracies and has re-engineered globalization to turn what we believe to be the strengths of those institutions into vulnerabilities. Nadège Rolland: My personal
view is that Russia is a declining country. Yes, it’s a very important actor that still has a lot of military
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power. It has a lot of leverage over Europe because of its energy power as well. But overall, compared with China’s economic clout and political and diplomatic influence, I think it’s not as important in the in the long run. Why has the United States been so passive about the threat of China? Spalding: I don’t think that
national security professionals understand the dynamics of global economics or global finance. Authoritarian capitalist systems like China use economic and financial relationships to suppress the freedoms generally valued in a democracy. Are Americans becoming more aware of China’s aggression? Spalding: For the most part. But
unless you’re forced into making national security policy at the highest levels, you will probably not get a full understanding of the picture. Cook: Over the last year we’re seeing much greater awareness among a much wider range of audiences in the U.S. and other parts of the world. My Twitter feed was all about China after the NBA’s acquiescence to Chinese censorship and then the South Park ban. James Griffiths: Governments
in the West—particularly in the U.S. but also the U.K. where I’m from—have a lot of other things on their plates that are preventing this from becoming a priority. That’s understandable but doesn’t necessarily mean we’re going to be in a great space.
How would the U.S. military be affected if China withheld supplies? Spalding: The risk is quite severe
because we’ve almost completely de-industrialized the United States.
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Whole industries are dominated by China, one of which is the rare earth metal industry. Another is the refinery capability of the United States, which is less than it needs to be. We’ve allowed these things to die in the United States through lack of care or lack of industrial policy. Could the loss of America’s manufacturing base embolden China to attack the U.S.? Spalding: I don’t believe that the
Chinese pose a military threat in the sense that they seek a military conflict with the United States. Ear: China’s Belt and Road Initiative is producing airports and seaports with regional military potential in countries like Pakistan and Cambodia. It’s spoken of as the “ring of pearls” that could extend China’s military power beyond its borders. (See “The New Silk Road,” p. 28.) Does China’s suppression of its people extend beyond its borders? Cook: Intimidation and harassment
are sometimes targeted at members of the exile community here in the United States. We see that very directly. When Chinese nationals are abroad, family members still in China are sometimes detained. Some are not allowed to go back and can’t see their families for years. They have elderly parents
Sarah Cook, Freedom House senior research analyst for East Asia and director of Freedom House’s monthly China Media Bulletin @sarah_g_cook
who they can’t go visit before they pass away. Are China and Russia cooperating to spread authoritarianism? Cook: There’s formal and informal
cooperation. They’re both members of the Shanghai Cooperation Organization, which has provisions that result in persecution. Other examples are more informal. Russia is trying to copy internet regulation tactics from China. And then China is copying information tactics on social media that are very Russia-like—that started emerging over the last year. They definitely feed off of each other. Ear: Both are undemocratic so
they have a common adversary— the West. It seems that China and Russia have the same goal in mind—to undermine us and show they can screw with the world’s biggest economy. They want to prove they can manipulate elections, taking advantage of our openness in ways that we need to be aware of. China learned from the collapse of the Soviet Union and now applies policies with “gradualism” instead of shock.
Griffiths: Russia has realized that it was trailing by a long way, and it’s increasingly adopting the Chinese mode. Chinese experts
Sophal Ear, Occidental College associate professor of diplomacy and world affairs and co-author of The Hungry Dragon: How China’s Resources Quest is Reshaping the World @sophal_ear
are flying to Russia and consulting with them. In recent months Russia has been experimenting with taking its domestic internet offline and controlling how the internet intersects with the rest of the world, which is how China’s internet already exists. Russia is essentially adopting the Chinese model for the internet. Rolland: Well, it’s not an alliance.
“I don’t think that national security professionals understand the dynamics of global economics or global finance.”
It’s everything but an alliance. They don’t have a treaty. Their relationship is unsustainable —Brig. Gen. Robert because of the underlying distrust Spalding between the two countries. It’s a very close relationship based on a common view of what the world should look like, which is a recognition that Western democracies and values are dangerous for both of their regimes.
How should the United States address concerns about China? Rolland: With regard to China,
realizing the importance of working together with your allies is really fundamental. This is something America needs to do for its own interests, but it’s too complex for the U.S. to act alone. It really, really needs cooperation and understanding and joint work with allies and friends and like-minded countries to be efficient. This is really fundamental.
James Griffiths, author of The Great Firewall of China: How to Build and Control an Alternative Version of the Internet @jgriffiths
Nadège Rolland, senior fellow for political and security affairs at the National Bureau of Asian Research and author of China’s Eurasian Century? Political and Strategic Implications of the Belt and Road Initiative @rollandnadege
Retired U.S. Air Force Brig. Gen. Robert Spalding, author of Stealth War: How China Took Over While America’s Elite Slept @robert_spalding
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SINOMUSLIM HORROR Millions of Uyghurs in China suffer the inhumanity of concentration camps, crematoriums, unrelenting surveillance and forced marriage, leading to genocide BY RUSH A N A BBA S
Twelve million Muslim Uyghurs who make their home in the northwest corner of China differ racially and culturally from the country’s Han Chinese majority. As a result, the Uyghurs have been targeted for ruthless indoctrination aimed at bringing them under the stifling regimentation of the Chinese Communist Party.
Question: When was the last time you spoke to your parents? Answer: More than two years ago. Q: Have you texted or sent pictures of your kids to your family in your hometown? A: No. They told me not to contact them more than two years ago, and now I have no idea where they are. Q: Have you contacted your siblings back home? A: No, I have no idea of their whereabouts. Sadly, these are typical, everyday conversations among the victims of Chinese oppression who have abandoned their homes to take flight in the Uyghur Diaspora. Despite the worldwide proliferation of smartphones and the universal convenience of Instagram, Facebook and Twitter, Uyghurs find themselves almost totally cut off from communicating with their loved ones. But that’s just the beginning of the Uyghur horror story. The Chinese Communist Party (CCP) combines racism and cutting-edge technology to assert nearly total control over the entire Uyghur population. The Uyghurs dwell in a constant state of terror and endure unrelenting surveillance and censorship. The CCP denies them freedom of movement, freedom of thought, freedom of religion and freedom of speech. The Uyghurs (pronounced we-gur) have been isolated from the rest of the world since 2017. Even those who have escaped to other countries often fear to speak out because their friends and families back home could face savage retribution. Concentration camps The United States Department of Defense estimates that as many as 3 million Uyghurs—a fourth of the Uyghurs who reside in China—have been herded into concentration
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camps that the CCP euphemistically calls Vocational Education and Training Centers. The camps represent the culmination of decades of repressive policies, and the aim is social reengineering, says Darren Byler, a lecturer in anthropology at the University of Washington. Inside the camps, detainees are indoctrinated with Communist Party propaganda and forced to renounce Islam. They’re raped, tortured and forced to undergo abortions, according to Aiman Umarova, a Kazakh human rights advocate. China’s first concentration camp in Xinjiang was built under the “Strike Hard Campaign” in 2014. The camps have grown in size by almost 500% in the past 24 months alone. The Chinese government is building crematoriums in the camps to alter a culture that doesn’t practice cremation, says Foreign Policy, an American news source. Crematoriums in combination with concentration camps bring to mind the Nazi Holocaust. China’s campaign of despotism also extends far beyond the camps, says New Dawn, a Turkish newspaper. Security that’s tighter than George Orwell dreamed of in his novel 1984 has fostered a massive, high-tech police state in the Xinjiang Uyghur Autonomous Region that most of the world’s Uyghurs call home, the paper says. 24-7 surveillance The streets of Xinjiang’s towns and villages are festooned with cameras equipped with facial recognition software. Iris scans identify residents on the flimsiest of pretenses. Police maintain street-corner checkpoints. GPS tracking devices trace the movements of every vehicle, and QR scanning codes help keep track of daily activities in every home, according to Newsweek. While gathering all that intelli-
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PHOTOGRAPH: REUTERS/JORGE SILVA
gence on the Uyghurs, the CCP has also managed to maintain an information blockade so tight that news of the situation rarely reaches most people in many countries. The goal of the incredibly intrusive surveillance and iron-fisted social control is to wipe out Uyghur civilization by force. Their religion has been outlawed. Uyghur mosques, cemeteries and historical buildings have been demolished or turned into entertainment facilities, says The Washington Post. Copies of The Qur’an, Uyghur historical books and cultural materials are burned. Everything that makes the Uyghurs unique has been treated as an abnormality—a disease to be eliminated. That includes language,
culture, history, religion, identity and way of life. But that’s not how the CCP tells it. According to China’s ambassador to the U.S., Cui Tiankai, Beijing’s regime is turning Uyghurs into “normal persons,” says CNN Philippines. Today, all “normal religious activities” of Islam are banned and labelled as “extreme” and “toxic” under the pretext of the “People’s War on Terror.” No escape My family has not avoided the horrors. After I exposed the atrocities in the camps and the fate of my in-laws, the authorities abducted my sister, Dr. Gulshan Abbas. Surely, my sister, a medical doctor, doesn’t
need job training in a camp. Moreover, she’s not outspoken on political matters. But, unfortunately, her fate’s not unique. Detainees include hundreds of physicians, academics, businesspeople and other professionals. What’s more, the children and the elderly in the camps don’t need job training. Even children who aren’t in the camps have become a target of China’s policies of assimilation and social engineering. The Chinese government is trying to eradicate the Uyghur identity by controlling the younger generation. While their parents are detained in the camps, more than 500,000 Uyghur children have been held hostage in government-run orphanages, where
“Everything that makes the Uyghurs unique is treated as an abnormality— a disease to be eliminated. That includes language, culture, history, religion, identity and way of life.”
A Uyghur protester uses a mask to decry censorship during an anti-China demonstration last year at the G20 summit in Japan.
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Asymmetric Reaction The Chinese government’s monitoring, arrest and internment of members of its minority Uyghur population may be tied to the “Xinjiang Conflict.” The clash is named after the northwest region of China, Xinjiang, where nearly 50% of the population is Uyghur. Animosity there reached the boiling point in 2014 after three separate attacks—at least one of them by Uyghur sepearatists—killed more than 70 people and injured several hundred more. One of the incidents, the 2014 Kunming attack, has been referred to as “China’s 9-11.” It was a railway station knife attack that claimed the lives of 31 people andl injured 143.
Where are the Uyghurs? China 12 million Kazakhstan 223,000 Uzbekistan 55,000 Krygyzstan 49,000 Saudi Arabia 50,000 Canada 6,000 U.S. 8,000
2 to 3 Million
Estimated number of Uyghurs in Chinese concentration camps
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they swear loyalty to the CCP, says Taiwan News, an English-language daily. The overcrowded orphanages are tantamount to locking children up like farm animals in a shed, according to Radio Free Asia reports. Some are suffering severe injuries, and some die without adequate medical care. Economic ruin Besides incarcerating masses of Uyghurs in the camps in the Xinjiang Region where most members of the ethnic group live, the CCP has dispersed Uyghur prisoners throughout China in an attempt to hide the number detained. So many have been imprisoned that the Uyghurs’ economy has been destroyed. Much of the value that remains in the Uyghur economy and ownership of the Uyghur’s land has been redistributed to members of the Han Chinese ethnic group that constitutes 92% of the country’s population. Meanwhile, conditions in the camps show no sign of improvement. Dr. Olsi Yazeji, a Canadian-Albanian scholar, joined a group of reporters on a “visit” to the camps by invitation of the Chinese government. He went with the intention of telling the world that concentration camps where just false propaganda by the U.S. and other
Western countries. However, even in pre-arranged, government-orchestrated visits and interviews with coached, supervised detainees, he saw Uyghurs facing oppression only because of their faith. Dr. Yazeji said publicly that he encountered real concentration camps and witnessed brutal human rights violations. During the interviews in the camps, the government repeatedly told the journalists in Dr. Yazeji’s group that detainees return home for the weekends and use phones to call family members. The reality? My sister has been missing for almost a year and a half, and she has not called her daughters, one of whom she knew was pregnant. “Mass Rape” The CCP is orchestrating “mass rape” of Uyghur women who are forced to share a bed with Han Chinese while their husbands are away in forced-labor facilities, says the Daily Sabha, a Turkish newspaper. Chinese state-owned media report 1.1 million Chinese cadres have been stationed in Uyghurs’ homes, according to Bloomberg News. They have taken up residence in Uyghurs’ living rooms, dining areas and bedrooms. As a result, Uyghur women are facing sexual abuse. The “Pair Up Program,” or “Double Relatives,” monitors and supervises Uyghurs inside their own homes and shows the deep imbalance of power between Han Chinese and Uyghurs. It’s part of the CCP’s forced assimilation. Under the programs, Uyghurs outside the camps are facing severe political indoctrination by their Chinese houseguests. The “hosts” are required to provide these houseguests with information about their lives and political views. The “guests” are supposed to become part of the family, but the relationship actually constitutes one-sided
discrimination and oppression in the private sphere. Meanwhile, state-owned media have released propaganda videos encouraging Han Chinese men to travel to Xinjiang and marry Uyghur girls. Men are offered money, jobs and housing for intermarriage. Girls and their families are afraid to refuse the forced marriages because they could be viewed as Islamic extremists and get sent to the camps, the U.S. State Department says. Besides helping to dilute Uyghur culture, the forced marriages ameliorate the government’s infamous birth-limitation policy. That one-child limit, combined with a cultural preference for sons, has created a skewed gender ratio of 117 boys to 100 girls in China, says Leta Hong Fincher, a sociology doctoral student at Tsinghua University. I firmly believe Uyghur girls are being raped through sham marriages. Enslaved in factories The atrocities don’t end at the gates of the camps or stop with the stifling scrutiny. Millions of Uyghurs have been forced into modern-day slavery, laboring against their will at low-level tasks that help China’s economy grow, says Foreign Policy. In addition, the Belt and Road Initiative dislocates Uyghurs from their homes and transfers the properties to Han Chinese, The New York Times says. On organ farms, millions are forced to undergo DNA tests to aid in surveillance and, according to some reports, prisoners are killed to harvest their organs, says Business Insider. But the persecution of the Uyghurs is only part of a rising tide of intolerance rapidly spreading from Beijing, says CNBC. China is also persecuting Tibetans and attempting to control Hong Kong. This struggle should concern everyone who values the basic human
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rights of dignity, respect and freedom. These rights are a fundamental part of the human legacy that is under attack from the totalitarian Chinese nationalist regime. International bodies should come to the aid of Uyghurs in China. But fear of interfering with trade, the power of the Belt and Road Initiative, and the strength of debttrap diplomacy are keeping much of the world silent. China, as the second-largest financial supporter of the U.N., strong-arms the world into kowtowing to its every wish. The Chinese regime is bribing and leveraging some politicians, journalists, scholars and businesspeople around the world. The world backs down Last summer, 22 countries, which later increased to 24, including mostly Western democracies, signed a U.N. declaration condemning China’s so-called “Uyghur Detention Centers,” says The Daily Mail, a British newspaper. In response, 37 countries signed a letter expressing support for China’s brutal treatment of the Uyghurs. The number supporting China later increased to 50, according to the newspaper. When will the world stand up for what’s right? China is changing the rule of law, spreading totalitarian ideology and making its influence felt around the world, while committing genocide at home. The world’s weak reaction to China’s transgressions may be more shocking than the transgressions themselves. Besides turning a blind eye to inhumanity, the world is actively investing in CCP-controlled companies and inviting those companies to export 5G infrastructure that could harbor spyware. China has instilled fear of talking on the phone in 12 million Uyghurs but remains the world’s largest supplier of telephones, notes the Hong Kong-based
South China Morning Post. The world is also granting China the privilege of hosting the Winter Olympics in 2022, an event where people should come together to celebrate their differences. To say the least, the CCP does not respect such values but instead tramples them. It seems like a repeat of the 1936 games in Berlin, where Hitler announced the opening of competition. Caught in the act The 403 pages of the Xinjiang Papers, one of the first major leaks from Beijing in decades, provide an unprecedented inside view of the CCP’s racially targeted hatred and brutality, The New York Times reports. They reveal Xi Jinping’s vision for using the “organs of dictatorship” against Uyghurs and showing them “absolutely no mercy.” And it was the new Xinjiang Communist Party Secretary Chen Quanguo’s heavy-handed tactics that ordered security forces to “round up everyone who needs to be rounded up” into involuntary camps for “concentrated education and training.” The papers prove these vicious policies were conceived and orchestrated by top officials in the Chinese government. Xi Jinping’s ability to mislead the international community about the nature of the camps continues to erode. The fact that the leak happened indicates that some official questioned China’s approach deeply enough to risk his or her life to take action. The papers verify discoveries that journalists, researchers and activists have made over the past few years. What’s inescapable is the culpability of senior party leaders, especially Chen Quanguo. Plea for compassion It’s time to sanction China under the Global Magnitsky Act, a U.S. law passed in 2012 to punish Russia
Rushan Abbas holds a photo of her sister, who’s languishing in a Chinese prison.
for its crimes. Freezing assets and restricting freedom to travel has the power to shame officials and express the world’s disgust with their actions. Perhaps the number of Uyghurs in the concentration camps would not have reached the millions if the world had acted early, when intellectuals were among the first imprisoned. By waiting so long to respond, the world has enabled China to commit every act prohibited by the Convention on the Prevention and Punishment of the Crime of Genocide passed by the U.N. in 1948. But it’s not too late to stop this genocide. Act bravely to help bring the atrocities to an end. Hold China accountable for its unspeakable crimes against millions of Uyghurs. We are all responsible for what happens next.
Rushan Abbas, author of this article, came to the United States to attend graduate school in 1989 after completing her degree at Xinjiang University in China. Since 2017, when the Chinese Communist Party ratcheted up the persecution of her people, the Uyghurs, she’s been unable to contact family members who remain in her homeland. But she’s learned that the Chinese authorities have abducted her sister and aunt as retaliation for her activism in the U.S. Now she works seven days a week explaining the continuing atrocities in her homeland at public forums and other gatherings. She’s become an American citizen, worked as a reporter for Radio Free Asia and served as an interpreter for Uyghur prisoners at Guantanamo.
Learn more and help Visit campaignforuyghurs.org or contact@campaignforuyghurs.org Follow @cuyghurs and Rushan Abbas @rushan614
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HUAWEI, 5G & THE US-CHINA TECH WAR Is the West ceding power to China? BY A N DR EW PRO CH NOW
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Most countries have a city or region that’s the national leader in technological innovation and development. In the United States, it’s California’s Silicon Valley, and in India it’s the city of Bangalore. In China it’s the city of Shenzhen, which is arguably the fastest-growing major city in the history of humanity and is located a 20-minute, high-speed train ride from the center of Hong Kong. Today, the Shenzhen prefecture occupies roughly 675 square miles of land north of the Hong Kong border. Shenzhen presents stark contrasts— it’s China’s richest city but workers sweep the streets with straw brooms and make as little as $300 a month. One could argue Shenzhen is one of the most important cities that most Americans haven’t heard of— not only because of its immense manufacturing capacity but also because the city’s population surged from 10,000 in the 1970s to more than 13 million today. Shenzhen’s also home to some
of China’s best-known brands, including Tencent (TCEHY), Ping An Insurance (PIAIF) and BYD Company, which is backed by Warren Buffet’s Berkshire Hathaway (BYDDF). Privately held Huawei is based there, too. Huawei (pronounced “WahWay”), a telecommunications and consumer electronics maker, has become well-known, but not for all the right reasons. Rightly or wrongly, it was ensnared in the recent trade war flare-up between the United States and China, and has remained in the spotlight from the beginning of the escalation to present. Huawei’s development almost mirrors that of the entire Shenzhen region. It began as a manufacturer of basic equipment and morphed into a leader in telecommunications innovation. Huawei now produces more telecommunications equipment than any other company on the planet. It’s also the world’s second-largest manufacturer of mobile hand-
PHOTOGRAPH: REUTERS/ALY SONG
Huawei’s first global flagship store is doing business in Shenzhen, Guangdong province, China.
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sets, after Samsung, despite being blacklisted by its placement on the “Entity List” last May and barred from conducting business in the United States. What prompted such a severe reprisal from the world’s largest economy? The United States has claimed that Huawei’s front-runner status in 5G technology represents a national security threat not only to the United States but also to its allies. Like its predecessors 4G and LTE, 5G represents the next generation of wireless technology for digital cellular networks. 5G is expected to provide much faster data speed, and it will not only connect people (like the current 4G network) but also interconnect and control machines, objects and devices. Besides providing speed, 5G promises higher capacities and lower latencies, which will make virtual reality, artificial intelligence and machine learning significantly more robust. A new network with that power isn’t cheap. The 5G upgrade will cost trillions of dollars. But implementation, which will likely take until 2035, could contribute a jaw-dropping $12 trillion in new goods and services to the global economy, a study by Qualcomm projects. Given the almost inconceivable size of that pie, global technology companies are struggling to claim a slice. And thinking ahead, those companies want to interweave themselves in the 5G standard in anticipation of claiming an even bigger piece of the pie when 6G rolls around. Huawei has established itself as an innovator in 5G, producing the hardware to build or upgrade cell towers, transceivers, radios and antennae. The firm benefits from the relatively low cost of manufacturing in China, which enables Huawei to offer 5G products and services at competitive prices.
The United States government has argued that a global 5G network controlled by Huawei poses serious risks. The Chinese government could use the Huawei network to listen in on the secret communications of sovereign nations, according to the U.S. government, a sentiment echoed by Stealth War author Robert Spalding (see “Modern Warfare 5.0,” p. 28). Given the control the proposed 5G network would have over people and things, the risk that Huawei could turn the network on and off at its leisure has also been cited as a potential risk. On the other hand, a 5G global network controlled by any single nation (the United States, for example) might be used for the same purpose. After all, the United States National Security Agency (NSA) collects and stores the communications of American citizens collected from internet companies via a surveillance program code-named PRISM. Edward Snowden, whose leaks informed the world of the existence of PRISM, warned that data collection activities by U.S. security services were much more extensive than commonly believed. He characterized the initiatives as “dangerous” and “criminal.” Mini-narratives of 5G development are playing out in every country on earth because of the nearly unprecedented opportunity the technology promises. These stories are pertinent because the United States and China are embroiled in a highstakes game of tug-of-war over the direction of 5G, with Huawei representing one of the colored knots in the middle of the metaphorical rope. Every country on earth faces the question of which government they want listening in on their conversations. And it’s not simply a two-choice problem, as other countries are vying for 5G supremacy as well. Another complication is that no
American company qualifies as a Huawei equivalent. That became clear last November when President Donald Trump asked Apple (AAPL) CEO Tim Cook (via Twitter) “to see if he could get Apple involved in building 5G in the U.S.” Given that Apple builds mobile devices and not cellular networks, this was viewed at the time as a somewhat unrealistic request. Only a shortlist of companies is perceived to have the technological knowhow to sell “complete” 5G systems to carriers: Datang Telecom (China), Ericsson (ERIC, Sweden), Huawei (China), Nokia (NOK, Finland), Samsung (South Korea) and ZTE (ZTCOF, China). Of those, Huawei is thought to possess the “best” end-to-end solution. And no matter what position the United States takes, technology waits for no one—the 5G rollout is already well underway. South Korea crossed the finish line first a year ago when it activated a 5G network built by Samsung comprising roughly 38,000 base stations and operated by SK Telecom. By June 2019, South Korea had about 1 million 5G subscribers. That’s just the beginning. As many as 2.5 billion people will have access to 5G by 2025. And because of Huawei’s vision and execution, one-third of those will likely be in China. In the meantime, where the remaining 5G chips fall is anyone’s guess. The United States has tried to convince allies to steer clear of Huawei, with varying degrees of success. Australia and Japan have basically adopted the U.S. position and aren’t expected to lean on Huawei too heavily when building 5G networks. On the other hand, the United Kingdom and Germany remain undecided. Because of its rising
A global 5G network controlled by Huawei could give China too much control, U.S. officials say.
Entity List The U.S. Bureau of Industry and Security published the first Entity List in February 1997 to alert the public to organizations that have done something that could increase the risk of transferring anything related to weapons of mass destruction. The 270-page list has expanded to include activities sanctioned by the State Department or contrary to U.S. national security or foreign policy interests. U.S. Department of Commerce
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5G Facts Data speeds 10x faster than 4G Supports 1,000 times the mobile data volume of 4G and up to 100 times the number of connected devices 2.5 billion people are expected to have access to 5G by 2025 Statistica
influence in Africa, China has helped secure Huawei’s position in many countries on that continent. At the top of the list is South Africa, a country that often sets standards in the region. Another complication for the United States is the interdependence inherent in globalization, a result of tightly integrated international supply chains. While the United States is wary of Huawei, the company has been a massive contributor to the U.S. economy in recent years because of vast purchases of American-owned technology. Blacklisting Huawei cut revenue from the income statements of many U.S. technology companies. And that lost revenue isn’t the only problem. It doesn’t account for complications arising from China’s retaliation for the Huawei situation. For example, the Chinese government mandated not long ago that all computer equipment in China must be of Chinese origin. That means companies such as Hewlett Packard (HPE) and Dell (DELL), which have distributed large quantities of
computers and other equipment in China, may likewise have to cut their forecasts for this year and beyond. Likewise, Huawei recently warned that this year’s earnings in 2020 may falter because of the blacklisting in the United States. Another dynamic is that President Trump has more than once implied that if the Chinese were to make trade concessions on other thorny issues in trade war negotiations, he might be willing to reduce the severity of the sanctions imposed on Huawei. That offer appears to undermine the notion that Huawei represents a national security risk to the United States. Otherwise, that “carrot” would be off the table. The United States has complained loudly in trade negotiations about Chinese government subsidies to companies. U.S. officials claim those subsidies prevent competition, citing Huawei as an example of a manufacturer that attained its dominance thanks to the Chinese government’s support. The Chinese might argue that the
United States is trying to enforce a set of rules that don’t apply to their way of doing business. China has emerged as a global economic powerhouse using policies and tactics that aren’t the same as those used in the West. The U.S. and China are both trying to extend their spheres of influence, and the 5G competition represents just one of the skirmishes between the two nations. But unlike some rivalries, the 5G dustup will produce clear winners and losers. So far, it appears Huawei will play a central role in the global deployment of the next generation of cellular networking technology despite the Trump administration’s efforts to hobble the company. What’s more uncertain is how Huawei’s success will affect U.S.China trade relations and whether it will intensify the apparent technology cold war developing between the two nations. Andrew Prochnow, a longtime options trader and columnist, visits Asia quarterly and owns a stake in a technology company in Shenzhen.
Modern Warfare 5.0 If a Chinese telecom builds and controls a nation’s 5G network, there will be no checks and balances to keep the Chinese company from stealing and mining all the data on that network: all the academic papers and research, all engineering and business plans, all the photos, emails, and text messages. Everything will be fair game to a country that doesn’t believe in fair games. Furthermore, controlling another nation’s network will allow the Chinese Communist Party, or CCP, to weaponize the technology that is managed by the network. What does that mean? Think of a hostile force taking over a self-driving car or bus and directing it to crash into a crowded sidewalk. Think of a flock of drones moving into the flight path of an airplane. Think of every digitally controlled furnace shutting down during a subzero cold spell. The blend of technologies and spectrums behind 5G will allow for about three million connected devices per square mile. This is an exponential upgrade from 4G, which enables about ten thousand connections per square mile. That means that in a stadium hosting an NFL football game, every smartphone-owning fan in attendance will have a network connection, but so will any drones, sensors or robots in or near the stadium—including the cars in the parking lot. The capacity for communication offered by 5G is stunning. It is much better to think of 5G as a network built for machines, since most of the network traffic will eventually be machine to machine. This will allow for massive data production, which will feed machine learning and artificial intelligence algorithms, which in turn will continue improving the technology in a giant information feed- back loop. The societal implications of 5G—on how we live and how we work—are truly mind-boggling. And so is the capacity to abuse that power. Anything connected to an unsecured 5G network will be a potential weapon that can be used to gain geopolitical influence and control. If China were to control a 5G network, it would be able to weaponize the technology within entire cities—or entire countries—served by that network and hold that city or state at its mercy. Excerpted from Stealth War: How China Took Over While America’s Elite Slept, by Brig. Gen. Robert Spalding
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PHOTOGRAPH: REUTERS/BRENDAN MCDERMID
Alibaba Group Holding Ltd. founder Jack Ma brandishes the gavel he used to ring a ceremonial bell at the New York Stock Exchange to celebrate the company’s initial public offering on Sept. 19, 2014
CHINESE STOCKS: CAVEAT EMPTOR Alibaba illustrates a Chinese scheme that attracts foreign capital BY EM M A M U H L EM A N
For more than a decade, the Chinese Communist Party has refused to allow America’s Public Company Accounting Oversight Board to examine audits of Chinese companies whose shares trade on the NYSE, Nasdaq and other U.S. exchanges. So Chinese companies have avoided oversight while raising billions of dollars in the U.S. Luckbox invited global macro strategist and forensic accountant Emma Muhleman to reveal how China has abused accounting standards and SEC regulations to take unfair advantage of American investors. Americans who think they’re investing in Chinese tech giants are actually buying shares in offshore shell companies with no operations and no assets. The cash they pay for the worthless “stock” may actually go directly into the coffers of the Chinese Communist Party to fund oppression, surveillance and censorship. Take the example of a typical American investor who thinks he just put some money into the Chinese E-commerce juggernaut Alibaba
(BABA). He didn’t. Someone else in the U.S. might believe she picked up some stock in China’s Tencent (TCEHY) or Baidu (BIDU). Nope, didn’t happen. Why are they being fooled? Two reasons. First, foreigners aren’t allowed to own shares in Chinese companies. Second, Chinese business people and government officials have figured out a scheme that attracts foreign capital in exchange for nothing at all.
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Big Trouble in Chinese Stocks “There are some significant issues related to Chinese stocks listed on public exchanges. Fraud is ubiquitous. There are issues related to fake receipts, fake invoices ... [the] hardest stuff is fake cash balances because it’s very hard for auditors to penetrate that wall.” — Peter Navarro, the Trump Administration’s director of trade and manufacturing policy
“The U.S.-China Economic and Security Review Commission identified 156 Chinese companies, including 11 state-owned enterprises, that are listed on America’s three largest exchanges. Their combined market capitalization of $1.2 trillion means that significant American capital is exposed to the risk created by China’s lack of economic transparency.” —Sen. Marco Rubio, R-Fla.
“China’s state security laws are invoked at times to limit U.S. regulators’ ability to oversee the financial reporting of U.S.-listed, China-based companies,” the SEC said in a joint statement with the Public Company Accounting Oversight Board. “The inability to date to achieve this level of regulatory cooperation with Chinese authorities raises a number of investor protection and general oversight issues.” —Jay Clayton, U.S. Securities and Exchange Commission chairman
Chinese business people and government officials are running a scam that attracts foreign capital in exchange for nothing at all.
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The scam works well because Chinese companies have no qualms about shamelessly abusing accounting standards to overstate their sales volume and distort their financial reports. Importantly, it’s not a crime in China to defraud U.S. investors. This results in a culture of dishonesty. Why the Securities and Exchange Commission (SEC) would allow companies like Alibaba to use this structure to list on the U.S. markets is indeed puzzling. It’s especially difficult to understand given China’s long history of plotting to procure hard currency outside its protectionist borders. How does it all work? Let’s take look. The mechanisms The Variable-Interest Entity (VIE) structure, which is recognized by the United States Financial Accounting Standards Board, allows companies to list on American stock exchanges. They’re contractual agreements instead of direct ownership. Investors receive no right to share in profits and no authority to control the company. In a reverse takeover (RTO), or reverse merger, a private company purchases control of a public shell company and merges it with the private company. Thus the private company avoids the complexity and scrutiny of an initial public offering. This creates a loophole that has enabled a number of fictional Chinese companies to get traction in the U.S. and compete for American capital. A wholly foreign-owned enterprise (WFOE) is set up in a place like the Cayman Islands or the Seychelles to take on 100% ownership of a VIE. The VIE holds the licenses and assets that enable operations in China, and the WFOE makes contracts with the VIE that purport to entitle it to the VIE’s operating profits in exchange for a “management” or “consulting” fee.
The contracts aren’t enforceable, and they’re illegal under Chinese law, but they’re designed to trigger “beneficial ownership” provisions in U.S. accounting standards, requiring the shell to consolidate the operations of the VIE in its SEC filings, giving investors the impression that it and the Chinese-owned VIE are the same. Now, let’s look at how the alphabet soup of mechanisms work in practice. Alibaba’s lack of magic Alibaba Group Limited Inc., an entity incorporated in the Cayman Islands, trades on the New York Stock Exchange after raising $25 billion from Americans in its IPO, even though Chinese nationals and the CCP retain full control and effective ownership inside China. Just like magic. The listing entity (Alibaba management) is not being transparent about what investors are buying. But the filing is virtually indistinguishable from others, misleading individual investors into believing the shares are worth something. All of the hype aside, the company isn’t another Google or eBay. Its purported sales volume is wildly exaggerated. After all, the National Bureau of Statistics of China cooperates with the company to help inflate the numbers. In an extreme example, Alibaba reports sales for Singles Day (the Chinese equivalent of Black Friday) in a manner entirely inconsistent with generally accepted accounting principles (GAAP). For example, Alibaba might offer a discount of $3 on a shirt that costs $5 and then record the entire $5 in gross merchandise volume. Management could also pad its revenue reporting by including sales from real estate, defaulted airplane loans and utility bill payments made through its Alipay or Ant Financial
PHOTOGRAPHS: (NAVARRO) REUTERS/LEAH MILLIS; (RUBIO) MIAMI HERALD/TNS/ABACAPRESS; (CLAYTON) REUTERS/SHANNON STAPLETON
CHINA’S STEALTH WAR
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PHOTOGRAPHS: (ALIBABA) REUTERS/ALY SONG
partner. Meanwhile the company can tell the world that its mind-boggling (literally, impossible) results are a result of the healthy Chinese consumer markets. And more trouble lies ahead. Alibaba’s management stressed on a recent earnings call that its margins will decline substantially as it spends “aggressively” on overseas partnerships and acquisitions. That suggests it has reached the extent of Chinese consumer growth. Still worse, Alibaba will face competition when it pursues its latest plan to offer payment services in Ethiopia. eBay already operates in the prominent developing economies. Meanwhile, other problems are arising for Alibaba because its platform is used to sell counterfeit goods in the United States. In response to the adversity, Alibaba cites its massive logistical operation, a creation supposedly capable of feats beyond human imagination given the number of workers it employs. However, with so much questionable or even blatantly false information emerging from the company, it would be understandable if observers questioned those claims. Smaller scams Though giants like Alibaba get most of the attention, tiny Chinese entities have also managed to exploit the same mechanisms, including reserve mergers. The documentary The China Hustle (2017) shows how Roth Capital and another investment bank matched low-quality Chinese businesses to shell companies and then attracted an investment audience in the United States. Some of the companies have virtually no operations at all. They might, for instance, sell minor assets to family members to show big accounting gains. The SEC had to deal with a flood of these bogus companies suddenly appearing on U.S. exchanges.
Of 182 Chinese companies surveyed on the NYSE and Nasdaq, 125 (69%) use the VIE structure, according to Paul Gillis, professor of practice at Peking University’s Guanghua School of Management. When investors realized the WFOE shell companies were worthless, the share prices tanked and the Chinese Communist Party forced them to delist. But some of the empty companies survived and their shares are still offered today. Ongoing need for cash The discovery of fraud didn’t lessen the CCP’s need for regular infusions of capital. After rough times in 2015 and 2016, followed by an even more troubling period in 2018 and 2019, China’s reserves had been drained, according to an International Monetary Fund formula that suggests the bare minimum a country should maintain in what amounts to working capital. That precarious position prompted the CCP to launch a frenzy of renationalization and to integrate the party into nearly every aspect of business, money and society, while monitoring internal discussion with heavy surveillance. The party deemed some sectors “sensitive,” including E-commerce, media, telecom, internet, financial services and other “new economy” companies. Foreigners were banned from owning companies in those fields because that was now seen as a threat to the power of the state. And the state, in turn, relied on the capital markets to keep the whole thing spinning. Inadvertently, the SEC regulations have contributed to the mess by requiring private companies that buy public companies consolidate their financial statements. The requirement obscured the histories of the firms and legitimized the presence of shell companies on the exchanges.
The value of goods sold flashes on a screen last year during Alibaba Group’s Singles’ Day global shopping festival.
Discovering the scams Because of the widespread use of the VIE structure, some institutional investors recognize it and don’t participate. Individuals seem more likely to get caught up in the subterfuge. The CCP uses the scams to haul in much-needed foreign capital. The Chinese government’s prohibition on foreign ownership prevents foreign companies from wielding power and removing capital. For Alibaba management, the objective is to stay alive and use the schemes as the party requests. Clearly, companies in China operate primarily to serve the party, not the shareholders, employees, customers or the public in general. In America, investors should be fully apprised of the pernicious ways U.S. citizens are duped, time and again, into funding the Chinese Communist Party’s ongoing, diabolical assault on human life. Emma Muhleman, CFA, CPA, works as a long/short equity analyst specializing in forensic accounting at Ascend Investment Management, LLC. @emmamuhleman1
Some companies based in China serve the Communist party—not the shareholders, employees, customers or the public.
Emma Muhleman
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THE TRADE WAR & GDP GROWTH Will the U.S.-China trade war affect GDP growth? Bet on it … literally
January saw the signing of a “Phase 1” trade agreement between the United States and China, signaling progress in the trade war enveloping the world’s two largest economies. “With this signing, we mark more than just an agreement,” President Donald Trump said. “We mark a sea change in international trade.” Phase 1 obligates Beijing to purchase $200 billion worth of additional U.S. goods and services over the next two years. In return, Washington promises to slice tariffs from 15% to 7.5% on $120 billion worth of Chinese products.
The agreement looks like a win for both nations—or at least a step in the right direction. But the trade war is only one factor in a more deep-rooted slowdown of China’s economic growth. A day after signing Phase 1, China reported its weakest annual GDP growth rate in nearly three decades. While China’s 6.1% growth rate for 2019 is nonetheless impressive, it marks a significant decline from the 6.6% figure it posted in 2018, and an even further departure from the double-digit growth rate of 2010. (See “U.S. and China GDP
Growth Rates,” below.) Complicating matters further, the World Health Organization confirmed five days after the signing of Phase 1 that 282 cases were linked to the coronavirus epidemic that has since inspired unprecedented travel lockdowns affecting tens of millions of people in China. Likened to a potential black swan event for the global economy, the still-unknown ramifications of the coronavirus cast a shadow of uncertainty over first-quarter GDP rates in China and the United States. Still, some remain hopeful.
What Lies Ahead for U.S. and China GDP Growth Rates? 2010
2011
2012
2013
2014
2015
2016
2017 (Q1)
2017 (Q2)
2017 (Q3)
2017 (Q4)
2018 (Q1)
2018 (Q2)
2018 (Q3)
2018 (Q4)
2019 (Q1)
2.6%
1.6%
2.2%
1.8%
2.5%
2.9%
1.6%
2.3%
2.2%
3.2%
3.5%
2.5%
3.5%
2.9%
1.1%
China 10.6% 9.6%
7.9%
7.8%
7.3%
6.9%
6.7%
6.9%
6.9%
6.8%
6.8%
6.8%
6.7%
6.5%
6.4%
U.S.
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2019 (Q2)
2019 (Q3)
2019 (Q4)
3.1%
2.0% 2.1%
2.1%
6.4%
6.2%
6.0%
6.0%
PHOTOGRAPH: ALEX WROBLEWSKI/POOL/ABACAPRESS.COM
BY M IK E R EDDY
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A New Podcast for Gambling on Politics
President Donald Trump signs the Phase 1 trade deal between the United States and China during a ceremony in the East Room at the White House on Wednesday, Jan. 15, 2020
Shang-Jin Wei, a professor of finance and economics at Columbia University, estimated in a MarketWatch column that the virus would reduce China’s GDP by only 0.1 percentage points this year. The initial effect in Q1 would be big, he argued, but would be offset during the rest of the year.
Uncertainty begets volatility, and volatility begets opportunity. That’s why Luckbox asked PredictIt to introduce two markets to their prediction market trading platform—one forecasting China’s forthcoming Q1 GDP announcement, and the other forecasting U.S. Q1 GDP. Prediction markets, introduced to Luckbox readers in November’s “Betting on the Future” issue, offer traders a venue to place bets— and make or lose real money—on the outcomes of political and economic events. The launch of the GDP markets on PredictIt comes in tandem with a new project: Inspired by the tastytrade financial network’s comprehensive daily coverage of stocks, options and futures markets, Luckbox launched The Political Trade, a weekly podcast devoted to the growing universe of prediction market traders. Each episode of The Political Trade, available on Apple Podcasts, Spotify, Google Play and YouTube, features elite prediction market traders and political insiders offering actionable insights into the week’s best political trading strategies and wagering opportunities. Frustrated by politics and politicians? Don’t let politics just happen—learn The Political Trade and profit from it.
China Q1 GDP estimate?
Prediction markets offer a venue for betting on the outcomes of political and economic events.
5.7% or lower
85¢
20¢
5.8% to 6.2%
12¢
China’s 6.1% GDP growth rate for 2019 might seem impressive, but it marks a significant decline from 6.6% in 2018.
7¢
US Q1 GDP advance estimate? 1.7% or lower
44¢ 5¢ 2.3% or more
39¢ NC
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trends life, luxury & the pursuit of happiness
o OUTLIERS
China’s Ghost Cities Few explore the streets of China’s more than 50 “ghost cities.” Luckbox features a photographer and an author willing to share the haunting spectacle. Portfolio by Michael Christopher Brown
The mostly empty apartment buildings of Kangbashi, photographed in the evening.
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I
t’s estimated that China is home to more than 50 “ghost cities,” or vastly underoccupied municipal developments. Many of the cities contain nearly everything necessary for urban life, but one component is sorely lacking: people. Some of those who do wander the desolate streets of China’s ghost cities, however, are journalists and photographers documenting the phenomenon for those who otherwise wouldn’t have known the cities existed. Among them are Wade Shepard, author of Ghost Cities of China, and freelance photographer Michael Christopher Brown. Shepard shared an excerpt from his book with Luckbox, and Brown shared his photos. Together, they shed light on what lies within the empty and mysterious metropolises.
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A pedestrian walks past a mostly unoccupied commercial district of Kangbashi New Town
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Prospective buyers assess buildings under construction in Kangbashi.
50 CITIES, NO PEOPLE Excerpt from Wade Shepard’s Ghost Cities of China
A woman gets a ride on a mostly empty street near downtown in the Kangbashi New District.
It is projected that by 2030 one in eight people on earth will live in a Chinese city. Preparation for this deluge is reshaping the country. Hundreds of new districts, cities, towns and neighborhoods are being constructed as hundreds of millions of Chinese are expected to transition from rural to urban terrains. China has designed a master urbanization plan unlike anything ever seen before in history, but its implementation has produced a peculiar side effect: ghost cities, everywhere. These empty new cities, dubbed “ghost towns” by the international media, have become a global phenomenon and a major point of confusion and contention among China watchers, journalists, governmental agencies and investors alike. One common point of view is that these stagnant new cities reveal a crack in the veneer of the rising superpower, that China’s staggering GDP and economic ascension really isn’t all it’s said to be, that decades of irresponsibly rampant development and growth are now taking their toll. These claims poist China’s ghost cities as harbingers of a premature collapse of the country, which could produce a ripple that takes the entire global economy down along with it. Headlines like “China’s property slowdown could have a domino effect on global commodities” play on the fear of a Western readership that is already primed to be on edge about China. Whatever the case, the reports of new cities with wide open, empty streets, block upon block of vacant buildings and entire skyscrapers with nobody in them have caught the imagination of the world. But it quickly becomes apparent that beneath the thin veil of sensationalism very little is actually known about China’s ghost cities. From Wade Shepard’s Ghost Cities of China: The Story of Cities Without People in the World’s Most Populated Country
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THE NORMAL DEVIATE
Day Trading in China Even in a communist country, people like to make money By Tom Preston
government, but to trade U.S. stocks they need U.S. dollars. Converting renminbi to dollars is where the difficulty lies. So hundreds of millions are turning to the Shanghai Stock Exchange. The renminbi is good to go with the SSE, and technology is enabling people to trade. Day trading stocks, buying and selling shares intraday, can be more
fast-paced than a game of craps. The nearly never-ending stream of changing numbers can become addictive. But for making money, day trading stocks amounts to a 50/50 bet. That’s gambling. But, some might say, the SSE 50 Chinese stock index had a great return in 2019! That surely means there’s a better chance that a stock
Because of commissions, fees and slippage in execution, most Chinese day traders probably leave with less money than when they started. 38
A passerby walks past a panel displaying China stock indexes at the financial Central district in Hong Kong, China, on Aug. 24, 2015
PHOTOGRAPH: REUTERS/BOBBY YIP
T
he Chinese began gambling at least 4,000 years ago, and they’ve made it a tradition ever since. It’s the reason that Macau has some of the busiest casinos in the world. Some might find a penchant for games of chance incongruous with a planned economy that enforces control over its people with hard and soft power. But the pull of gambling is just too great. And believe it or not, that’s relevant to trading. It turns out that even in a communist country, people like to make money. Chinese 30-somethings are using the latest and greatest tricks to squeeze out a little more alpha. Jack Ma’s money market fund and other interest-bearing products were hot until people realized the returns were pitiful. Then, savvy Chinese discovered the capitalist joys of peer-topeer lending and enjoyed returns commensurate with the risk. But that was a little too free-market for the Central Committee, and last year the People’s Bank of China shut most of the P2P lending sites down, probably keeping the few that are open for the benefit of the well-connected. What, then, were the majority of return-hungry Chinese to do? They day-trade stocks. But it’s difficult for Chinese nationals to trade stocks on U.S. exchanges. It’s not forbidden by their
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will go higher than lower. Over time, that might be true. But that works for buy-and-hold, not day trading, which doesn’t offer millennials the thrill they seek. Despite an upward progression of stock prices, the intraday “noise” in prices is unpredictable. Day trading that noise amounts to a coin flip. Even though a stock might rally over time, its price goes up and down in fits and starts, with the occasional up move not offset by a commensurately large down move. Enough of those occasional up moves constitute a rally. But trying to determine which up move in a stock’s price will be maintained and not sink back down at a given minute of a trading day is a complete guess. That doesn’t mean that out of hundreds of millions of day traders a few won’t succeed. But it does mean the odds aren’t on their side.
Trading volume on China’s stock market rose more than
And even though profits and losses from day trades are a wash, the commissions, fees and slippage in execution mean that most Chinese people who try day trading leave with less money than when they started. Sounds like gambling. Now, the general secretary of the Chinese Communist Party could force everyone who wanted to trade to start with options. That’s right, evil capitalist derivatives. Why? Used intelligently, options can tip the odds in an investor’s favor. The SSE lists options on the exchange-traded funds (ETFs) for the SSE 50 and, since late last year, the SSE 300. Investors who think the SSE 50 might go higher could sell an out-of-the-money put. It will have a higher probability of making money than buying shares of the SSE 50 ETF. Investors who think the SSE 300 might drop could sell an out-of-
125.27%
China’s online retail trading volume could triple from $445.4 million in 2019 to about $1.36 trillion in 2022. Source: Consulting firm Oliver Wyman
the-money call. No, don’t day-trade options. Use them to speculate on market moves that might run from a few weeks to a few months. While the profit on a short put might be less than on long 100 shares of an SSE 50 ETF if the index makes a big move higher, those big moves higher are less frequent than one might think. And the short put can still be profitable if the SSE 50 doesn’t move from its current price or even drops a bit. Options trading with smart strategies can lift trading from 50/50 bets to a consistent source of profits. Will all those Chinese day traders see the light? I hope they do, or at least until their government shuts them down. Tom Preston, quantitative strategist for tastytrade, is the purveyor of all things probability-based and the poster boy for a standard normal deviate.
from 3,286.1 billion shares in 2012 to 8,203.73 billion shares in 2018. Source: Statista 2020
350 million Chinese young people are day traders. Source: Bloomberg
Wannabe Chinese traders face the difficulty of converting renminbi to dollars to enter U.S. markets.
Tiger Brokers is an online brokerage startup that caters to Chinese investors who want to invest in overseas securities, particularly stocks listed on the U.S. and Hong Kong exchanges. More than 70% of Tiger’s individual brokers were under age 35 as of December 2018, according to the company’s prospectus. More than 85% made more than $40,000 annually. Wall Street billionaire Jim Rogers is an investor. march 2020 | luckbox
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LIQUID ASSETS
Down on the Baijiu
What you should know about the world’s most popular liquor—and what to try
C
hinese spirits have a clear, colorless appearance and a biting, fragrant aroma. Though they’re typically distilled from sorghum, they can also be made from rice, wheat, corn and all sorts of starchy substances. The average strength of baijiu (pronounced “bye-joe”) is around 52% alcohol by volume, but it can be purchased in eye-watering excess of 140 proof. It’s as ubiquitous as it is potent. Today, baijiu is the world’s best-selling spirits category, and each year a greater volume of baijiu—almost 2.9 billion gallons—is sold than that of vodka and whiskey combined. Almost all of it is consumed in China: Roughly 99% of liquor sold there is baijiu. It’s served in every Chinese restaurant and banquette hall, and no traditional festival or holiday would be complete without it. Yet most of the world’s drinkers have never heard of it. —Drunk in China, Baijiu and the World’s Oldest Drinking Culture
Jin Liu Fu, $28 One of the largest baijiu brands in China, so we were excited to try it. Unfortunately, yes, 1.4 billion Chinese can be wrong. Barnyard booze. Avoid.
Gu Zhong Er Guo Tou (Red Star) $25 Floral, aromatic and creamy— wonderful! The reason to buy baijiu, and it won’t require 70 shots to enjoy it.
A JOURNEY OF 300 SHOTS Drunk in China, Baijiu and the World’s Oldest Drinking Culture Sandhaus, D. (2019) After 70 shots of baijiu, the author develops a taste for the distinctively potent spirit.
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Ming River Sichuan Baijiu, $45 The author of Drunk in China co-founded Ming River to introduce the spirit to American palates. Nice packaging, but the liquid misses the mark.
“That first shot of sorghum sauce is a rubber-meetsthe-road movement. When the lips purse and the eyes narrow and the head recoils like a slingshot, one gets a rare glimpse of what it really looks like to know about the band before it was cool. This is real-time culture shock turned up to a hundred thousand volts. This is where open minds slam shut.” —Drunk in China, Baijiu and the World’s Oldest Drinking Culture
Beijing Er Guo Tou (Red Star) $6 Our very first taste of baijiu was from this highly potent, but very portable potable. We picked up an oddly appealing mix of licorice, anise and olive brine. Ganbei!
BAIJIU ETIQUETTE Never fill your own glass Consider your comrades first. Fill their glass to the brim. It is hospitable to overflow. Any less is considered stingy. Don’t clink glasses at the same level when you toast Keep the rim of your drink lower when toasting to demonstrates respect. Expect to be undercut in a race to the bottom. Drink up If someone shouts “ganbei!” (dry the glass) consume all in one shot. It’s impolite not to drink up your pour. Give thanks After someone pours you a refill, tap the table with one finger to say a silent thank you.
PHOTOGRAPHS: GARRETT ROODBERGEN
Don’t drink alone In China it’s impolite to drink by yourself. Enjoy In China there is no social stigma attached to indulging at the drinking table. The host’s job is to allow you to indulge. Your job is to enjoy yourself.
march 2020 | luckbox
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ARTS & MEDIA
AMERICAN FACTORY In 2008, a General Motors factory closed in a suburb of Dayton, Ohio, leaving more than 2,000 employees without work. The plant, which had produced SUVs and trucks, would lay dormant for years, offering no indication that life—or jobs— would return. Then entered China. Six years after the closing of the GM plant, China-based manufacturing company Fuyao Glass Industry Group, under the leadership of founder and chairman Cao Dewang, purchased the barren factory and transformed it into an automotive glass production facility. The U.S. subsidiary of the Chinese company brought jobs and hope back to town, but not without controversy.
Such is the story told in American Factory, the awardwinning Netflix documentary directed by Steven Bognar and Julia Reichert. The nearly twohour film chronicles the opening and first few operating years of Fuyao Glass America, as well as the sometimes-contentious, sometimes-inspirational cultural exchanges that came as a byproduct. “America is a place to let your personality run free,” the Chinese workers relocated to the U.S. were told. “You’re free to follow your heart.” The film’s beautifully shot, flyon-the-wall style doesn’t hold back from showcasing the challenges and frustrations that befell both the American and Chinese workers. Language barriers, cultural
differences and contrasting work expectations often sparked conflict, especially when efforts were made to unionize the plant’s workforce— something Fuyao desperately wanted to avoid. Conflicts aside, American Factory offers a rare glimpse into a real business experiment that can simultaneously warm and break viewers’ hearts. Average, everyday people take center stage, and what unfolds is a bittersweet, albeit captivating story that continues to be told to this day in Dayton, as well as at other plants across the United States. “The most important thing is not how much money we earn,” Cao said to the Chinese workers, “but how this will change the Americans’ views of the Chinese and toward China.” —Mike Reddy
ONE CHILD NATION
abortions and sterilizations. He feels bad about what happened but doesn’t believe he had any choice. “Policy is policy,” he says sadly. An 84-year-old midwife who estimates she performed between 50,000 and 60,000 abortions and sterilizations emphasizes that she and her co-workers didn’t make decisions. They executed orders. “I was the executioner,” she admits, while maintaining that her work to promote fertility compensates a little for the deaths. In a culture that heavily favors boys, families simply discarded baby girls. Some placed female infants in baskets, cardboard boxes or plastic bags and left them on tables in markets in the hope someone would take them home. Others simply tossed baby girls onto rubbish piles to die from
thirst, hunger or exposure. Other babies wound up in the international adoption machine that enriched human traffickers. The directors discovered during filming that the government seized babies and took part in the profiteering. But one-child propaganda so thoroughly permeated life that many grudgingly accept what they view as the necessity of limiting population. Even now, five years after the end of the policy, they continue to defend what happened. Still, there’s no denying the pain of the young woman whose interview concludes the movie. The camera lingers on her, a girl in China who’s now in contact with her identical twin in America. A heart-wrenching range of emotions cross her face. —Ed McKinley
The film One Child Nation brilliantly documents a 35-year human tragedy. The Chinese Communist Party decreed in 1979 that families could have only one child, setting in motion a retinue of horrors that included mind-numbing propaganda, forced abortion, mandatory sterilization, exploitative adoption and lifelong feelings of abandonment. The narrative builds slowly, beginning with an interview of a minor local official who oversaw the abduction of women for forced
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AMERICAN FACTORY
5 out of 5 When China comes to Ohio, Ohio’s workers wrestle to come to terms
ONE CHILD NATION
4.5 out of 5 A powerful and sobering exposé of the human toll of oppressive rule
luckbox | march 2020
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FINANCIAL FITNESS
Sweet & Sour Secrets Undergoing a radical physique transformation parallels the highs and lows of this dish By Jim Schultz, Ph.D.
I
s there a better dish, a better flavor profile, than sweet and sour chicken? Wait—don’t bother answering that. It’s not open for debate. No, there is not. The sweetness from the sugar and the tartness from the rice vinegar live together in a world of perfect harmony. Tasty notes of brown sugar are set against a melodious backdrop of ketchup, corn starch and soy sauce. It could be an elegant rendition of this Asian classic presented at a five-star Chinese restaurant downtown, or piles of scrumptious slop scooped out of a tray at a mini-mall buffet. Everyone knows that sweet and sour anything easily takes the dish up into uncharted territory, from its non-sweet and sour status. Why? Call it increased friction. Call it variable rewards. Call it any number of things. The yin from the sweetness is paired with the yang from the sourness. The ups from the crunchy breading are met with the downs from the softened rice. The entire dining experience is nothing but an amalgamation of highs and lows. And at its core, dieting down to new levels of leanness is no different. Ask people who have undergone a radical physique transformation, and their stories will share the same characteristics in a similar pattern. The highs from a new personal
record on the gym floor are coupled with the lows of some stalled readings on the scale. And the eventual lows in those body weight readings are sometimes followed by some celebratory high carb days. All too often, it can feel like ups are canceled by downs, and every win is washed away by an equal and opposite loss. No ground is gained. No progress is made. But every physique athlete knows that stagnation finally breaks and progress eventually resumes. Stalls and sticking points are followed by gains and growth. Stay long enough with a sound strategy that’s grounded in caloric deficits, resistance training and ample patience, and the victories start to overshadow the defeats. The triumphs outnumber the trials. Really? It’s nothing more than the cliche of three steps forward and two steps backward. Or in the present circumstance, three bites of pan-fried chicken to two spoonfuls of sauce-soaked rice. The basic tenets of portfolio construction are no different. Winning positions are followed by losing positions. Good trades beget bad trades, and profits beget losses. Every winning streak eventually ends, and every losing streak eventually turns. Active trading in the world of stocks, options and financial products is nothing if it isn’t an
indefinite series of ups and downs. Inevitable highs are followed by eventual lows. Or for the trend-following crowd, higher highs are followed by higher lows. But in the end, with either training or trading, the noise eventually quiets and the chaos calms. Sure, anything can happen with body weight during a random weigh-in, and there’s no telling what’s in store in the gold markets on any given day. But when the dust finally settles, the scorecard of wins versus losses is strategically driven. The player with the highest level of execution on the best laid plan comes out on top. In short, strategy wins and spontaneity loses. Follow the sweet and sour lead of Americanized Asian food. Set physical or financial life against a backdrop of ketchup, and watch as higher highs are followed by even higher highs.
Every winning streak eventually ends, and every losing streak eventually turns.
Jim Schultz, Ph.D., a derivatives trader, fitness expert, owner of livefcubed.com and the daily host of From Theory to Practice on the tastytrade network, was named North American Natural Bodybuilding Federation’s 2017 Novice Bodybuilding Champion. @jschultzf3
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THE POKER TRADE
Counting Outs The essential poker skill all players need to know By Jonathan Little
P
oker players often have either a strong made hand or an obvious draw. A draw is a hand that’s almost certainly behind at the moment but could improve and become a hand that can beat all or almost all other hands. For example, when a player has 5-4 on the K-6-3-J turn, if a 7 or 2 comes on the river it’s the best possible hand. Just because a player has the potential to improve his draw to an effective nut hand doesn’t mean he should continue when facing a bet. Compare the pot odds to the odds
one of the cards needed to complete the draw is the next face-up community card. Suppose a player has a 5-4 and an opponent goes all-in for $100 into a $100 pot on the K-6-3-J turn. Knowing it would probably require improving to a straight to win, the player can figure out if he can profitably make the call. To figure out how often one needs to win to justify calling, divide the amount the player has to call (100 in this case) by the current pot (100) plus the bet he’s facing (100) plus
Jonathan Little knows the math behind poker.
the amount he has to call (100). Then: 100/(100+100+100) = 33%. So, if the draw will arrive on the river 33% of the time or more, one can profitably call. Take the next step Next, figure out how often a 7 or 2 will arrive on the river. Four unseen 7s and four unseen 2s remain in the deck (including the folded and burn cards, because one has no way of knowing which cards are in the deck. Forty-four unseen cards remain in the deck (52-card
When to call To figure out if you can profitably make a call, follow the guide below. When a player has A -K on 7 -5 -3 -2 , he has … 9 outs to the flush. If the 9h, 8h, 6h, 4h, or 3h comes, one could lose to a straight flush. If the 3h or 2h comes, one could still lose to a full house. 3 outs to the straight. The 4h gives a flush, not a straight. If one makes a straight, he could still lose to a bigger straight. 6 outs to top pair. If a player makes top pair, he could lose to a better made hand. Q -9 on J -7 -6 -2 9 outs to the flush. If the 6h or 2h comes, a player could still lose to a full house. Even if one makes a flush, he could still lose to a bigger flush. 3 outs to top pair. If one makes top pair, he could lose to a better made hand. 3 outs to middle pair. If one make top pair, he could lose to a better made hand. 9 -8 on 7 -5 -2 -3 4 outs to a straight. 6 outs to top pair. If the player makes top pair, he could lose to a better made hand.
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deck minus the four on the board, minus the two in one’s hand, minus the two cards in the opponent’s hand). Take the number of cards that let one win (8) and divide it by the number of cards remaining in the deck (44) to see how often the draw will complete on the river: 8/44 = 18%. Use the shortcut A shortcut to figuring out how often a draw will arrive on the next card is to take the number of outs one has (8) and multiply it by 2. Make that number a percentage, and that is roughly the percentage of time one will improve on the next card. 8 x 2 = 16% (which is close to 18%). Multiply the number of outs by 4 to get roughly how often one will improve on the turn and the river: 8 x 4 = 32%. While these numbers are not as precise as dividing outs by the number of unseen cards, they’re close enough. So, one needs to win 33% of the time but will only win 18% of the time. Because 18% is less than 33%, one has to fold. If facing a $20 bet into a $100 pot, one would now only need to win 20/(20+20+100) = 14%, making a call profitable because one will improve 18% of the time but needs to improve only 14% of the time. If facing a non-all-in bet, meaning money remains in the stacks to be bet on the next betting round, one does not necessarily need to be getting the correct immediate pot odds to call. For example, if an opponent bets $50 into a $100 pot, one needs to get there 25% of the time (50/(50+50+100) = 25%), which an 8-out straight draw will not do. However, if a player can get, on average, another $150 to go into the pot on the river, he is effectively risking $50 to win a $250 pot, making a turn call profitable (50/ (50+50+250) = 14%). Make sure to realize that sometimes a player will not need to
improve to a nut hand to win. Sometimes improving to a one-pair hand will be good enough to win the pot. This increases the number of outs one has. For example, if a player has an ace-high flush draw, he has nine outs to make a flush, but also three outs to improve to a pair of aces, which will often be the best hand. While a pair of aces will not always be the best hand, it should still be accounted for, perhaps counting those three outs as 1.5 outs or so, depending on how confident an opponent seems in his holding. Remember that when a player makes a strong but non-nut hand, he could still lose. For example, if a player improves to a low flush, he could lose to a better flush. If an opponent makes a substantial bet, it’s often best to not raise, opting instead to just call with a strong, but non-nut hand. When there’s money remaining in the stacks to be bet on the river, a player may be able to bluff an opponent off the best hand when one fails to complete the draw. In general, the best cards to bluff are those that complete other draws besides one’s own draw, such as when one has a missed straight draw but the flush draw comes in. Second nature Practice counting outs so it becomes second-nature at the poker table. (See “When to call,” left.) Some players enjoy figuring out how many outs they have against an opponent’s specific hand. But one never knows what an opponent has, so that exercise isn’t too useful. “Counting on improvements,” right, shows how often a draw will improve on the turn, river or the turn and river combined.
Counting on improvements Here’s how often a draw will improve on the turn, river, or turn and river combined. Outs
Flop to Turn %
Turn to River %
Turn and River %
20
43%
44%
67%
19
40%
41%
65%
18
38%
39%
62%
17
36%
37%
60%
16
34%
35%
57%
15
32%
33%
54%
14
30%
30%
51%
13
28%
28%
48%
12
25%
26%
45%
11
23%
24%
42%
10
21%
22%
38%
9
19%
20%
35%
8
17%
17%
28%
7
15%
15%
28%
6
13%
13%
24%
5
11%
11%
20%
4
9%
9%
17%
3
6%
7%
12%
2
4%
4%
8%
1
2%
2%
4%
Just because a player has the potential to improve his draw to an effective nut hand doesn’t mean he should continue when facing a bet.
Jonathan Little, a professional poker player and WPT Player of the Year, has amassed more than $7 million in live tournament winnings, written 14 best-selling books and teaches at pokercoaching.com. @jonathanlittle
march 2020 | luckbox
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TRADER
ROB HOFFMAN 1 3
4
2
5
7
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10 9
CEO and founder, becomeabettertrader.com Age 49 Years trading 25 Office Lake Geneva, Wisc. What did you start trading? Since childhood I’ve always enjoyed playing chess and thinking several moves ahead. As I grew up, I found that same perspective was a perfect fit for trading. One key aspect of that is identifying statistically significant trends and looking for re-entry opportunities within those trends prior to, or on resumption of, the quality trend. So when I look at the market, I don’t really look at it as a chart and if I am going to go long or short, instead I am focused on where the market looks like it is to the general public. Once I know where public perception expects trends to go, I can take a step back and see where the pieces on the board really are in the big picture.
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Favorite trading strategy? The biggest problem I see is the use of oscillators at the wrong time. For trending markets, which is where most people get into trouble with oscillators, I only use one side of the oscillator. In a long side trending market I will wait until the stochastic comes from approximately the 80 level and above, and rather than shorting the market as it starts to pull back, I will wait until the market falls down below the 20 level and starts to firm up and look for the long side trade for a fresh entry or re-entry in the direction. In the short side market, rather than buying the market as it comes from below the 20 level and starts to rise back up, I want to trade with the trend, so I will wait for the market to pull back above the 80 level and start to weaken, and look to do a fresh entry short. Average number of trades per day? 3 What percentage of your outcomes do you attribute to luck? Every trade has an element of luck. Most of my
strategies are focused on 80% to 90% probability, but you can’t control everything, so by default there’s a 10% to 20% chance for risk of failure, or need for luck. Favorite trading moment? Recently I competed against several of the top traders from Europe. One of those competitors was using a completely automated algorithmic trading program. I saw it as my chance to take on the machine. The program fired off trade after trade successfully. Through much of the event I was behind. Then something changed that allowed live traders to demonstrate the benefit of human intuition. The market started to shift its behavior and trend, and that was something I was able to see and feel before the machine could. In the end, by continuing to trade well through the market turn while the machine had to slow down and identify what the current action meant, I ended up nearly twice as profitable as the machine.
WealthCharts (1-4): 1. Economic calendar and trade ideas 2. Multitimeframe screen with tastytrade broadcast 3. Rob’s ITP indicators 4. Multi-market display 5. Email: Always up to keep up 6. ITP and TRP indicators and OptionsPlay research tool 7. The tastyworks platform 8. WealthCharts social platform where Rob posts his trading research 9. Phone—ringing off the hook 10. Yeti microphone
FAVORITE BOOK
HIGH PROBABILITY TRADING by Marcel Link $18.96 (Amazon) Hardcover (393 pages)
luckbox | march 2020
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CALENDAR
MARCH 3 Super Tuesday
5 National Absinthe Day
7 That’s What She Said* Phoenix
PHOTOGRAPHS: (SUPER TUESDAY) REUTERS/CARLOS BARRIA; (MARCH MADNESS) SHANNA LOCKWOOD-USA TODAY SPORTS
Republican presidential candidate Sen. Marco Rubio reacts to Super Tuesday results in 2016. Super Tuesday: For Democrats, 15 primaries and a caucus are up for grabs March 3 on Super Tuesday, including those in delegate-heavy California and Texas. Voters will choose about 40% of convention delegates on Super Tuesday this year, making it a critical day for securing the Democratic Party’s nomination in a race with no shortage of candidates.
7–9 The TradersExpo* New York 8 International Women’s Day (Women have a half day off in China) China 13–22 SXSW Austin, TX
17 St. Patrick’s Day
17–18 March Madness Begins Dayton, Ohio (First Four) 19 Spring Equinox (New beginnings) 20 Gann Day (Change of trend) The Virginia Cavaliers celebrate their 2019 championship win. March Madness: While Selection Sunday lands on March 15, games in the popular NCAA basketball tournament begin with the First Four series on March 17-18 in Dayton, Ohio. A Duke University math professor calculated the odds of making a perfect March Madness bracket as one in 2.4 trillion, and last year, more than 17 million brackets were entered into the ESPN Tournament Challenge. Of those 17 million brackets, one set the record for the longest perfect bracket, going 49 for 49 and shattering the previous 39 for 39 record.
28 20/20 Trading* Denver 29 Adobe Summit 2020 begins Las Vegas
The TradersExpo The TradersExpo is coming to New York’s Marriott at the Brooklyn Bridge for three days of education geared to traders of all levels of experience. Tastytrade’s Tom Sosnoff is scheduled to make a presentation on options trading on March 8, and Luckbox contributor Amelia Bourdeau is slated to cover global macro outlook on March 7. Register for the event on the MoneyShow website. *For more information visit tastytrade.com (events)
THE TIDES OF MARCH Like seeds and plants awakening after winter, astrological energy is astir at the spring equinox (11:50 p.m. on March 19) and five days afterward. The S&P 500 could make a significant low while gold scores a high during this period. The kickoff is Friday, March 20; a quadruplewitching day for stock derivatives and one of 10 days annually that legendary trader W.D. Gann looked at for a change of trend. With Mars conjuncting with Jupiter that day, the action could be excessive. A significant high could occur on March 3, as voters in 15 jurisdictions go to the presidential primary polls on Super Tuesday. Two weeks later, the S&P 500 could make a low on March 18 (one day before the spring equinox) and gold could score a significant high a day after the March 19 spring equinox. Susan Abbott Gidel is the author of Trading In Sync With Commodities— Introducing Astrology To Your Financial Toolbox.
march 2020 | luckbox
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BIG CHANGES FOR YOUR PORTFOLIO You can replace stocks and futures with efficiency and ease.
Save on trading the Smalls all year, every year. Lock in reduced market data and exchange fees for life! subscribers.thesmallexchange.com
Š 2020 Small Exchange, Inc. All rights reserved. The launch of Small Exchange, Inc. is contingent upon designation as a contract market by the U.S. Commodity Futures Trading Commission. The information presented here is for illustrative purposes only, and is not intended to serve as investment advice since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Trading in derivatives and other financial instruments involves risk.
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trades actionable trading ideas
CHERRY PICKS
R I PE & J U I CY T RADE IDEAS
Three Roads to China By Michael Rechenthin, Ph.D.
ome stocks offer more exposure in Chinese markets than their names suggest. Here’s a sampling of opportunites.
S
Alibaba A Chinese holding company with a range of products and companies, Alibaba (BABA) invests mostly in independent firms that expose investors to only small amounts of industry risk. Take a look at some of the companies under the wing of Alibaba in the table “Apples to apples?” below. Here’s a slightly bullish trade that uses a short put in Alibaba. Because it’s a short option, it benefits from the decay of time—in effect, the
investor will be “paid” to enter the trade through risking money. Trade idea: Sell one put in Alibaba below the current price of 205. As of Jan. 29, the price of the April 200 put is $8.00. That means the seller will be paid $800 to enter this trade. Caterpillar Investors don’t realize most Dow Jones stocks are largely international. A great example is Caterpillar (CAT)—59% of its sales come from outside of the United States and nearly 25% come from the Asia-Pacific region. International sales have declined, but that perhaps explains why the stock is off nearly $40 from its highs.
Trade idea: Investors who’d like to take some risk could consider selling the 130 put in May. That’s a couple months away and will pay $530. Starbucks Starbucks (SBUX) operates 4,100 stores in China, the company’s second-largest market outside the U.S. While Chinese people aren’t known to be coffee drinkers (they often prefer tea), that’s changing and means a lot of potential for Starbucks. Trade idea: Based on a neutral to slightly bullish position, short the 82.5 put and 95 call in April. That brings in approximately $210 worth of credit with lots of room to be wrong.
Apples to apples? Take a look at some of the companies under Alibaba’s wing. Alibaba Company
Similar to ...
Alipay
PayPal
Aliyun OS
Android
Kuaide
Uber
Taobao
eBay
Xiami
Spotify or Pandora
Youku Tudou
Hulu
Sign up for free cherry picks and market insights at info. tastytrade. com/cherrypicks
march 2020 | luckbox
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THE TECHNICIAN
A V E T E RA N T RA D ER TAC K LES T EC HNICALS
Long & Short Sino Picks By Tim Knight
ost traders in the United States have probably encountered two or three Chinese stocks in their search for market opportunities, but about 150 publicly traded Chinese companies are available for trading directly on exchanges here. Six of those stocks seem particularly interesting, and they fall into two categories: two are deemed weak and the others appear relatively strong.
M
BIDU
WEAK TRADES Baidu For many years, Baidu (BIDU) seemed sensational, earning a reputation as the “Google of China.” However, it stalled in 2017 and then stumbled badly, falling from nearly 300 to one-third that amount in just a couple of years. Although it has recovered somewhat, it seems unlikely it will regain its lost glory, probably staying below $150 for years to come, if not permanently.
PTR
PetroChina It may seem hard to believe, but the first trillion-dollar company wasn’t Apple, Google or Microsoft. It was PetroChina (PTR), which soared from a few dollars per share to nearly $200. Since then, over the course of many years, it has tumbled about 80%. In addition to its persistent downtrend, there’s far more overhead supply right now than support beneath. It’s conceivable this stock could re-enter the teens in years to come.
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STRONG TRADES
BABA
Alibaba Group Alibaba’s (BABA) first year as a public company was terrible, as it lost about half of its peak value. That nadir proved to be an important bottom, however, as BABA ascended from $60 to almost four times that amount. It has also completed another large basing pattern, recently moving to new lifetime highs. GDS Holdings Ltd. The company GDS Holdings (GDS) is a leading data center provider in China, and it is sporting a very bullish pattern. What’s especially intriguing about this chart is its analog. In 2016 and 2017, the stock chart formed a bullish base which proceeded a very powerful advance higher. The stock seemed to stall in the middle of 2018 and began forming an extremely similar, but even larger, pattern. It has recently broken out of this pattern, which suggests more gains to come.
GDS
NetEase Inc. NetEase (NTES) is a large Chinese internet company which has been around since 1997. What’s remarkable about this stock’s chart (p. 52) is that it shows not only the enormous price gains it has enjoyed, but the relatively steady, robust perfor-
Alibaba’s first year as a public company was terrible. march 2020 | luckbox
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mance of the stock for nearly 20 solid years. Even the most severe economic downturns don’t seem to affect the stock badly, and the persistence of its rally conjures up similar powerhouses, such as Home Depot (HD) and Disney (DIS). TAL Education Group As the name suggests, TAL focuses on education, particularly K-12, one-on-one tutoring and other educational services, both online and offline. Even though its business model is utterly different from that of NetEase, its stock behavior is extremely similar. Its own bullish basing pattern formed from 2010-2012, which was followed by multi-thousand percent gains. After peaking in 2017, it lost about half its value, only to recapture those losses and push to new lifetime highs. This stock has been in a steady uptrend for eight years and is exhibiting the signs of a long-term winner.
The beauty of technical analysis and charting is that investors can apply it to an enormous array of financial instruments and international markets, irrespective of the country of origin. These charts can provide fresh ideas about opportunities with respect to price change and the most probable price directions in the months ahead.
NTES
TAL
Tim Knight has been using technical analysis to trade the markets for 30 years. He hosts Trading the Close daily on the tastytrade network and offers free access to his charting platform at slopecharts.com.
The first trilliondollar company wasn’t Apple, Google or Microsoft. It was PetroChina. 52
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MACRO VIEW
ACT I O N A BL E GLO BAL DIR ECT IO NAL T R ENDS
US-China Trade Impacts Aussie Dollar By Amelia Bourdeau
.S. equity indexes have hit historic highs, but the price action included periods of drawdowns throughout last year. Some drawdowns were related to negative U.S.-China trade war headlines, a major macro theme that will continue to roil the markets this year. That leaves no escape from the headlines for Australian currency. The Australian “Aussie” dollar (AUD), as a high beta currency, is influenced by movements in U.S. equity indexes and the global growth cycle. The Aussie dollar typically feels risk-on or risk-off on market days. As a result, some of the ChinaU.S. trade war announcements that affected the U.S. equity markets also affected the Aussie dollar. China accounts for just over 30% of Australia’s exports. In its December monetary policy announcement, the Reserve Bank of Australia noted “U.S.-China trade and technology disputes continue to affect international trade flows and investment as businesses scale back spending plans because of the uncertainty.” China has taken steps to support its economy, and its currency has weakened as well. As shown in “In bad sync,” above, it’s difficult for the Aussie dollar to appreciate when China’s currency is weakening. When the Chinese yuan (CNY) is weakening versus the U.S. dollar (USD), AUD/USD usually weakens along with it. To gauge how the Aussie dollar could trade in the session ahead, get a feel for whether it’s a risk-on or risk-off trading day.
U
In bad sync It’s difficult for the Aussie dollar to appreciate when China’s currency is weakening. Note: USD/CNH the offshore rate is used as proxy for USD/CNY the onshore rate
Source: TD Ameritrade
For another gauge, check the People’s Bank of China (PBOC) “fix” for USD/CNY. The PBOC allows the spot rate for USD/CNY to trade with a range of 2% above or below the day’s official fix. The “fix” or “yuan reference rate” for USD/ CNY is announced daily at 9:15 a.m. Beijing time. If it’s noticeably stronger or weaker than the previous day’s fix, then that can help set the tone for the Australian dollar for the trading day ahead. Unfortunately, this year has started on a sad note for Australia because of devastating bushfires. Given the scale of the fires, they could damage the economy by imperiling consumer confidence and curtailing tourism. Spending on recovery or rebuilding efforts may be delayed until fires are over—it won’t be immediate. Ahead, the Reserve Bank of Austra-
The partly unresolved U.S.-China trade war and the possible escalation of the U.S.-Iran conflict both pose significant macro risks. lia may cut its policy rate further in response, which would weigh on the Aussie dollar. In addition, those macro themes— if they heat up—could result in riskoff sentiment days in the financial markets and for the Aussie dollar. TRADE IDEA Buy a six-month 0.6600 AUD/USD put to reflect downside risks discussed above. Amelia Bourdeau is CEO of marketcompassllc.com, an advisory firm that provides global macro education and trading strategies to investors of all levels. @ameliabourdeau
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FUTURES
A SAV V Y F U T U R ES T RA D ER’S TAK E O N T HE M AR K ETS
Currencies’ Future By Pete Mulmat
ost traders don’t pay much attention to foreign currencies or their value relative to the dollar. But everything that’s traded has a dollar component. Whether it’s gold, crude or soybeans, traders buy and sell them priced in dollars. That’s why rises and falls in the value of the dollar can have a direct impact on the performance of the products we trade every day. The dollar has played a major role, not just in foreign currency markets, but also in stock market performance. Investors have a number of ways to trade the dollar. Using specific currency pairs, such as euro or yen, offers partial diversification. But for a better tool, look to a basket of currencies that affords a more holistic way to gain or manage currency exposure. Adding currencies to a portfolio has become much more popular in recent years. One way to do so is with a dollar
M
index product like the Invesco DB U.S. Dollar Index Bullish Fund (UUP) or the U.S. Dollar Index (DXY). UUP is an exchange-traded fund (ETF) and DXY is the futures equivalent, both constructed in the same fashion. To gain a better understanding of how the index works and what role it plays in a portfolio, take a look at what it can and cannot do. Defining the U.S. Dollar Index The U.S. Dollar Index measures the value of the U.S. dollar in relation to the value of a basket of some of America’s most important trading partners. The index comprises six foreign currencies. Because these regions aren’t all the same size—the euro, for example, is used in 23 countries—the USD Index assigns varying weight to each currency. The biggest proportion of the Dollar Index (USDX) is made up of the euro, which has a 57.6% weight.
Moving up
China has overtaken Canada to make the yuan the second-most traded currency in the United States. Typical Dollar Index Euro
Small Dollar Index
57.60%
34.30%
-
20.70%
Japanese Yen
13.60%
18.20%
Pound Sterling
11.90%
9.70%
Canadian Dollar
9.10%
7.20%
Chinese Renminbi
Australian Dollar
-
5.80%
Mexican Peso
-
4.10%
Swedish Krona
4.20%
-
Swiss Franc
3.60%
-
54
The currencies are weighted in the following ways: 1. The euro (EUR), 57.6% 2. The Japanese yen (JPY), 13.6% 3. The British pound (GBP), 11.9% 4. The Canadian dollar (CAD), 9.1% 5. The Swedish krona (SEK), 4.2% 6. The Swiss franc (CHF), 3.6%
The Chinese renminbi ranks among the world’s five most-used currencies and is getting its rightful place in the International Monetary Fund’s basket of reserve currencies.
Because it’s an index, the USD index functions much like the S&P 500 or NASDAQ 100, but instead of indicating the health of the equities market, it shows the relative strength of the U.S. dollar. As many traders have discovered recently, foreign currency markets can affect the results of U.S. multinational corporations. When the dollar is strong, the foreign-currency revenue that a company gets from its overseas operations translates into fewer dollars, hampering growth in sales and profits. Moreover, for companies whose costs are mainly in dollars, a strong U.S. currency can make them less competitive against foreign rivals that have costs denominated in cheaper currencies. As an example, sales at Philip Morris International (PM) come mostly from outside the United States, with exposure to dozens of international currencies. A strong dollar has hurt its results lately, and the tobacco giant believes that weak foreign currency performance could cost it as much as $1.15 per share in earnings this year.
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Alternatives to the weighted U.S. Dollar Index Because of its concentration in the euro, the traditional U.S. Dollar Index has started to lose its appeal as an investable index. In the past, the ability to combine exposure to the German mark, the French franc, the Italian lira and other key European currencies hedged much of a company’s or trader’s risk of forex exposure and Dollar Index moves. The need for a relevant index The Chinese renminbi already ranks among the world’s five mostused currencies. The International Monetary Fund recently announced it will add the renminbi to the basket of reserve currencies in the IMF’s Special Drawing Rights, known as SDRs. The renminbi is part of the
2003-trades-futures.indd 55
SDRs because of China’s importance in the global economy and its position as the world’s largest trading nation, IMF officials said. Based on the currency weights used by the Federal Reserve in its trade-weighted Dollar Index, China has overtaken Canada to make the renminbi the second-most traded currency by the United States, just after the euro. (See “Moving up,” p. 54.) A new dollar index With China’s influence in global markets and its growing relevance in the forex world, wouldn’t a basket of currencies that included the renminbi be a more useful and relevant tool for traders in today’s markets? A new futures exchange, the Small Exchange, has created the Small Dollar Index. It is a combination
of the euro, renminbi, yen, pound, Canadian dollar, Australian dollar, Mexican peso and the Korean won. Weights are determined according to each country’s gross domestic product and dollar-denominated trade volume. Taking into account the size of a nation’s economy, and not just trade volume, provides a more relevant dollar index for today’s markets. This index creates a more global view of currency pairs weighted against the U.S. dollar. More than ever, traders need products that offer exposure to the most relevant part of any asset class. Pete Mulmat, chief futures strategist at tastytrade, serves as host for a number of daily futures segments on the tastytrade network under the flagship programming slot called Splash Into Futures.
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DO DILIGENCE
QU I E T FOU N DAT I O N HELPS P ROACT IV E INV ESTO RS U NDERSTAND T HEI R PORTFOLI OS
Diversify With Alibaba & Baidu By James Blakeway
he U.S.-China trade war creates far-reaching ramifications for the economies of both nations. The ebb and flow of negotiations only exacerbates tensions and casts uncertainty on the future. But despite such disputes, the close of 2019 marked the end of a stellar year for U.S. investors. It also capped off an incredible decade for the U.S. stock market. The S&P 500 index grew 29% last year and 190% since the end of 2009. Across the same time frames, the tech-heavy Nasdaq 100 index grew 38% and 369%, respectively. On the other side of the Pacific,
T
Chinese investors saw sizeable returns in 2019 with the Shanghai Stock Exchange Composite Index (SSE) rallying 22%. The Hong Kong Hang Seng Index lagged behind the mainland, growing 9% by year’s end. Despite the positive returns in 2019, both Chinese indexes experienced a less impressive decade compared with the American market, with both fairly close to where they started in 2010. (See “Less than impressed,” p. 57.) The Chinese market’s underperformance over the last decade may present opportunities for investors. Aggressive investors and traders may choose to deal with individual Chinese stocks because many
are available as American Depository Receipts (ADRs). ADRs represent foreign stocks that are traded at U.S. exchanges. Two popular Chinese firms, for which ADRs are traded, are Baidu Inc. (BIDU: $138.31) and Alibaba Group (BABA: $219.30). Baidu, an internet conglomerate, operates the most popular search engine in China and offers other services. Its shares saw negative returns in 2019 after falling from their mid-2018 highs. Alibaba hit new highs in January after strong returns last year. Alibaba’s primary business is E-commerce, with an emphasis on
Four potential funds The exchange-traded fund industry offers a range of choices that provide exposure to the Chinese stock market. (Data from Jan. 6, 2020.)
Evaluate any portfolio with Quiet Foundation
Stocks in Fund
Liquid Options
Price
Yield
Expense Ratio
iShares China Large-Cap ETF
50
Yes
$44.12
2.13%
0.74%
MCHI
iShares MSCI China ETF
597
No
$64.88
1.45%
0.59%
ASHR
Xtrackers Harvest CSI 300 China A-Shares ETF
306
Yes
$29.94
0.98%
0.65%
EEM
iShares MSCI Emerging Markets ETF
1221
Yes
$44.82
2.77%
0.67%
Symbol
Name
FXI
Past performance is no guarantee of future results. Information provided in an EPI Report does not consider the specific profile, objectives or circumstances of any particular investor or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her investment professional. Investment suitability must be independently determined for each individual investor. QF does not make suitability determinations or investment recommendations for investors. EPI utilizes the S&P 500 as its benchmark given that the S&P 500 is considered a barometer of stock performance in the United States. Aspects of the analysis and information found in an EPI Report are based upon simulated and/or hypothetical performance. Simulated and hypothetical performance have inherent limitations and do not represent the actual performance results of any particular investment products. The EPI Report does not guarantee any results or outcomes in the financial markets. Investors should be aware of the methodology used to produce an EPI Report and the inherent limitations when placing reliance on the results. For additional information about EPI Reports, visit the QF website: quietfoundation.com.
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business-to-business sales. Shares in both Baidu and Alibaba have become popular trading vehicles over the last few years. Each has liquid option markets with high open interest and volume. The rich option premium and large price movement may be ideal for derivatives traders, but the individual stocks likely won’t add enough diversification to offset the risk for long-term investors. Luckily, investors have multiple choices if they’re looking to add exposure to the Chinese markets with layers of baked-in diversification. The exchange-traded fund (ETF) industry offers a range of choices that provide exposure to the Chinese stock market. (See “Four potential funds,” p. 56.) The table highlights four potential ETFs that offer interesting diversification possibilities. The ETFs, whih are FXI, iShares MCHI, and ASHR, are built to provide exposure to the Chinese stock market. All three hold diversified portfolios, though FXI and ASHR have larger holdings in the financial sector, 46% and 33%, respectively. At 25% of its portfolio, MCHI’s largest sector exposure is consumer cyclical. The last ETF listed in the table is not strictly a China fund. It’s called iShares MSCI Emerging Markets Index (EEM), and it provides exposure to equity holdings in 12 emerging market countries, including China. The Chinese holdings of EEM constitute 34% of the portfolio, and many of the stocks are the same large Chinese companies in the aforementioned China ETFs. The other 66% of the portfolio comprises more than 700 stocks from emerging market countries. EEM could make for a compelling investment for those looking to diversify with some Chinese exposure but also some broader global assets. Running an equal-weighted portfolio of these four ETFs through the free Quiet Foundation analy-
Less than impressed Despite positive returns in 2019, both Chinese indexes experienced a less impressive decade compared with the American market.
sis system yields some interesting metrics. Two areas that stand out are liquidity and opportunity. These ETFs scored high in both categories because of liquid stock and option markets. MCHI scored slightly lower in both categories because of limited available options and a less-liquid share market. The analysis report indicates the three-month correlation among the four ETFs is high at 0.88. That’s because the portfolios have a concentration of large cap Chinese stocks. More intriguing was the metric comparing the portfolio to the S&P 500, a correlation of 0.68. From August 2019 through the end of the year, global markets rallied alongside U.S. stock indexes, explaining the high correlation. It’s possible that a drop in U.S. stock indexes would be accompanied by a similar downturn in the Chinese markets. The global diversification provided by these ETFs does come at a higher cost than typical U.S.
Investors have multiple choices if they’re looking to add exposure to the Chinese markets with layers of baked-in diversification.
sector or index ETFs. All four of these ETFs have expense ratios above 0.5%. However, investors may consider this a fair price, given the international exposure afforded by the funds. These ETFs grant U.S. investors access to investments they couldn’t make on an individual basis because most foreign stocks are not listed on U.S. exchanges and aren’t available through domestic brokers. Investors itching for some immediate diversification may find comfort in siphoning off some funds into one of these ETFs. More-skittish investors may hold off if they anticipate a global slump this year. As always, whether investing for the long haul or trading for short term swings, investors should continue to perform their due diligence. James Blakeway serves as CEO of Quiet Foundation, a data science-driven subsidiary of tastytrade that provides fee-free investment analysis services for self-directed investors. @jamesblakeway
march 2020 | luckbox
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WIN A TRADE CREDIT! $
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Low Rates. Fast Tech. Smart Ideas. 2003-tactics-basic.indd 58
1/31/20 10:28 AM
tactics
SPECIAL SECTION Luckbox is devoting this month’s tactics section to techniques for trading Chinese stocks, courtesy of the Learn Center at tastytrade
essential trading strategies
BASIC
Chinese Stocks & ETFs to Trade Investing in China remains notoriously difficult, but here are some liquid options
By Michael Rechenthin
W
ith the second-highest gross domestic product (GDP) in the world—and a close second to the GDP of the entire European Union—China is indisputably a major player in the global economy. Even though some Chinese stocks don’t have great liquidity (ease with which investors can “enter” or “exit” a trade), there are smart ways to get exposure to the Chinese stock market. The exchange-traded funds (ETFs) and individual company stocks in “10 most-liquid Chinese stocks & ETFs,” right, have high levels of liquidity and enable investors either to speculate in China’s market or diversify their portfolios. The table was created by multiplying the volume by the price to get an average dollar traded per day value. For example, the iShares Trust China Large-Cap ETF (FXI) trades more than $1 billion worth of shares per day. The most heavily traded Chinese ETF, iShares MSCI Emerging Markets ETF (EEM), is only partially a Chinese ETF—only 35% of the companies in it are Chinese stocks and 11% are Taiwanese. But trading this ETF provides greater diversification in the sphere of China. The table also presents a list of the top liquid Chinese stocks: Alibaba (BABA) comprises multiple companies. It’s an online middleman between buyers and sellers. Let’s say a shopkeeper wants to stock up on cheap scooters. They can purchase one for $400 or purchase in bulk from Alibaba at $200 each if they buy at least 100. Alibaba also runs an online payment service, cloud services and mobile apps. Baidu (BIDU) is the Google of China. It
10 most liquid Chinese stocks & ETFs Multiply the volume by the price to get an average dollar traded per day value. Avg. Dollar Traded Per Day
Current Implied Volatility
3-month Correlation with S&P 500
iShares Trust MSCI Emerging Markets ETF
$2,796,149,898
0.16
0.73
BABA
Alibaba Group Holding Ltd DR
$2,733,656,356
0.29
0.6
FXI
iShares Trust China Large-Cap ETF
$1,109,529,264
0.18
0.66
BIDU
Baidu Inc ADR
$479,210,224
0.33
0.57
JD
JD.com Inc ADR
$406,515,927
0.32
0.58
MCHI
iShares Trust MSCI China ETF
$267,277,838
0.19
0.7
PDD
Pinduoduo Inc ADR
$199,881,587
0.39
0.48
NTES
NetEase Inc ADR
$189,312,898
0.3
0.26
ASHR
DBX ETF Trust Xtrackers Harvest CSI 300 China A-Shares ETF
$131,922,344
0.21
0.56
EWH
iShares Inc. MSCI Hong Kong ETF
$128,407,005
0.16
0.53
Symbol
Description
EEM
provides a search engine that controls 76% of the Chinese market and owns a number of other businesses, including Baidu Wallet, which has 100 million users. Jingdong or JD.com (JD) provides marketing, logistics and financing to global brands trying to reach the Chinese markets. Pinduoduo (PDD) helps users participate in group-buying deals of everything from cheap toilet paper to computers. NetEase (NTES) is one of the largest internet and video game companies in the world, with 18,000 employees. One of its games,
Knives Out, reached 250 million players. The items covered here are liquid and have exposure to China. Investors who find one that seems like an interesting opportunity could consider a bullish strategy of selling a put several dollars below the current price up to several months away. Or for a more neutral strategy, consider a short strangle—a strategy that has the advantage of making money as long as the symbol doesn’t move too much, staying between the two strikes. Michael Rechenthin, Ph.D., aka “Dr. Data,” is the head of data science at tastytrade. @mrechenthin
march 2020 | luckbox
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INTERMEDIATE
China’s Neutral Price Action Testing the strength of a strangle in the FXI By Anton Kulikov
Strangle: Sell one 43-strike put and one 46-strike call with roughly 45 days to expiration. Look to take this off when it has made 50% of total possible profit or when the position reaches 21 days to expiration, whichever comes first.* Investors who are more risk tolerant can sell a straddle. Sell a 44-strike put and call with roughly 45 days to expiration. This will be riskier because investors want the stock to move even less than if they had sold a strangle. However, the max payoff is more than double that
Neutral price action U.S. markets (SPY) are up nearly 200% since 2010, while Chinese markets are virtually unchanged. When selling premium, it’s preferable to have no price change in the long run.
150%
SPY FXI
100% 50% 0% -50% JAN 2010
JAN 2014
JAN 2016
JAN 2018
JAN 2010
of a strangle. Look to manage this more aggressively at 25% of total possible profit or roughly 30 days to expiration, whichever comes first.* Risk-averse investors can sell an iron condor. It’s the same setup as a strangle but, in addition, investors buy the 41-strike put and the 48-strike call. Buying these “wings” will cap losses, but in exchange for some protection from big moves in the stock, investors reduce their total possible profit. Look to close this trade the same way as a strangle, at 50% of max profit or 21 days to expiration.* Final tip: Waiting for implied volatility in FXI to increase will boost potential profits while keeping probability of profit roughly the same. Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov97
* Based on market conditions as of 2/1/20. Prices may have changed and losses may occur.
60
JAN 2012
CARTOON BY JONNY HAWKINS
F
or the past 10 years, U.S. stock markets have tended to move in a single direction: up. This has been a challenge for options sellers with a neutral assumption on the market. Strategies like strangles have been tested on their upper breakevens through the past 10 years. Although the strategies have still been profitable for the most part, their performances have been hampered by the short call (bearish) side. Anyone still worried about selling directionally neutral premium in the monodirectional U.S. markets can look elsewhere. Enter China. The large-capitalization Chinese exchange-traded fund, iShares FTSE/ Xinhua China 25 Index (FXI) has experienced virtually no price change since 2010, and as a result, has been cyclical and range-bound. That makes this underlying a directionally neutral premium seller’s dream. (See “Neutral price action,” above.) What basic strategy can investors employ when they assume FXI will continue this neutral price action?
luckbox | march 2020
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tactics
ADVANCED
Spreading for Risk Reduction Traders can spread risk with calendar spreads, pairs trades and options By Michael Gough
S
hort naked options are a preferred strategy among experienced traders because of their high probability of profit, ease of management and positive theta. But these strategies also have a significant drawback: large buying power requirements. Because of their large theoretical risk, selling naked options requires a significant initial capital outlay. Consider a position in the Chinese E-commerce giant Alibaba (BABA). Selling the 240-strike call option requires $3,000 in buying power requirement, while buying the 210 put option, which has the same directional risk (delta), requires only $300. To reap the benefits of short options strategies but reduce the buying power requirement, traders can consider spreading. Traders have many ways to spread risk. They do so in the futures market with calendar spreads, which involve buying the front month and selling the back month. Traders spread risk with pairs trades by buying and selling related securities simultaneously—such as gold and silver. And options traders spread risk by buying a further out-of-the-money option against their short option. All of these spreads reduce risk. At the time of this writing, Alibaba is sitting on all-time highs since its initial public offering in 2014, up nearly 60% over the past year. At these levels, one can’t help but wonder if it’s overdue for a small price correction. One way to lean short would be to sell a call. The 240-strike call option expiring in February would bring in a roughly $300 credit and could make money
in a variety of situations, including Alibaba sitting at its current price level, decreasing in price, and increasing roughly 7% but not penetrating the 240 strike. Compare that strategy with buying the 210 put option, which only makes money if Alibaba sells off. To skirt the large capital requirement and maintain similar trade profitability profiles, traders can consider spreading their risk with an additional long call option. Instead of just selling the 240-call, they can sell the 240-call while simultaneously buying the 250-call, which turns the short call into a short call spread. Spreading risk with the long call brings the buying power requirement down from $3,000 to $850 while maintaining similar profitability characteristics. Spreading the risk with a long call lowers the buying power requirement but also reduces the potential max profit. While the naked call nets a credit of roughly $300, the call spread only brings in $150. For traders with smaller trading accounts, the 50% reduction in profit potential compared with the 71% reduction in
buying power requirement may be worth considering. Having more but smaller positions enables traders to diversify without pushing their capital comfort zone. Additionally, the flexibility of options helps traders adjust the width of the spread to fine-tune risk and return. The wider the spread, the more closely the trade resembles the naked position, which results in a larger credit and a larger buying power requirement. The narrower the spread, the more slowly the position’s profit and loss will change, which results in a lower credit and a lower buying power requirement. These spreading mechanics aren’t limited just to naked calls and puts. They can also be used to turn strangles into iron condors, and ratio spreads into broken-wing-butterflies. When capital requirements become too burdensome, consider spreading to slow down a position’s profit and loss and reduce initial capital outlay.
Spreading slows down the movement of a position’s profit and loss (P&L), which often drastically reduces the buying power requirement.
Michael Gough enjoys retail trading and writing code. He works in business and product development at the Small Exchange, building index-based futures and professional partnerships.
Risk and return profile of spreads Here are the credits, buying power requirements and delta exposures for Alibaba call spreads of varying widths. The wider the spread, the more closely the spread resembles its naked counterpart. Credit Received
Buying Power Requirement
Delta
$265
$3,125
-24
240 / 245 Call Spread
$95
$405
-7
240 / 250 Call Spread
$152
$848
-12
240 / 260 Call Spread
$223
$1,777
-18
Position Naked 240 Call
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BY 1893 INSPIRED
F E W H A S T H E S P I C E . H A N D - M A D E I N S M A L L B ATC H E S, U S I N G A M A S H-B I L L INSPIRED BY WHISKEY ’S PRE-PROHIBITION GOLDEN ERA. F E W COMBINES A HIGH RYE CONTENT & PEPPERY YE A ST TO MAKE A UNIQUELY SPIC Y BOURBON.
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tactics
CHEAT SHEET
The Rolling Defense Rolling a trade helps manage a winning or losing position By Mike Hart and Anton Kulikov
W
hen defending an options trade, investors often rely on a technique known as “rolling.” The process closes out the current position and moves it—or rolls it—to another strike. That can boost the credit received and increase the probability of success. Follow the guide below to learn how to roll positions.
Mike Hart, a former floor trader at the Chicago Stock Exchange and a proprietary futures trader, specializes in energy markets and interest rates. He’s a contributing member of the tastytrade research team. @mikehart79 Anton Kulikov is a trader, data scientist and research analyst at tastytrade. @antonkulikov97
UNDEFINED RISK SIDE HAS BEEN BREACHED WITH MORE THAN 21 DAYS LEFT
IV Rank is high (>30)
IV Rank is low (<30)
Downside breach (put is in the money)
Upside breach (call is in the money)
Downside breach (put is in the money)
Upside breach (call is in the money)
Close out call, sell new call at the money
Close out put, sell new put at the money
Close out call, sell new call (30-40 delta)
Close out put, sell new put (30-40 delta)
march 2020 | luckbox
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luckbox of the month
ROLEX ROADSHOW
M
aybe anyone who waits long enough could wind up Luckbox of the Month. Take the case of a guy known to the media only as “David,” who waited nearly half a century for good fortune to find him. David bought a Rolex watch for $345.97 in 1974, and it recently appraised on PBS’s Antiques Roadshow for between $500,000 and $700,000. In response, he faked a fainting spell that helped him get lots of attention online, in newspapers and on television. David feigned passing out when Peter Planes, an appraiser on the show, told him that watches like his sell for around $400,000 at auction. But this watch was special. Because the Rolex was unworn, Planes doubted there was another one in the world in better condition. Paired with the fact that David saved everything that came with it, including the original receipts, Planes said it was worth a premium. Chance had played a part in the preservation. David was in the Air Force when he bought the watch and had intended to wear it while scuba diving. But it looked too nice to put in saltwater. Instead, it sat it in a safe deposit box for decades. But David’s luck may not have been entirely undeserved. He had the good sense to preserve the timepiece, which had set him back about a month’s pay. If it fetches the $700,000 valuation, the 202,230% return on investment is an outlier return worthy of Luckbox recognition. An aside: Watch aficionados refer to another time piece, the Rolex Daytona, as the “Paul Newman.” It got the name because the actor was often seen wearing one given to him by his wife, Joanne Woodward. The watch that belonged to the star, “Newman’s Newman,” brought a record $17.8 million in 2017 that was surpassed only last year when a Patek Philippe watch sold for $31 million. Some luck.
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Originated in the U.K. in 1979
24 seasons in the U.S.
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17 Emmy nominations
PBS’s mostwatched ongoing series
5,000 pieces per episode 150 appraisals are recorded 30 make it into each episode
Biggest Appraisal Diego Rivera painting for $1.2 – $2.2 million
PHOTOGRAPHS: MEREDITH NIERMAN FOR WGBH
ANTIQUES ROADSHOW FACTS
A rare Rolex Oyster Cosmograph watch appraised on Antiques Roadshow for up to $700,000. What luck!
luckbox | march 2020
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