China Launches Yuan-Ruble Payment System

The monetary regimes of China and Russia, two of the world’s most resource-rich nations, are drawing closer with every passing day.

In the latest push for convergence, China has established a payment versus payment (PVP) system for Chinese yuan and Russian ruble transactions in a move to reduce risks and improve the efficiency of its foreign exchange transactions. The PVP system for yuan and ruble transactions, designed to streamline commerce and curency transactions between the two nations, was launched on Monday after receiving approval from China’s central bank, according to a statement by the country’s foreign exchange trading system.

It marks the first time a PVP system has been established for trading the yuan and foreign currencies, said the statement, which was posted on Wednesday on the website of the China Foreign Exchange Trade System (CFETS). PVP systems allow simultaneous settlement of transactions in two different currencies.

According to CFETS, the system would reduce settlement risk as well as the risk of transactions taking place in different time zones, and improve foreign exchange market efficiency. Of course, if the two countries had a blockchain-based settlement system, they would already have all this and much more.

CFETS said it plans to introduce PVP systems for yuan transactions with other currencies based on China’s Belt and Road initiative, and complying with the process of renminbi internationalization. Russia, however, is a top priority: the world’s biggest oil producer recently became the largest source of oil for China, the world’s top energy consumer.

To be sure, the monetary convergence between Beijing and Moscow is hardly new. The most notable recent development took place in April, when the Russian central bank opened its first overseas office in Beijing on March 14, marking a step forward in forging a Beijing-Moscow alliance to bypass the US dollar in the global monetary system, and to phase-in a gold-backed standard of trade. As the South China Morning Post reported at the time, the new office was part of agreements made between the two neighbours “to seek stronger economic ties” since the West brought in sanctions against Russia over the Ukraine crisis and the oil-price slump hit the Russian economy.

At the time, Vladimir Shapovalov, a senior official at the Russian central bank, said the two central banks were drafting a memorandum of understanding to solve technical issues around China’s gold imports from Russia, and that details would be released soon, to which we said that If Russia – the world’s fourth largest gold producer after China, Japan and the US – is indeed set to become a major supplier of gold to China, the probability of a scenario hinted by many over the years, namely that Beijing is preparing to eventually unroll a gold-backed currency, increases by orders of magnitude.

Furthermore, also around the same time, as the Russian central bank was getting closer to China, China was responding in kind with the establishment of a clearing bank in Moscow for handling transactions in Chinese yuan. The Industrial and Commercial Bank of China (ICBC) officially started operating as a Chinese renminbi clearing bank in Russia on Wednesday this past Wednesday

“The financial regulatory authorities of China and Russia have signed a series of major agreements, which marks a new level of financial cooperation,” Dmitry Skobelkin, the abovementioned deputy head of the Russian Central Bank, said. “The launching of renminbi clearing services in Russia will further expand local settlement business and promote financial cooperation between the two countries,” he added according to.

Irina Rogova, a Russian financial analyst told the Russian magazine Expert that the clearing center could become a large financial hub for countries in the Eurasian Economic Union.

* * *

The creation of the clearing center, and the launch of PVP systems enables the two countries to further increase bilateral trade and investment while decreasing their dependence on the US dollar. It will create a pool of yuan liquidity in Russia that enables transactions for trade and financial operations to run smoothly. In expanding the use of national currencies for transactions, it could also potentially reduce the volatility of yuan and ruble exchange rates. The clearing center is one of a range of measures the People’s Bank of China and the Russian Central Bank have been looking at to deepen their co-operation, Sputnik reported.

But one of the most significant measures under consideration is the previously reported push for joint organization of trade in gold.

In recent years, China and Russia have been the world’s most active buyers of the precious metal. On a visit to China last year, the deputy head of the Russian Central Bank Sergey Shvetsov said that the two countries want to facilitate more transactions in gold between the two countries.

We discussed the question of trade in gold. BRICS countries are large economies with large reserves of gold and an impressive volume of production and consumption of this precious metal. In China, the gold trade is conducted in Shanghai, in Russia it is in Moscow. Our idea is to create a link between the two cities in order to increase trade between the two markets,” First Deputy Governor of the Russian Central Bank Sergey Shvetsov told Russia’s TASS news agency.

In other words, China and Russia are continuing to shift away from dollar-based trade, to commerce which will eventually be backstopped by gold, or what is gradually emerging as an Eastern gold standard, one shared between Russia and China, and which may day backstop their respective currencies.

Meanwhile, the price of gold continues to reflect none of these potentially tectonic strategic shifts, just as China – which has been the biggest accumulator of gold in recent years – likes it.

“It Is Time To Return To Sanity” Gorbachev Urges Trump And Putin To Save Crucial Cold-War Arms Pact

Former Soviet Leader Mikhail Gorbachev the last Soviet leader, is urging Russian President Vladimir Putin and US President Donald Trump to meet face to face to resolve their differences as each side accuses the other of violating a Cold War-era arms-control treaty that Gorbachev believes is essential to maintaining peace between the two world powers.

The Intermediate-Range Nuclear Forces Treaty, a landmark arms control treaty signed in 1987 by Gorbachev and former US President Ronald Reagan, helped end the Cold War by requiring both countries to eliminate all nuclear ground-launched ballistic and cruise missiles with a range of 500 to 5,500 kilometers.

But recently, both sides have called for the treaty to be scrapped as perceived encroachment by NATO “missile-defense” systems in South Korea and Europe has unnerved Putin, while Russia’s efforts to influence the US presidential election with a “sophisticated” propaganda campaign

In an essay that was published in a local newspaper, and re-published by the Washington Post, Gorbachev explains why preserving the treaty – which he sees as the most vulnerable link in the system of limiting and reducing weapons of mass destruction – is imperative to maintaining the Russia-US relationship.

In the essay, Gorbachev argues that the US-Russia relationship is “in a severe crisis” and only a dialogue based on “mutual respect” can help repair it – if only the two leaders could scrounge up the political will to make it happen.

So what is happening, what is the problem, and what needs to be done?

 

Both sides have raised issues of compliance, accusing the other of violating or circumventing the treaty’s key provisions. From the sidelines, lacking fuller information, it is difficult to evaluate those accusations. But one thing is clear:

 

The problem has a political as well as a technical aspect. It is up to the political leaders to take action.

 

Therefore I am making an appeal to the presidents of Russia and the United States.

 

Relations between the two nations are in a severe crisis. A way out must be sought, and there is one well-tested means available for accomplishing this: a dialogue based on mutual respect.

 

It will not be easy to cut through the logjam of issues on both sides. But neither was our dialogue easy three decades ago. It had its critics and detractors, who tried to derail it.

 

In the final analysis, it was the political will of the two nations’ leaders that proved decisive. And that is what’s needed now. This is what our two countries’ citizens and people everywhere expect from the presidents of Russia and the United States.

If Trump and Putin could agree to preserve the agreement, it would encourage the generals and diplomats responsible for implementing and monitoring the terms to fall in line, Gorbachev said.

I am confident that preparing a joint presidential statement on the two nations’ commitment to the INF Treaty is a realistic goal. Simultaneously, the technical issues could be resolved; for this purpose, the joint control commission under the INF Treaty could resume its work. I am convinced that, with an impetus from the two presidents, the generals and diplomats would be able to reach agreement.

 

We are living in a troubled world. It is particularly disturbing that relations between the major nuclear powers, Russia and the United States, have become a serious source of tensions and a hostage to domestic politics. It is time to return to sanity. I am sure that even inveterate opponents of normalizing U.S.-Russian relations will not dare object to the two presidents. These critics have no arguments on their side, for the very fact that the INF Treaty has been in effect for 30 years proves that it serves the security interests of our two countries and of the world.

Unfortunately, the INF isn’t the only important treaty in danger of collapse. As we reported last month, US officials are preparing restrictions for Russian military flights over American territory permitted by the 2002 Treaty on Open Skies after accusing the country of concealing movements of personnel and military equipment near its western enclave of Kaliningrad as Russia prepared to stage its “Zapad-2017” drills, its biggest display of military power since the end of the Cold War.

In another sign of mounting tensions, the US suspended joint military exercises with its Gulf allies after a historic Russia-Saudi Arabia summit.

Gorbachev led the Soviet Union from 1985 until its dissolution in 1991.

‘Shocker’ Of The Day: ‘Tech’ Company That Buys Movie Tickets For $10 And Sells Them For $0.33 May Not Survive

Over the past 4 weeks, the stock of a tiny New York based “IT service management” company, Helios & Matheson Analytics, Inc., has surged just over 1,300% after announcing plans to purchase a majority stake of an “innovative and disruptive technology company” called MoviePass at a $210 million valuation.

So how exactly does MoviePass, the “innovative” and “disruptive” tech powerhouse that it is, plan to change the entertainment world forever, you ask?  Well, apparently by paying movie theaters $10 a pop for movie tickets and then re-selling them to their own monthly subscribers for a small 97% discount, or roughly $0.33 each (in the worst case scenario). Per Bloomberg:

The company sells a monthly subscription that gives moviegoers a daily pass to movie theaters for $10 a month – though MoviePass is paying theaters full price for tickets, which can cost $10 apiece or more.

Genius plan, right? 

MoviePass

And while the company planned to supplement its top line with advertising revenue and deals with theater chains to share in concession sales, at least according to Bloomberg, a problem developed when its subscriber base ballooned from nearly nothing to 400,000 in a matter of weeks.  Unfortunately, at least when you’re business model is dependent upon selling your primary product at a 97% loss, the more ‘successful’ you are the more money you lose.

And while the ending of this particular movie seemed obvious from the start, it apparently eluded Helios investors until today when the company announced that the business they just purchased 4 weeks ago may not survive…all of which sent their stock plunging by 40%. 

Helios & Matheson Analytics Inc., the backer of the controversial $10 MoviePass subscription, fell as much as 21 percent after warning the money-losing cinema service may not make it.

 

Helios boosted its support for MoviePass to $11.5 million from $5 million as part of an August deal to acquire a majority stake, according to a regulatory filing. At the same time, Helios said MoviePass’s auditors are expected to warn of substantial doubt about its ability to continue as a going concern.

Who knew that massive cash losses could be considered detrimental for a tech company?

MoviePass

Just to put this problem in perspective, lets apply some math to this case study on how not to run a business.  Lets assume that each of MoviePass’s 400,000 subscribers decide to see 2 movies each week (they’re entitled to one movie pass a day…but lets just assume they only use 2 per week) at a cost of $10…that’s a total cost of $32 million each month.  Now, each of those subscribers are paying $10 per month for their service which means MoviePass is collecting $4 million in revenue and burning $28 million every single month or $336mm per year…and that doesn’t even count their staff and other overhead expenses which we’re sure are considerable.  Does that sound like a business plan that might be of interest to you?

Meanwhile, even AMC, undoubtedly one of the biggest beneficiaries of the bizarre MoviePass business model, said that the company was “unsustainable.”

MoviePass sparked an outcry in the movie business after cutting the price of its movie subscription plan to just under $10 from $30. That led to a flood of sign-ups that the company struggled to keep up with. The biggest movie-theater chain in the world, AMC Entertainment Holdings Inc., has said the plan is unsustainable — because MoviePass is paying exhibitors full price for tickets — and was looking to block the deal.

Sorry guys, only Bezos and Musk are able to sell products at a massive loss, in perpetuity, without investor backlash…

Andy Xie Warns “The Bubble Economy Is Set To Burst” As Political Tension Soars

Authored by Andy Xie via The South China Morning Post,

Central banks continue to focus on consumption inflation, not asset inflation, in their decisions. Their attitude has supported one bubble after another. These bubbles have led to rising ­inequality and made mass consumer inflation less likely.

Since the 2008 financial crisis, asset inflation has fully recovered, and then some. The US household net worth is 34 per cent above the peak in 2007, versus 30 per cent for nominal GDP. China’s property ­value may have surpassed the total in the rest of the world combined. The world is stuck in a vicious cycle of asset bubbles, low consumer ­inflation, stagnant productivity and low wage growth.

The US Federal Reserve has indicated that it will begin to ­unwind its QE (quantitative easing) assets this month and raise the ­interest rate by another 25 basis points to 1.5 per cent. China has been clipping the debt wings of grey rhinos and pouring cold water on property speculation. They are ­worried about asset bubbles.

But, if recent history is any guide, when asset markets begin to tumble, they will reverse their actions and ­encourage debt binges again.

Recently, some central bankers have been puzzled by the breakdown of the Philipps Curve: that falling unemployment rates would lead to wage inflation first and consumer price inflation next. This shows how some of the most powerful people in the world operate on flimsy ­assumptions.

Despite low unemployment and widespread labour shortages, wage increases and inflation in Japan have been around zero for a quarter of a century. Western central bankers assumed that the same wouldn’t happen to them without understanding the underlying reasons.

The loss of competitiveness changes how macro policy works. Japan has been losing competitiveness against its Asian neighbours. As its population is small, relative to the regional total, lower wages in the region have exerted gravity on its ­labour market. This is the fundamental reason for the decoupling between the unemployment rate and wage trend.

The mistaken stimulus has the unintended consequences of dissipating real wealth and increasing inequality. American household net worth is at an all-time high of five times GDP, significantly higher than the bubble peaks of 4.1 times in 2000 and 4.7 in 2007, and far higher than the historical norm of three times GDP. On the ­other hand, US capital formation has stagnated for decades. The outlandish paper wealth is just the same asset at ever higher prices.

The inflation of paper wealth has a serious impact on inequality. The top 1 per cent in the US owns one-third of the wealth and the top 10 per cent owns three-quarters . Half of the people don’t even own stocks. Asset inflation will increase inequality by definition. Moreover, 90 per cent of the income growth since 2008 has gone to the top 1 per cent, partly due to their ability to cash out in the ­inflated asset market. An economy that depends on asset inflation always disproportionately benefits the asset-rich top 1 per cent.

There have been so many theories on why inequality has risen. The misguided monetary policy may be the culprit. Germany and Japan do not have significant asset bubbles. Their inequality is far less than in the Anglo-Saxon economies that have succumbed to the allure of financial speculation.

While Western central bankers can stop making things worse, only China can restore stability in the global economy. Consider that 800 million Chinese workers have ­become as productive as their Western counterparts, but are not even close in terms of consumption. This is the fundamental reason for the global imbalance.

China’s model is to subsidise ­investment. The resulting overcapacity inevitably devalues whatever its workers produce. That slows down wage rises and prolongs the ­deflationary pull. This is the reason that the Chinese currency has had a tendency to depreciate during its four decades of rapid growth, while other East Asian economies experienced currency appreciation during a similar period.

Overinvestment means destroying capital. The model can only be sustained through taxing the household sector to fill the gap. In addition to taking nearly half of the business labour outlay, China has invented the unique model of taxing the household sector through asset bubbles. The stock market was started with the explicit intention to subsidise state-owned enterprises. The most important asset bubble is the property market. It redistributes about 10 per cent of GDP to the government sector from the household sector.

The levies for subsidising investment keep consumption down and make the economy more dependent on investment and export. The government finds an ever-increasing need to raise levies and, hence, make the property bubble bigger. In tier-one cities, property costs are likely to be between 50 and 100 years of household income. At the peak of Japan’s property bubble, it was about 20 in Tokyo. China’s residential property value may have surpassed the total in the rest of the world combined.

How is this all going to end? Rising interest rates are usually the trigger. But we know the current bubble economy tends to keep inflation low through suppressing mass consumption and increasing overcapacity. It gives central bankers the excuse to keep the printing press on.

In 1929, Joseph Kennedy thought that, when a shoeshine boy was giving stock tips, the market had run out of fools. Today, that shoeshine boy would be a genius. In today’s bubble, central bankers and governments are fools. They can mobilise more resources to become bigger fools.

In 2000, the dotcom bubble burst because some firms were caught making up numbers. Today, you don’t need to make up numbers. What one needs is stories.

Hot stocks or property are sold like Hollywood stars. Rumour and ­innuendo will do the job. Nothing real is necessary.

In 2007, structured mortgage products exposed cash-short borrowers. The defaults snowballed. But, in China, leverage is always rolled over. Default is usually considered a political act. And it never snowballs: the government makes sure of it. In the US, the leverage is mostly in the government. It won’t default, because it can print money.

The most likely cause for the bubble to burst would be the rising political tension in the West. The bubble economy keeps squeezing the middle class, with more debt and less wages. The festering political tension could boil over. Radical politicians aiming for class struggle may rise to the top. The US midterm elections in 2018 and presidential election in 2020 are the events that could upend the applecart.