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The Transformation of the U.S. Financial Ecology in the Context of Excess Capital

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The U.S. stock market has long been dominated by institutional investors, with retail investors accounting for only about 10% of the trading volume. In mid-2018, U.S. institutional investors accounted for a whopping 93.2% of the market capitalization, while retail investors accounted for less than 6%. The latest data shows that the retail trading boom is reshaping the U.S. stock market in the wake of the Covid-19 outbreak. Retail stock trading in the United States is at its highest level in a decade. In the U.S. stock market, which has traditionally been dominated by institutional investors, the trend of retail investors picking up is becoming a new phenomenon with structural implications for U.S. capital markets.

In the face of the pandemic, the stay-at-home young American generation has started trading in the stock market. In addition, the zero-commission model of online brokerages has attracted a large number of retail investors in the U.S., who have become increasingly active as the U.S. stock market continues to hit record highs. Robinhood Market Inc.’s exposure in financial news and stock forums has skyrocketed recently. Robinhood is the favorite zero-commission trading platform for U.S. millennials, where users can trade stocks, ETFs, options, etc. The platform now has more than 10 million accounts, mostly owned by retail investors, with an average age of 31. In the first four months of this year, Robinhood saw a 30% increase in users.

Robinhood, the emerging retail brokerage that bills itself as the “retail stronghold” in the U.S., added 3 million trading accounts in the first quarter of this year, bringing its total number of accounts to 13 million. Recent data shows that Robinhood hosted more than 4.3 million daily average trades in June and its daily average trades more than doubled in the second quarter from the previous three months. According to a recent regulatory filing with the U.S. Securities and Exchange Commission (SEC), Robinhood generated USD 180 million in order flow revenue in the second quarter, of which USD 111 million came from options trading, roughly doubling revenue from the previous quarter. The other three major U.S. retail traders, TD Ameritrade, Charles Schwab, and E-Trade, have all seen record growth in their trading accounts in 2020.

It is worth noting that retail investors in the past are driving big moves in some stocks, creating the so-called “Robinhood effect” — investors using popular apps stampeding in and driving irrational price movements in stocks. Larry Tabb, Head of Market Structure Research at Bloomberg Intelligence, said recently that retail trading accounts for a greater share of market activity than at any time in the past decade. In the first six months of this year, retail investors accounted for 19.5% of U.S. stock market trading volume, up from 14.9% last year and nearly double the 2010 level, Tabb estimates. On some days this year, retail activity even accounts for about 25% of market transactions. The data suggest that retail traders are upending years of trading patterns in the U.S. stock market.

To what extent will the large number of retail investors entering the market affect the trading structure of U.S. stocks? Will this be a confirmed and sustained trend, or just an occasional blip?

Traditional institutional investors are not optimistic about retail investors entering the market, believing that retail investors are a kind of crazy people who do not understand market risks. As hedge fund magnate and founder of Omega Advisors, Leon Cooperman, says the frenzied trading in certain stocks in recent months is a warning sign for the market. He sees this as a sign that the market is close to its peak and that the surge in daily transactions for apps such as Robinhood is a “crazy market”. Cooperman warns that speculative trading by retail investors would not end well, They are just doing stupid things, and in my opinion, this will end in tears.” The stock market is so crazy that even professional investors fear it. “With a market like this, who needs to go to Las Vegas and Macau?” said a 20-year veteran trader in Germany.

However, researchers at ANBOUND believe that institutional investors’ dismissive attitude to new developments in the U.S. stock market may be too conceited. Institutional investors once dominated trading in the U.S. stock market, and the “rules of the game” in the market were set up for them — the market trusts them and hands them money (in various funds); institutional investors establish an investment team to evaluate the investment value and risk; institutional investors determine investment strategies and portfolios and make investment transactions; the institution determines their principle of returns, such as the proportion of capital management fees; regulatory rules were also set up for institutional investors. However, institutional investors have been disrupted by an influx of retail investors who are not following the rules of the game at all and are trading irrationally. So, it is entirely understandable that retail investors provoke the “wrath” of institutional investors.

In our view, this is a significant shift that may be related to the changing context of the current financial markets. Unlike the past, when there was a shortage of capital, today’s world is a world with excessive capital. Historically, since the collapse of the Bretton Woods system, the “floodgates” of central banks’ credit expansion have been removed, and the world has gradually moved towards a credit expansion trajectory. Since 2008, in particular, the continued massive easing by the world’s major central banks has exacerbated the extent of the world’s capital glut. The “crisis triangle” model proposed by ANBOUND explains the origin of excess capital from the perspective of credit expansion; with excessive urbanization brings about capital expansion, while capital expansion brings about crises.

When these changes accumulate to a certain extent, financial ecology begins to change. We tend to believe that this is not an accidental fluctuation, but a major change or shift involving the development of financial markets. From the perspective of Modern Monetary Theory (MMT), widespread excessive capital is not an accident. In the view of MMT, money originates from the debt-liability relationship, governments spend money by creating money, and fiscal expenditure precedes revenue. MMT argues that sovereign governments do not go bankrupt under a sovereign monetary system, and that issuing bonds is similar to monetary policy, sovereign governments do not need to borrow in their own currency to spend. The corollary is that government spending is not constrained by the country’s tax revenue, i.e., there is virtually no constraint on fiscal expenditure. With the current outbreak hitting the global economy, MMT is undoubtedly a gateway for governments in need of fiscal expansion to stimulate their economies — a tempting policy of debt expansion for governments not to worry about local-currency debt leading to government bankruptcy.

While MMT remains highly controversial in academic circles and policy departments, the practice of countries under the pandemic shows that major countries have adopted fiscal expansionary policies to varying degrees. Especially the United States, where the federal deficit could reach USD 3.4 trillion in FY2020, and the balance of government debt will soon exceed the size of the annual GDP. This means that the world will be in the midst of an ever-growing glut of capital for a period and even an era to come. As the environment changes, the trend of retail participation in the U.S. stock market is likely to continue, which will change the trading structure of the U.S. stock market and even the financial ecology of the United States.

Final analysis conclusion:

As a result of the pandemic, a large number of retail investors participating in the stock market is becoming a trend, which could change the pattern of the U.S. stock market. In the context of excess capital, this change is not an accidental market fluctuation and is likely to imply a structural change in the financial ecology of the United States.

Mr. He Jun takes the roles as Partner, Director of China Macro-Economic Research Team and Senior Researcher. His research field covers China’s macro-economy, energy industry and public policy

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Economy

Role of WTO in Regularization of International Trade

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International trade is one of the main features of the globalized world and global economy. There it needs also a well-organized institutional mechanism to regulate it. World Trade Organization is an international organization established in 1995, whose main objective is to facilitate trade relations among its member countries for their mutual benefits. Currently 164 states are its members. The activities and works of WTO are performing by a Secretariate of about 700 staff located in Geneva, Switzerland, led by the Director General. English, Spanish and French are the official languages of World Trade Organization. The annual budget of WTO is about 180 million dollars.

Since its creation it is playing an important role in the regularization of international trade. It offers a forum and facilitation for negotiating trade agreements in order to reduce the barriers in the way of smooth international trade among member countries. Thus, the role of this organization is playing very important role in the regularization of international trade which is contributing to economic development and growth of member countries in this globalized world. The World Trade Organization also offers an institutional structure and legal framework for the execution and supervising of the international trade related agreements which are very helpful in regularization of international trade. It also settles disputes, disagreements and conflicts occurring during the interpretation and execution of the components of the international agreements related to international trade. During the past 60 years, the World Trade Organization and its predecessor organization the GATT (General Agreement on Tariffs and Trade) have assisted to establish a solid and flourishing global trade system, by this means helping to extraordinary international economic development.

The WTO is regularizing international trade more specifically through negotiating the decrease and finally elimination of barriers to trade among countries and try to make smoothly the working of the rules and principles governing the international trade e.g. tariffs, subsidies, product standards, and antidumping etc. It also administers and monitor the execution of the World Trade Organization’s determined guidelines for trade in services, goods as well as intellectual property rights related to international trade. It also monitors and review the member states international trade policies as well as make sure the transparency in bilateral and multilateral trade agreements. Likewise, it also solves disputes arising among members related to trade relations or related to the explanation of the provisions of the trade agreements. It also offers services to the governments of the developing states in the fields of capacity building of officers in matters related to international trade. WTO is also doing research on matters related to international trade and its related issues and collect data in order to find better solutions of the problems and obstacles in regularization of international trade. It is also trying to bring into the organization the 29 states who are yet not members of the organization aimed to assist and regulate their international trade according to the international standard.

One of the main barriers in way to international trade is disputes between the engaged parties. Since long this was a very critical issue limiting the trade among states. The WTO is playing very good and instrumental role in the solution of trade related disputes. Since the establishment of WTO in 1995 over 400 disputes related to trade have been brought by its member countries to WTO. The increasing number of bringing trade related disputes to WTO is showing the faith of member countries in the organization. Close trade relations have massive advantages but also create disputes and disagreements. With the increase of international trade, the possibility of its related disputes also increases. Previously, such problems and disagreements have caused in severe disputes. But at present, in the era of WTO the international trade related disputes are decreased because the member states have now dispute’s solution platform, and they are turning to the World Trade Organization to solve their trade related disagreements and disputes. Before the World War Second, there was not any such international organization or forum which could facilitate international trade and its related affairs, and there was also noany legal framework for solving trade related disputes among states of the word.

One of The World Trade Organization’s guiding principal is to continue the open boundaries for trade, ensure the Most Favoured Nation (MFN) status among member countries and stop discriminatory behaviour of members towards other member(s) and bring transparency in doing international trade. It is also assisting counties to open their indigenous markets to global trade, with justified exemptions or with suitable flexibilities, promote and support to durable growth, reduce trade deficit, decrease poverty, and promote economic stability. It is also working to integrate different international trade policies and principles. The member countries of WTO are also under the compulsion to bring their trade related disputes to this organization and avoid unilateral actions. WTO is the central pillar of the current international trade system.

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Economy

Russia and France to strengthen economic cooperation

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On April 29, Russian President Vladimir Putin held videoconference with leaders of several French companies-members of the Franco-Russian Chamber of Commerce and Industry (CCI France-Russia) to discuss some aspects of Russian-French trade, economic and investment cooperation, including the implementation of large joint projects as well as the prospects for collaborative work.

Putin noted that the Economic Council of the Franco-Russian Chamber of Commerce and Industry is still operational in spite of difficulties, and the late April meeting was the fourth time since 2016. From the historical records, France has been and remains a key economic partner for Russia, holding a high but not sufficiently high, 6th place among EU countries in the amount of accumulated investment in the Russian economy and 5th place in the volume of trade.

Despite a certain decline in mutual trade in 2020 (it went down by 14 percent compared to 2019) the ultimate figure is quite acceptable at $13 billion. French investment in Russia is hovering around $17 billion, while Russian investment in France is $3 billion.

Over 500 companies with French capital are operating in various sectors of the Russian economy. French business features especially prominently in the Russian fuel and energy complex, automobile manufacturing and, of course, the food industry. “It could have been more if the French regulatory and state authorities treated Russian businesses as Russia is treating French businesses. We appreciate that in a difficult economic environment, French companies operating in Russia have not reduced their activity,” Putin pointed out.

The Russian Government established the Foreign Investment Advisory Council, which includes six French companies. Further, there is an opportunity to discuss specific issues related to the economic and investment climate in Russia, and that opportunity is traditionally provided at the St Petersburg International Economic Forum, which will be held on June 2-5.

French companies are involved in the implementation of globally famous landmark projects, such as the construction of the Yamal LNG and Arctic LNG 2 facilities and the Nord Stream 2 gas pipeline project. This, Putin regrettably said “We are aware of and regret the amount of political speculation concerning the latter. I would like to point out once again that it is a purely economic project, it has nothing to do with present-day political considerations.”

Russia intends to increase assistance to the development of science and technology. Funds will be directed primarily to innovation sectors such as pharmaceuticals and biotechnology, nuclear and renewable energy, and the utilisation of carbon emissions.

“We are interested in involving foreign companies that would like to invest in Russia and in projects we consider high priority. In order to do this, we will continue to use preferential investment regimes and execute special investment contracts, as you know. A lot of French companies successfully use these tools on the Russian market. For example, more than one third of 45 special investment contracts have been signed with European, including French, partners,” he explained during the meeting.

He also mentioned continuous efforts to attract foreign companies to localise their production to state purchases and to implementing the National Development Projects, as well as existing opportunities for French businesses in special economic zones. Today there are 38 such zones created throughout the Russian Federation.

Russia pays particular attention to attracting high-quality foreign specialists. Their employment is being fast-tracked, and their families can now obtain indefinite residence permits. There is a plan to launch a special programme of ‘golden visas’ whereby to issue a residence permit in exchange for investment in the real economy, a practice is used in many other countries.

Taking his turn, Co-Chair of the CCI France-Russian Economic Council, Gennady Timchenko, noted that the pandemic has changed the world, people and business, and that French companies in Russia are responsible employers and socially responsible members of Russian society.

Despite the crisis and the geopolitical situation, a number of French companies have launched production in 2020–2021. Companies such as Saint-Gobain and Danone have renewed their investments. French companies have increased their export of products manufactured in Russia; they are investing in priority sectors of the Russian economy. For example, this year the French company Lidea is launching a plant called Tanais to produce seeds. Russia is dependent on the import of 30 to 60 percent of these seeds, according to various estimates.

Despite the current geopolitical conditions and information field, there are important signals for French business and the Russian side to strengthen economic cooperation, attract investment, and create partnerships on a new mutually beneficial basis.

Co-Chair of the CCI France-Russian Economic Council, Patrick Pouyanne, noted that the meeting has become an excellent tradition, the presence of 17 CEOs and deputy CEOs of French companies shows the importance of these joint meetings, and further reflect the deep interest of French business in Russia.

In addition, Patrick Pouyanne further offered some insights into Russia-French cooperation. By 2020, twenty members of the Economic Council invested a total of 1.65 trillion rubles, supporting 170,000 jobs. These companies have operated in Russia for decades and continue investing in the Russian economy despite the sanctions and the epidemic. These companies help France maintain its status as the second largest investor in Russia. In 2020, France invested over $1 billion in Russia despite the economic difficulties caused by the pandemic.

Concluding his remarks, Patrick Pouyanne stressed that the economic operators believe everyone will benefit if Russia, France and all of Europe are not divided or isolated. This is the challenge today. Indeed, diplomacy has to continue playing an important role in settling differences, and businesses are convinced that meetings like this create bridges between Russia and France to strengthen investment and economic cooperation.

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Iran’s Economic Diplomacy through CPEC

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U.S. sanctions against Iran are characterized by strategic flexibility and adaptability. They are designed to have maximum negative and deterrent effect on Iran’s military, economic and diplomatic growth.  Tehran is exploring ways to counter these sanctions most probably by economic engagements with the regional countries. Iran’s perception of CPEC lends some credit to this argument.

Since the initiation of CPEC, the regional perception has already started to change as many countries have begun to see the project within the domain of their national interests. Iran has expressed its long-standing interests to join the CPEC viewing the corridor as a cornerstone for the country economic prosperity and regional connectivity.

Iran solely focuses more on the economic aspect of CPEC. Regional connectivity through CPEC can boost Iran’s stake in the global output. In 2015, on the sidelines of the United Nation General Assembly (UNGA) address, Iran’s President Hassan Rouhani expressed a desire to be the part of CPEC. He emphasized the importance of connectivity projects for the region. Iran’s initial reluctance to CPEC was transformative in nature and heavily came down with the unfolding of new geoeconomic realities.

Iran’s inclination for the CPEC project even becomes the part of official discourse. Iran’s ambassador to Pakistan Mehdi Monardost showed keen interest to participate in the CPEC and named it as one of the greatest projects in the history of the region. He envisioned a great boost to bilateral trade between Pakistan and Iran under the framework of this regional connectivity corridor. In 2017, Iran’s economy minister Ali Tayyebnia participated in the New Silk Road summit. He praised the New Silk Road concept for regional connectivity.

Iran’s economy is already clutched due to the international sanctions invoked by the Trump administration after pulling back from the Iranian Nuclear Agreement formally known as the Joint Comprehensive Plan of Action (JCPOA) in May 2018.Downplaying the perception of geopolitical competition between Gwadar and Chabahar, Iran higher officials negated the impression of competition falsely exaggerated by International and India media and insisted on the complementary nature of two ports.

In 2016,Iran and India signed an agreement for the development of Chabahar port and it was view as the counterweight to Gwadar port. Without explicitly mentioning India by name, Iran’s ambassador to Pakistan Syed Mohammad Ali Hoseeni defended the decision of his country to drop out India from the project in Chabahar by stating “when some foreign governments found reluctant in their relations with Iran and need other’s permission for even their normal interactions, for sure they would not be capable of planning and implementing such long-term cooperation contracts”.

The same rhetoric appears in the views of Chinese leadership. Brushing aside the allegations of Iran’s perceived resistance to CPEC and Gwadar port, Iran’s foreign minister Jawad Zarif dismissed the allegations and supported growth and development anywhere in Pakistan.

Chabahar is often seen as a rival to Gwadar port. However, Indian discourse has got an altogether different lease of life in the media compared to the Iranian one. Iran’s ambassador to Pakistan Mehdi honardoost utterly disregarded the narrative of competition of two ports. He invited both Pakistan and China to closely work in Chabahar port.

China considers Iran as an important country for its energy security, BRI and in the larger context of global competition with USA. China dual role both in Gwadar and Chabahar, according to the analysts, will likely reduce the impression of competition between two ports. Chinese stance on the Chabahar port also complement the Iran’s position on Chabahar. Chinese premier Le Keqiang rejected the notion that Chabahar port is in competition with the Gwadar. He is convinced with the idea that both ports have the potential to complement each other.

Tehran global status goes upward with the emerging financial and diplomatic backing of China. Beijing openly backs Tehran in the face of U.S. might.  On March 26, 2021, China and Iran signed an agreement expressing a desire to increase cooperation and trade relations over the next 25 years. Wang Yi, Chinese foreign minister, said that USA should rescind the sanctions against Iran. The 25 years deal is considered as part of the Belt and Road Initiative (BRI). According to Tehran Times analysts Peyman Hassani and Ammar Hossein Arabpour, this deal is considered a relief to Iran’s gas and oil sector against USA sanctions.

USA sanctions forcefully bar the countries from purchasing oil from Iran. The US Department of Defense’s report notes that China Pakistan Economic Corridor (CPEC) focus on pipelines and port construction. Pakistan’s reluctance to follow the Iran-Pakistan gas pipeline which is stalled due to American pressure can be reviewed, too much sigh of relief for Tehran’s energy export.

Triangular relations of China, Pakistan and Iran will likely put Iran on the strong footing. Richard Caplan, a professor of international relations at the university of Oxford, notes, “The agreement which predates Biden, undercuts U.S. efforts to isolate Iran economically and, to some extent, diplomatically.

Diplomatic and economic isolation remain at the center of Iran’s foreign policy under the severe U.S. sanctions. Iran’s perceptions of CPEC revolves around the same fact that through regional engagements under CPEC and BRI, it can tackle its global problems to some extent.

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