Author Archives: zhuwei

[REVISED] Who Touched My RMB?

It’s always interesting to see how economic predictions and financial manipulations fail in China. The ridiculously high population/resource ratio turns China into a hungry giant that can easily overturn any rules: the Wall Street tycoons lost to Chinese housewives during the “gold battle”; Chinese government tried to stop the housing market’s craziness but ended up being one of the biggest obstacle to the success of taming the market. The list goes on and on.

And now it’s the RMB issue again. Bear with me if this topic is becoming increasingly boring for you. As the RMB’s behavior is totally going against the theory, it’s tempting to looking into the reasons behind all the weirdness.

Ever since the year of 2005, RMB has been appreciating internationally while depreciating domestically.

rmb_exchange_rate

Picture source: XE

rmb_inflation_rate

Picture source: Trading Economics

As explained clearly in this about.com thread, the value of a currency should be synchronized domestically and internationally. On one hand, when the exchange rate of RMB goes up, in theory, the demand of RMB will increase, leading to a decrease in the amount of liquidity, therefore the inflation will be alleviated, and eventually the value of RMB will go up. On the other hand, a higher value of RMB attracts investment from oversea, which will lead to a higher demand of RMB in the foreign exchange market and therefore drive up its exchange rate. However, historical data suggested differently: internationally up, domestically down. Why?

It’s a known fact that RMB was long undervalued in the foreign exchange market because of the government’s intervention. As Beijing gradually loose the leash, the exchange rate is bound to increase. So it must be the inflation, which comes from within the country, that’s causing the mismatch problem.

About the inflation, the government claims that “there exists measurement error that skews the statistical data”, and “the CPI data doesn’t fully reflect the reality”. Of course these official speech is too ambiguous to be believed, let alone the “CPI misreporting” can be interpreted both ways. As I see it, this inflation is due to the governments’ over-manipulation to the economy.

This manipulation is not the usual fiscal and monetary policy we’ve seen everyday. The level of governmental intervention in China is much higher than that. Since it’s difficult to explain this in theory, I’ll demonstrate it with China’s “land finance” example.

By constitution, all lands of China are owned by the central government. Therefore, Chinese government has control over the real estate pricing. To stimulate the local economy, local governments make huge spending every day, which almost always yields to budget deficits. To compensate the deficit, the most effective way is to sell the lands that are owned by the government. This is when things get crazy: since the government has control over the lands’ price, it can sell a certain piece of land at an extremely high price. And thanks to the heated housing market, there’s always a buyer. As a result, the price of houses almost doubles every year. House owners’ pockets are therefore inflated. The liquidity drastically increase in the market, and hence the inflation.

This kind of government intervention to the economy is not something foreseeable from the textbook, and the “land finance” is merely one piece of the puzzle. In a not-so-liberal economy, the government’s overexertion of its power to gain short-run benefit is clearly bringing problems to the economy. The mismatch of RMB value is one such example. What’s next? How to prevent these problems from happening in the future? Beijing needs to give better answers to these questions.

[REVISED] Bitcoin. Yea or Nay?

Was the shutdown of Mt. Gox, one of the major Bitcoin Exchanges, signifying the doomsday of Bitcoin?

No. Although $400 million worth of Bitcoins have lost as a result of the heist on the exchange, Bitcoin is far from a failed attempt. As an up and coming cyber currency, Bitcoin is going through the roughness during its infancy of being a “cyber product” and a “currency” at the same time.

Like every other cyber product, flaws and bugs are inevitable. Therefore Mt. Gox’s incident is not completely unforeseeable. Sooner or later, another bug will be exposed, some people will be hurt, some agency will lose its reputation, and some superhero will come to save the world. The release-bug-fix-release loop of software development has defined the imperfectness nature of bitcoin from day 0.

Bitcoin as a currency, although rebellious in nature and virtual in existence, is still exposed to the risk of being stolen. In fact, the $200 million heist is not the biggest heist on currencies. Beside no firearms involved and nearly untraceable, I don’t see the Mt. Gox meltdown any different from other bank robberies.

So, does Bitcoin have no problem at all?

Absolutely not. When it comes to security and trustworthiness, Bitcoin is much inferior to the dollar bills. In terms of security, in good days, Bitcoin is safe because it’s untraceable. When things go south, however, Bitcoin can be very dangerous, also because of the untraceablility. In the Mt. Gox’s incident, no one can find the suspect, let alone reclaim the money. The double-edged sword of information privacy makes Bitcoin a perfect choice for illegal transactions, and the worst option ever for people who want to secure their money.

In terms of trustworthiness, since Bitcoin is decentralized by design, there’s no institution backing it up. Columnist Megan McArdle explained this very clear in her article:

“… as yet, no currency exchange (for bitcoin) like the ones we use for regular currency — backed by large institutions that can be sued if things go wrong. … for folks in the regular old economy, that’s a problem. It’s hard to get enthusiastic about saving in a system where hundreds of thousands of dollars can disappear overnight, leaving you with no recourse.”

Now, what’s Bitcoin’s future?

I’ll argue that Bitcoin will continue to exist, but not as a full-fledged currency.       On one hand, a currency must be durable, divisible, transportable and uncounterfeitable. Although Bitcoin satisfies the latter three, it fails to be durable in terms of retaining the same value over time, which is the most important characteristic of money. On the other hand, even if someday Bitcoin managed to stabilize its price-to-dollar and became a reliable currency, it’ll receive enormous pressure from the government. The better it does at evading governments’ surveillance, the harder the governments try to shut it down. At the end of the day, it is the government that controls the ecosystem, and never will it allow the existence of a currency that poses a potential threat to the homeostasis.

As a result, for Bitcoin to be a successful currency, it has to fundamentally alter the economy system and take “government” out of the equations. Ironically, in order to be strong enough to fight with the government, it has to be accepted by the vast majority first, and that’s only achievable without the big brother’s interference. Simply put, Bitcoin can’t beat the government without first beating the government. This paradox has decided the cryptocurrencies’ defeat: you can be either a crypto product, or a type of currency, but you can’t be both.

Is E-Finance Moving Stock Market’s Cheese?

Within less than 9 months, Yu’ebao, the poster boy of e-finance products, has attracted more accounts than those in the China’s stock market. This mostly attributes to Alibaba’s (parent company of Yu’ebao) huge user base. At the same time, Yu’ebao’s convenience, high profitability and low entry barrier are also driving reasons to this success. Without doubt, the fast rise of Yu’ebao and every other e-finance product are surely disrupting the game of traditional financial markets.

This disruption has struck a few nerves. Naysayers state that e-finance, instead of revolutionize the finance industry, it is killing the industry. Or, in a more specific way, it is destroying the stock market by drawing cash away.

To these opinions, I disagree. The defeat of China’s stock markets and commercial banks wasn’t because of the disruption of e-finance, but because of themselves.

Due to the government’s interference, these traditional financial industries have long been unable to meet people’s expectation on profitability. The stock market was prosperous because there was no other option to make money. Now with the debut of e-finance, people realized there’s a much more profitable while safer way to invest. It’s only natural to see the disruption.

So it all comes down to the rate of return. If the stock market can perform better and produce a rate of risk/return at least neck to neck to the e-finance products, this “disruption” should stop. In fact, the 6% annual return of Yu’ebao isn’t that high for a financial product. It was only popular because of the low risk. This so called “e-finance revolution” reveals problems of China’s stock market: the return and risk are unpredictable.

Like it was mentioned above, this unpredictability was because of the government’s interference. Unlike it is in most developed stock markets where the primary function is to allow companies to raise capital for profitable investment opportunities, China’s stock markets, was created to recapitalize and restructure large state-owned enterprises that otherwise would have gone under. These state-owned companies, by nature, rely on state subsidies and governmental deals. That is to say, the growth of these companies depends on policy makers’ decision rather than the market. This is unpredictable to normal people. Since the stock market is driven by these state-owned enterprises, it inherits the unpredictability as well.

So who’s actually responsible for the disruption on China’s stock market? The stock market itself, and, of course, the government. After seeing two decades of unstable performance, people have realized the truth of the stock market. There have always been problems on the stock market system. E-finance only magnifies them to the public. Now with PBOC finally set its mind to make changes, let’s hope e-finance will survive and serve as a catalyst, too.

[REVISED] The “Zipper” Project

When we talk about unemployment in the U.S., we’re talking about economic conditions. When it comes to unemployment in China, it’s a social problem. When 1.35 billion people live in an economy second to the U.S.’s, how many jobs do you think that are available to the country? Yet China’s unemployment rate is as low as 4.1%. Despite the fact that labor-intensive manufacturing has provided abundant positions to hold the figure, during the process of urbanization, however, there are still a considerable number of farmers turning into jobless workers. In order to sponge out these extra workforces, local governments invented a special kind of projects – “Zipper” projects.

So what really is zipper project? Like a zipper, which is frequently zipped and unzipped, zipper project is a kind of frequently repeated construction or maintenance project. Most of the zipper projects are labor intensive, cheap and time-consuming. If you’ve been to China, you should’ve seen workers planting rode-side trees or fixing roads, those are most frequently used zipper projects. The reason I’m so sure that you have seen them is because they are there all the time – not long after the projects are finished, the same or another group of workers will be sent back to tear everything down and start over. It’s kind of like “the Myth of Sisyphus” in real life, only that it’s not a punishment but a way to provide temporary job opportunities.

“Zipper” project, is yet another unique social phenomenon in China. It exists to solve a social problem, but it’s not a real solution, because zipper projects can’t eliminate the migrant worker problem from the root. If anything, it’s a compromise.

It’s a compromise between keeping the rapid growth of China’s economy and maintaining the stableness of China’s society. You have to admit the difficulty of running a country is not linear to its population. Feeding the biggest population in the world while keeping up with the world’s economy growth is not an easy task. Many think the idea of zipper projects sounds ridiculous, as it makes no sense for a city to waste resources on prying and patching the same part of the road repeatedly. The reality is, however, if it weren’t for the zipper projects, there would be hardly enough temporary jobs to buffer the huge number of incoming migrant workers. When these people coming into the city without jobs, trouble comes, too. Between putting the the society at risk and wasting resource, it’s wiser to choose the latter.

This reminds me of the famous “Trolley Problem”: you see a trolley running towards five people out of control and there’s lever that can divert the trolley to a sidetrack where there lies one person, what would you do? I guess for the Chinese decision makers who shoulder the responsibility of 1.35 billion people, utility beats morality.

Is PC Really Dying?

We’ve heard too much about how “PC is dying”. As the media chanting about the popularity of smartphones and tablets, it is as if the mobile devices are going to take over the world of computers. Many believe that with the ever-increasing market size of mobile devices, the number of PC sales is going to hit the ground soon. Yes, mobile have been big in the past several years since the all mighty Steve Jobs first introduced iPhone, and they will be bigger in the future. But that doesn’t mean there will be no room for PC any time soon.

These two graphs generated from StatCounter show that in the first three months of this year, of all the accesses to the Internet, 71.05% were from desktop, whereas only 22.19% and 5.76% were from mobile devices and tablets. The world’s computer usage is still dominated by the desktop.

desktop-mobile-tablet-bardesktop-mobile-tablet-map

Analyst from Gartner believes that although the PC industry has seen the worst decline in Q4, 2013, during which the shipment of PC has dropped 6.9%, overall, however, the industry has bottomed out. Even with the significant decrease, there still were 82.6 million PC shipments as oppose to the 76.9 million tablet shipments.

Seeing the growth rate of tablet sales dropping from 87.1% in Q4 2012 to 28.2% in Q4 2013, I think there are enough reasons to believe that the tablet market is close to saturation and PC will be able to hold its position during this “mobile revolution”.

First of all, fewer shipments don’t mean PC is less desirable. The maturity of PC technologies has reduced the needs for buying new ones. Even with a 5 years old PC, you can still perform regular tasks or even play some low requirement games. When the PC is sluggish, you can clean up the software system or, if you’re an advanced user, replace the parts that are dragging the performance down.

Second, PC is, and will still be more useful than smartphone or tablet. Despite the fact that there are enough apps to cover almost everything, mobile device’s small size and lack of full-fledged mouse and keyboard has determined that a lot of apps are “crippled”. You can’t perform complex image editing using Photoshop on iPad, nor will you enjoy writing a 400 words blog by tapping the screen. Mobile devices are convenient, but when it comes to serious tasks, they can never beat PCs.

There are many other advantages of PC such as storage amount, multitasking ability, customizability, computing capability, etc. All of these have made PC strong enough to withstand the impact from the mobile markets. I think in the future, both PC and mobile device will continue to exist for their own niche market. Mobile devices, because of their convenience, will be broadly used for small, general tasks. PC, on the other hand, as a flexible and powerful computing device, will mainly serve for professional usages.

[REVISED] Intro to Sharing Economy

What do Bitcoin, Groupon, Airbnb, Waze, Meshnet, Kickstarter and Wikipedia have in common? They are all billion-dollar ideas based on one concept: Sharing Economy.

Like the name suggests, Sharing Economy is “a socio-economic system built around the sharing of human and physical assets”(Wikipedia). The system sees the excess capacity in goods and services as a problem and solves it with collaborative consumption. Simply put, Sharing Economy wants to lower your cost of living by letting you borrow a bike from you neighbor and make your trip in Porto Rico much more enjoyable while cheaper by renting you a house in San Juan.

Jeremy Rifkin’s comments on Airbnb’s success explains a lot about the Sharing Economy:

Airbnb owes its meteoric rise to a new phenomenon — near zero marginal cost — which is disrupting entire sectors of the global economy and giving rise to a new economic system riding alongside the conventional market. Marginal cost is the cost of producing an additional unit of a good or service once a business has its fixed costs in place, and for businesses like Airbnb, that cost is extremely low.”

The extremely low marginal cost is one of the greatest benefits of Sharing Economics. By efficiently redistributing resources among the crowd, this economy system significantly decreases the pressure of purchasing for individuals. For example, if you want to buy a vacuum machine, in the conventional market, you have to pay $200. That’s $200 per person. But with the sharing model, although the nominal price of the vacuum machine is the same, since you can share the purchase with your neighbor, the real cost becomes $200/n. The more you share, the less you actually pay.

The concept is simple, but the impact can be huge.

Ever since the recession, most households’ real income has been decreasing with the ever-rising CPI.

real_income

This forces average households to spend greater portion of their income on food and other basic living expenses. People are scared of big purchases because of the financial pressure. Shared purchases, however, removes this pressure. The real expense on shareable goods is divided as explained in the vacuum example and therefore become much lower. With the cheaper shareable goods, people will be able to buy more. Therefore, in the short run, sharing economy can create extra purchase power to stimulate the market.

In the long run, with the growth of population, the scarcity of resources is going be increasingly significant. U.N projects that, by the year of 2050, there will be 9.3 billion people in the world. A world without resource-sharing would be unimaginable by then.

The only concern about sharing economy is regulatory uncertainty. Sharing Economy’s model suggests that everybody can be service provider or property lender. This will surely introduce problems when it comes to security, licensing and other indirectly related issues such as benefit negotiating. But since Airbnb and Uber have been proven to be successful in their respective industry, it is expected that these obstacles on Sharing Economy will be removed in the near future.

The “Zipper” Project

When we talk about unemployment in the U.S., we’re talking about economic conditions. When it comes to unemployment in China, it’s a social problem. 1.35 billion people live in an economy second to the U.S.’s, how many jobs do you think that are available to the country? Yet China’s unemployment rate is as low as 4.1%. Despite the fact that labor-intensive manufacturing has provided abundant positions to hold the figure, during the process of urbanization, however, there are still a considerable number of farmers turning into jobless workers. In order to sponge out these extra workforces, local governments invented a special kind of projects – “Zipper” projects.

So what really is zipper project? Like a zipper, which is frequently zipped and unzipped, zipper project is a kind of frequently repeated construction or maintenance project. Most of the zipper projects are labor intensive, cheap and time-consuming. If you’ve been to China, you should’ve seen workers planting rode-side trees or fixing roads, those are most frequently used zipper projects. The reason I’m so sure that you have seen them is because they are there all the time – not long after the projects are finished, the same or another group of workers will be sent back to tear everything down and start over. It’s kind of like “the Myth of Sisyphus” in real life, only that it’s not a punishment but a way to provide temporary job opportunities.

“Zipper” project, is yet another unique social phenomenon in China. It exists to solve a social problem, but it’s not a real solution, if anything, it’s a compromise.

It’s a compromise between keeping the rapid growth of China’s economy and maintaining the stableness of China’s society. You have to admit the difficulty of running a country is not linear to its population. Feeding the biggest population in the world while keeping up with the world’s economy growth is not an easy task. Although the idea of zipper projects is ridiculous in theory, between putting the stableness at risk and wasting resource, in reality, it’s wiser to choose the latter.

This reminds me of the famous “Trolley Problem”: you see a trolley running towards five people out of control and there’s lever that can divert the trolley to a sidetrack where there lies one person, what would you do? I guess for the Chinese decision makers who shoulder the responsibility of 1.35 billion people, utility beats morality.

[REVISED] Why Google Will Live and Facebook Will Die

Give me a good reason why Facebook spent 19 billion for a 55-employee company with 450 million monthly users, 2 billion for a virtual reality headset that’s never been shipped and 3 billion trying to acquire a mobile app company that only let’s you stare at a picture for 10 seconds.

If you separate facebook.com the website from Facebook the company, the reason behind all these ridiculous moves should not be hard to see. Let me explain.

Like I said in my other blog post, facebook.com is no longer a pure social network, it’s a giant ad board. To maintain its revenue stream, Facebook uses all its resorts to keep on fine-tuning its ad engine and keep on spamming all its users to get a better click-through rate. Little effort was spent on improving user experience. We, the users, are annoyed. And for that reason, facebook.com is not cool anymore.

“I’m 13 and none of my friends use facebook.” True story.

To steal some wisdom from Burton G Malkiel’s book “A random Walk Down Wall Street”, where he explained the two traditional asset valuation approaches: the firm foundation theory and the castle-in-the-air theory, I’d like to relate Google’s success and Facebook’s fatal destiny to the two theories.

Google based its value on a firm foundation. As a search engine, google.com is the entrance to the Internet. It has the ability to control (on a certain level) the distribution of information, much like Walmart in the real world. People can’t navigate the Internet as smoothly without Google. As a result, Google’s price is set on its intrinsic value.

Facebook, in contrast, is more like a castle in the air. Unlike Google, facebook.com is not a necessity. People can still keep in touch with friends and stay in sync with news without social networks. Facebook was successful not because facebook.com was the prettiest face on the newspaper, but because it was the mostly favored face (A Random Walk Down Wall Street, Page 32). It gained traction when it was cool. Now that facebook.com has lost its “cool” factor, people will stop using it and divert to other “cooler” products shall there be any. The story of how Snapchat beats facebook.com is one great example. In short, most, if not all, of Facebook’s market value relies on the “coolness” of its products.

Facebook is definitely not unaware of that. Hence there came the biggest acquisitions of startups of all time. Through buying Instagram, WhatsApp, Oculus VR and many other companies on this list, Facebook is pouring money out to be cool, because the only way to keep this castle from collapsing is to keep it staying in the air.

Now why Facebook will die and Google will live? Consider Malkiel’s opinion about the Internet Bubble and the market’s response to irrationality: “the market at times can be irrational… But eventually, true value is recognized by the market, and this is the main lesson investors must heed.”

Although Facebook lives in the air thanks to the love from the Internet users, overtime, the market will come back to rational and recognize Facebook’s true value. Facebook can keep on buying all the trending companies to stay afloat, but if it couldn’t find a core value proposition solid enough to build a firm foundation upon, it will fail eventually.

Google, on the other hand, as the central hub of the world’s information, has laid a foundation firm enough to sustain itself. Now with the unbeatable advantages on what it knows about the world and how it interacts with the world through technologies, Google is going to continue its successful stories in the future.

App Eats Mobile Web

When people talk about how mobile is the future, they are actually talking about how mobile is going to be the entrance to the Internet in the future, because at the end of the day, without the Internet, any smart device is just a machine that computes. Therefore, as we chant about the awesomeness of mobile, it’s better to keep a clear mind on where mobile is leading us to in terms of how we interact with Internet.

There are two ways of talking with the Internet from smartphones: through web browsers, or through native apps. When people talk about “mobile traffic”, they’re mixing the two methods together. However, it’s crucial to notice the difference because whoever wins the dual, app or web, is going to decide where the Internet is growing into, an omniscient friend of ours, or a puppy of someone’s.

Web used to have an edge on the battle, but now it seems apps are taking control.app-web

If this trend continues, the future awaits web on mobile devices is to become a side salad to the apps. By the time every Internet service gets “appified”, people will only use browsers for trying out services before downloading the app, or consuming contents external to the apps, for example, blogs.

This trend is worrisome to me. Why? Because the current mobile ecosystems are not in favor of innovations.

First of all, unlike web, which allows everyone to develop anything, mobile platforms are controlled by Apple, Google and Microsoft. This control might be a good thing in terms of making sure there are only high quality products on users’ smartphones. However, there’s a downside that every mobile developer has to follow the rules set forth by the three companies. Your app is either an obedient citizen, or not a citizen at all. Sometimes even if the app follows all rules, it still can be kicked out. In a world like this, disruptive innovations are hardly seen. If you argue the opposite, think about North Korea.

Second, the mobile market is a winner-take-all market. Since there’s only one home screen on the smartphone, apps favored by the users get more attention, get used more, get ranked higher in the app stores and eventually get more money and resource. And the rest of apps are just left ignored. In a market like this, most of the times, improving is a better strategy than innovating.

In conclusion, it’s a sad truth that the trend of mobile web yield to apps is unstoppable, and the current mobile ecosystem is harmful to innovations. We can only hope that the giants can keep their word – “don’t do evil”.

Heartbleed for Open Source

A nuclear bomb was dropped onto the Internet world last week. Heartbleed, a serious bug in the popular OpenSSL cryptographic software library, was found and immediately caused panic across the entire Internet. Almost every website we use everyday is affected by the bug. This is like all banks’ vaults are blown open at the same time and anyone can just walk in, grab bags of cash, and walk out unnoticed. The potential damage of this bug is catastrophic. Ever since the bug was announced, companies that use this open source library have been racing to fix the issue (WSJ).

Sit tight when I tell you that this massive damage was caused by less than 10 lines of code reside in an open source library developed by 4 European programmers and managed by a team of 11. All of them are volunteers and only one of them is working full-time. While writing code for the world, these guys have only received $2000 a year in donation.

Open source gives, and open source takes it away.

Being a Computer Science major, I hold deep respect to those who have contributed to the open source community. Without asking for anything, these people give out their time and wisdom to make everybody’s life easier. However, there are always problems associated with the idea of open sourcing. Heartbleed revealed some of them.

“Given enough eyeballs, all bugs are shallow”, says Linus’s Law. The beauty of open sourcing is it exposes the code to every interested “eyeball”. Because of this, we believe that open sourced codes are rock solid. However, the lesson we learned from Heartbleed incident shows that Linus’s Law does not apply to every software project. While small projects do enjoy the benefit of peer reviewing, complex projects like OpenSSL, however, can only be managed by a handful of people who are capable of understanding the project’s complexity. Open sourcing or not, there will never be enough eyeballs for OpenSSL.

Another problem of open sourcing is the scarcity of resource for development. While open sourced software is publically appreciated because it charges $0 for use, for the developers, however, this is serious headache. As we all know that bugs are unavoidable for any software, the only thing we can do is to extensively test and debug. For for-profit organizations like Microsoft, its abundant resources help developers eliminate as many bugs as possible. But for the open source projects, resources are extremely limited. A formal audit of software code can cost at least $100,000 and often costs much more. With the $2000/yr donation, what more can you expect from the OpenSSL team?

As the software is “eating” the world, open source communities can only become more and more important. While enjoying the benefit of using high quality software for free, we should be conscious about the pros and cons of open sourcing.