 Welcome in Aloha. My name is Mark Shklav. I am the host of Think Tech Hawaii's Law Across the Sea program. Today we're going to discuss what's happening across the sea in China as relates to our financial markets. My guest is Benjamin Lau. Ben is a lawyer who has, among other things, practiced law on Wall Street, served as investment banking counsel at Merrill Lynch, and has a deep and vast experience in corporate finance and international financial markets. Ben also has personal and professional knowledge of the cultures of both the United States and China. Ben is presently Managing Director of Hakili Advisors in Honolulu. I've asked Ben to share his views from his financial market perspective concerning recent developments in China. Welcome, Ben. How are you? Very good, Mark. Thank you. How are you? I'm surviving. But Ben, there's recently been a flood of disturbing news coming out of China. Very confusing to me. Over the past few months, it seems like China has been restricting its economic opportunities and going back in time. From my viewpoint, it looks like China is shooting itself in the foot by cracking down on the opportunities that have made it so successful. And this is the basis for the title of today's program. As China lost, it's the party over. Ben, what is your view of what's happening in China? Yes. Thank you, Mark. Thank you. Before shifting over to China, I hope you give me just a moment to just acknowledge where we are this time of the year, September 13th. Time of the year where every year we acknowledge the special solemn time this is for many of us. I want to take this time to just remember 9-11 and those we've lost. I remember like it was yesterday. I was on my way to my office at the trading center, at the World Financial Center, the trading floor where I worked. And it's coming up from the subway on Rector Street and looked up to the sky. I thought I was seeing the most amazing Hollywood stunt ever, just this over-the-top disaster movie induction. I was actually looking at the World Trade Center, North Tower, as you can imagine, and it was where the first plane had hit. I didn't know at that time. I had no idea. So the tricks of the mind and what you see and what is, and even our world's changed. So like I said, at this time, friends of mine, former colleagues from Wall Street, New York Law, those who were there near ground zero like me, and those who are far. We're all bound by this. We connect this time of the year. We live our stories, our experiences, forging this tragedy. So if any of you happen to tune in, special hello, and yes, we'll never forget. Thank you. So to address your question mark, use the word flood. And that's a very appropriate word, I think. It's literally a deluge of developments coming out of China recently. Xi Jinping and the leadership of the CCP, the Chinese Communist Party, have been very busy these past years. And we're only beginning to see the fruits of their labor. Some on this side would say, poison fruit, poison fruit for our investors. It's a different culture. It's a different way. The CCP rules by edict. We're unfamiliar with that. In the recent weeks and months, we've been learning more details about the new rules, the new laws being enacted in response to the CCP's latest dispatch of edicts. Many over here in the US financial markets have been paying much closer attention than ever before. As these new rules hit us, affecting us far away from mainland China. We've seen the headlines. They blare. They're very full of image, chaos, sudden affluent, bewildering, threatening, aggressive, destruction, decoupling. The news is everywhere on everything. Like you said, market floods, everything. It's China, China, China. Xi, Xi, Xi and the CCP. It's critical we try and frame a more limited picture for viewers. It's such a big, big picture. Or try to keep the financial markets what we see and maybe why. For those of us who follow the financial news closely, the headlines show us literally our markets in somewhat of a grip, if you will, in the CCP's hands. Headlines blare, losses, collapse, data listing, debt bombs, crackdowns, hostile takeovers by the state, nationalization, decimation, robbery, millions of dollars. There was one headline, July 4th, Independence Day, middle finger from the CCP. News about a new Beijing stock exchange, competition, just chaos. Our markets have been shaken with the flip side, financial losses, the financial professionals are on the edge of the chairs. If you're not, if you're not on the edge of your chair, maybe you should be. Why? That's serious stuff coming out of China. We need to zoom in and then zoom out, zoom out for a second, try to get a 20,000 foot view, see the bigger picture. What we're witnessing, I think, is the equivalent of a series of increasingly alarming earthquakes unfolding on the other side of the Pacific. Those of us who live near the shores, we know this. After effects, the aftershocks, tsunami-like ripple effects, they travel across the sea, just like your title one. They hit us here. The earth shaking is from the CCP and their ongoing campaign that we're now paying closer attention to as the effects affect us, as they slam our shores. The CCP's campaign, if you haven't caught it in a summary, one way to look at it is essentially demolish and reconstruct China's modern-day economy, its culture, the way of life there. It affects, if you look at it, most all, mainly in Chinese in some way. And again, it touches us. It connects to our markets. That's where we're seeing it right now. It connects to our lives, our investment accounts, our livelihoods because we live in a world where we're just all more connected. We're familiar with many of the changes, amazing change China's undergone in the past 40 years. 800 million people lifted out of poverty, fantastic, amazing office towers and mega airports, super highways, high-speed railways, high-tech companies, worldwide brands, half a trillion dollar market values, China 40 years, half a trillion dollar market companies. Amazing. In certain other ways though, this is often lost. China really hasn't changed that much these past 100 years. It really hasn't. If we look to history, the CCP is doing what the CCP has always done. Many times before, since its founding 100 years ago, July 1921. If we zoom in now, that we would see re-engineering, reconstruction, as I call it, it's been pretty constant, unceasing, ongoing. This is what the CCP does. This is how they govern their country. We're just paying more attention. That's what's changed this time around. We're all more proximate to the construction, the reconstruction. We know those things kick up a lot of stuff. Anyone who has a neighbor who's undergone or is undergoing a major home remodel knows this. We not only see it, we feel it. We hear it. Sometimes we smell this stuff, even taste it, stuff coming off of our neighbor's remodel. And it could do damage to our property. This is no different. Today, we're all stakeholders in China. We're neighbors. We're entangled. We're interconnected in countless ways, invisible ways. But we see some of the effects of that interconnectedness. What happens there affects us here with more immediacy in some areas. In other ways, it'll be just like tsunami waves. It'll be slower with oscillation and back and forth and building up. And we'll see more impact. That's a prediction we'll see. But nowhere is the slamming of our shores more evident than our financial markets. The storm is still growing. Damage is not down. You can see that on the daily news, today's news, where there's more. It will impact more than just stock values. The seismic activity is earth shaking and it is man-made. So there are many questions and there are some who look to assign blame. So have their minds firmly made up? Others seek answers, ask questions, seek to understand. That's what we're going to try to do, Mark. That's what we've been trying to do. As I said, I'll try to limit the focus. China is too big. The issues are too vast. We have limited time. It's critical to frame the picture. Let's look at this slide. Please take a few seconds. Look at the slide on the left. What do you see? Do you see an image? We don't have time. So let me tell you what you might be seeing. A woman, right? Just look into the left. You can see her nose, her hair, her bonnet. Okay. Now look at the picture in the middle, the image in the middle. See her now within that heart-shaped frame? Did you see her the first time around before we framed it? My beloved, if you will, the young maiden, her jawline and the triangle at the bottom of the heart. Okay. Now focus on the picture on the right. See the framing. See the woman in the frame? You can see her eye, her chin, near the bottom of the heart. Her nose has a little bump on her eye line. Maybe you saw this the first time around. So this one, let's call my beloved grandma. It's called My Beloved and My Beloved Grandma. This is what they call an optical illusion. If you're unfamiliar with it, it's used as a teaching element. It's used to show, it reveals what we see may not be what others see, even though we're looking at the exact same thing. We may be right. They may be right. Each of us may think the other wrong. Here's the lesson. We're looking at the exact same thing and we're both right and we're both wrong. Why? Researchers tell us, those who study the mind and study the way we form ideas, and we see things through our own cultural optical lens, which you've referred to Mark, and we frame the picture of things that we see differently. We generally see things with predetermined ideas, biases. The task is to question our own framing each time. Constantly challenge our thinking. Try and look at the same thing over and over again, each time with a refreshed open mind. Here's an example of predetermined bias, the last slide we just saw. This exercise of My Beloved and My Beloved Grandma, your answer, if you saw the young maiden or you saw My Beloved Grandma, might relate all about you. Are you young? Are you looking for a female partner of a certain age? On the other hand, are you older or do you deal with elder parents? Do you have a grandma in your life that you're very close to and take care of? Did you see her first? It's very interesting what the mind can do. Now, why do we spend time doing this? Well, I think this is very important when we look at China, when we evaluate what's going on. We see what we see and we think we know what we see, but maybe we should question ourselves as to whether that's right or wrong. Ben, you say that what we see and they see is colored by our respective cultural optical lens. Well, what do we in the United States see through our western cultural lens concerning these recent events in China as they've played out in the financial market? Okay, well, this next slide will show us. I'll get to this in a second. I just want to address, you know, we're talking about the cultural lens. You might take a moment to address that. The cultures between the U.S. and China are vastly different. It's perhaps better to think that we're almost from different planets. That book, that famous book years ago about when ravenous men from Mars, it relates here, you know, talked about the psychological differences between the genders. Well, that barely begins to touch upon the cultural differences between a range of variants with the psychological makeups of Americans on the one hand and behind Chinese on the other. To address your question about the optical lens mark, this is very much about what we're going to talk about. So we have to consider, you know, on the one hand, we have America. The cultural values are pretty well individualism, independence, freedom, quality, things we're most proud of, rights, human rights, free expression, challenging authority, right? We teach ourselves and our kids to challenge authority. We prioritize winning. Those are some of our important values. Here's another way to contrast us and them. Remember this? Government is not the solution. Government is the problem. Turning on this head, in China, government is the solution. The other people, they're the problem or they will be. You don't want government to take care of things because you don't necessarily trust all those people that's going to be good for you. Look at the Chinese values that are fundamental to them as opposed to ours. Instead of individualism, collectivism, independence, self-restraint, freedom, loyalty, obedience. Chinese look for harmony. They look at rituals that face is very important. This is nowhere more critical than in the diplomatic relations between our countries. Deference to elders, filial piety, relationships. Chinese are not just about winning. They really aren't. They can't. There's too many people. They're always looking for win-win. It's a little bit contrary to us in America, we like to win. These differences in cultural values, they frame our optical lenses, if you will, on both sides of the equation. The heart of many of the current problematic issues and tensions between the US and China right now. Let's get back to these charts. Let's try to stick to the financial markets perspective. Just thought it was worthwhile talking about cultural lens. Let's look at these graphs. What do we see here? Very quick. A lot of information on this screen. It's not there to focus on that. These are just the major ETFs, electronically traded funds, that essentially contain baskets of Chinese stocks. If you had Chinese stocks, you might be familiar with these. You might own these directly. You might own the mid-directly. Cultural lens. What cultural lens does the financial markets look at? When they look at China, really they don't. They really look at things more in terms of color. Black or red. Anger or losses. What we're looking at is just showing that there have been a lot of downturns lately. If you own Chinese stocks, if you have exposure to Chinese stocks, excuse me, you've taken a hit. You've had losses. If you think you don't have Chinese exposure, you don't have Chinese stocks, you may be wrong. If you own a mutual fund or have a retirement benefit plan, chances are in that portfolio that's been put together for you, you have Chinese exposure. Our institutional money managers take on that exposure for you. Now, even if you don't have financial investments at any time, you still have exposure and risk to China. Let's look at our next slide. This is what this slide's about. A lot of data, a lot of information. These are stock charts. One on the left, that's Deedy, China's Uber. That's what their stock graph looks like for the first three, four trading sessions. First three or four days after IPOs in the US on the New York Stock Exchange. The one on the right, that's three lines showing to the right and downward movement for three of the major Chinese education funds, SNAP funds, Chinese educational technology stocks that are listed in the US. What are we looking at? We're seeing lines that are like lines you're not supposed to see. Now, it's too long to get into the story for Deedy, but the summary is two days after the IPO, after many people put millions of dollars, not individually, some did, but investors put all ranges of money. Nonetheless, they had massive losses. This is highly unusual. 30% losses in two and a half, three trading sessions. It's just not something that happens in our US capital markets. On the right, on the tech education stocks, we see losses of 50%, 60%, 80% in these names overnight. Again, unprecedented. I'll give this a cute little name without being too disrespectful. This is what this shows is the CCP is crashing the party. It's crashing our party, our financial markets, our investors party. They've been making a lot of good returns, but sudden rapid shifts. These companies came over to the US, availed themselves of the advantages of listing on our exchanges the best in the world, of going public in our country and having us, our investors, invest in them, our citizens invest in them. Why is that so amazing? It's because we're not used to seeing this in our capital markets. We're very careful about our capital markets. We are the best. We have the best because we've invested a lot of time, a lot of energy, many, many years. We have systems designed. We've invested in the infrastructure, not the physical infrastructure for stop changes, but the legal system. The courts, the legal precedents all the years of looking at disputes or cases and misunderstandings and having to brawl as a whole of them and a legal system and regulatory system. We're not perfect. We've had flaws. We're well aware of those, but we resolve ourselves. We recover. We're very resilient. The markets hold up. Now, why is this disturbing? It's because these kinds of charts, they're not supposed to look like this, like I said, and they do, notwithstanding all the efforts that we make on the American side, on the regulatory side, on the legal, on the lawmaking side, and that is part of the discussion that's going on, the part of the tension between the US and China is, what do we do when you have events like this where the CCP issues an edict, we suddenly see a new rule of law in China? Not anything to do with over here. And we experience the losses here. Just by comparison, I mentioned 9-11 earlier, the day the markets reopened after exit, such a shocking exogenous event like 9-11, markets were down 7.1 percent. Again, we're talking 30, 50, 60, 80 percent overnight changes. It's massive. It's uncalled for. This next slide. Take it from the micro to the macro. Now we're looking at the world. These images convey that these tsunami waves, as I described, they really do reach worldwide. The world's top four luxury brands lost 85 billion dollars in market value in a very short time. The world's richest man lost 10 percent of his wealth, not from investments in Chinese stocks, but impacted by the CCP edicts nonetheless. His holdings are in the luxury goods space, but it's incredible. The reach is just incredible. We see those numbers to trillion-dollar market cap, perhaps you significant losses. Those numbers do not properly quantify the amount of money at risk, I think. In China alone, if we're not considering, we're just talking about the companies, the public companies listed that have raised money through the capital markets. What about the private equity in China, the venture capital, the debt and credit, the US Treasury's stayhold? It's considerably more in businesses from the US and other countries. They do business in China. There's a lot at risk. Outside China, back here in home, many asset classes are affected and are going to be affected, real estate, cryptocurrencies. We'll get to it, but China's making a lot of changes. It's going to affect a lot. Ben, I'm getting a viewpoint from our Western cultural background. Now, what do they, the Chinese, or is it better to say the Chinese Communist Party, what are they seeing through their cultural optical lens? Well, you know, let's move to this next slide. What we're looking at here is a very, very big picture. But if you focus in a little bit, you're going to see globes that represent other countries. That's the point of this picture. China is one-sixth of the world's population. Wholesale countries fit just within provinces in China. Much the world fits in China. It's just, it's incredible. So the cultural lens that the Chinese government and Chinese look up is very different than ours. It's at an entirely different scale. When they make these changes, for instance, and scale has everything to do with it, the point I was making last about the worldwide reach, the effects with this latest campaign, if you will, of the CCP. The far-reaching effects are because we're all connected, but also look at the size of China. But because of the size of China, there are many things that they view differently. Okay, so what problems do they see within China? Well, let's take a look at what we see. Let's look at this next chart. What they see here, these charts, the information on this slide, shows that China has a lot of problems. We've heard of some of them. We read of them. We can't quite make sense of whether they're true or not or how they relate to us. If you look at the financial markets, the drops in these market values and people's wealth and more to come, I think, we're going to look back and we're going to see that it very much ties to the data. These are reports basically of what is going on in China. What China sees within China, what the CCP sees, is reflected in these graphs. They see that, first of all, we saw in the last graph, they have massive population. You think they have population control issues and want to manage that. It's ironic. No, it's the opposite. You want to grow their population. Why? Well, more specifically, they want to grow their certain demographics, the young demographics of the country. That just consequently results in increased population. Why do they need to do this? These charts show you why. We look at China, not this closely. Maybe our experts do. The regular person does. Maybe some of our investors don't need to do that. What we're seeing, though, is we're seeing that. Let's look into this next slide. Let me try to interpret here for you. This is a picture of China's demographics. What it shows is it's bands of color that represent bands of age, age ranges, a decade of age. Starting at the bottom, these are the children, the births, the new births. Moving to the top, those are the oldest in the population. This picture is not what you want a picture to look like. The one on the left is what China currently looks like. The one on the right is what China's headed as of right now. What should it look like? Well, let's think about this. You've got a lot of young people on the bottom, but you've got considerably more on this chart. You've got essentially your top head. What you kind of want this figure to look like is a pyramid. You want a very strong base below. What these charts show is there's too many people that are aging up in the top, if you will, of this picture. You need, think in terms of the World Trade Center, think of a super sky street for anyone around the world. What does it look like? It's got a very strong base and it goes up like the Egyptian pyramids. This is not what it's supposed to look like. Why? Because just like those real architectural things, it could topple. It could fall. That's what China's looking at. What next? Well, what next is they need to grow their population, their demographics, their kids. This is going to be, I think, very fundamental. Very fundamentally, one of the factors is we're looking at what China's doing. A lot of it relates to the younger generations in China and what's going on. We're seeing that with the latest campaign and the crackdowns that we're seeing. What kind of problems are there? Let's move to slide seven. I'm sorry, slide eight. These are further to the last slide about the structural instability of China and potentially collapsing on itself, very likely collapsing on itself. These show that China's got, in more detail, breaking down. They've got inequality, massive inequality across all spectrums. Income, wealth, wages, education. Very small percentage of China is educated. Single digit for all of China educated beyond high school. They've got inequalities of opportunities. They see declines where they want rising numbers. They have rising numbers where they need declines. They have declining birth rate. They have a dropping merit rate. They have a rising divorce rate. Declining households is a real big problem. China needs to grow the younger demographic. They need more births, or again, they will collapse upon themselves. Births require parents, require in China at least marriages, not divorces, not young divorces. They have rising unemployment rates. They have dropping labor participation rates. The opportunity inequalities are immense as well. Education, high paying jobs. The opportunities are not available to all Chinese market. This last image on the bottom right with the map of China with the orange. This shows that 50% of China's production as GMT as well is created in a small fraction of the cities in China. We're talking like 35 out of close to 700 cities. If you don't live there, the chance of you getting a good job, making a good pay, building a lot of wealth is micro. You don't have much of a chance. China has big problems. That's what they're trying to address. I think their campaign addresses some of these problems. They need high paying jobs, but they also need low paying jobs. Jobs too few people right now in China want. They don't want those jobs. They need to create pathways for upward mobility, for advancement. Not everyone can go into the tech sector. There's not enough space. There's companies, Tencent, Alibaba, Baidu, a host of others that you're beginning to hear the names of or have heard the names of for the last few years. They're big, but it's still not enough with 1.44 billion people, a good number of them who need to be employed. They need a more educated workforce and they need to educate in a certain way, not what's going on right now. What's going on right now is on self initiative or one's own self agenda. What you want is a good education from a very good school and you want to be lined up to get a job in the high paying sector in the high paying city. That just doesn't work for China because like a ship, if everybody's moving to one side of the ship and one portion of one side of the ship, the things are going to capsize. These are all these imbalances that we're talking about. China is the second largest economy in the world, but it's got the problems that you wouldn't think of as such a large economy. They have 1,058 billionaires, the biggest number in the world, but those numbers represent a nanofraction of real world population. They have 5 million millionaires, 9% of all millionaires in the world live in China, but given China's scale, that's three tenths of one percent of China's population. It doesn't do it for them. You see redistribution or we hear about this forced charitable giving, this encouragement of philanthropy. There's a reason for it. Three tenths of one percent. The graph up there on the top left shows the top 10 people in China shows that they make their worth rather, tens of billions, billions of dollars and tens of dollars. The rule household average annual disposable income, not well, converted to US dollars is $2,700. 20, 30, 40 billion at the top, 5 million millionaires. You've got how many living in poverty on $2,700 disposable income, discretionary income they could spend on other things. You can see China has a lot of things to resolve. These economic measures that have been taken, that's what they're aimed at. I think so. I think there's a little bit more to it than that, but underneath all of it the data would show that it aligns with what the CCP is doing with regards to its new rules and new laws. We view them through our cultural lens and we see a stern, angry, maybe authoritarian person whose language is translated for us and our media calls it a crackdown. It almost sounds like punishment. There might be that aspect of that. We'll get to that, but it's more than that. The CCP is addressing these imbalances, the structural instability where it could collapse upon itself, and this other stuff is going on as well. We have to look towards the end of this. Where is China's financial markets now and where are they going from here? China's financial markets, where are they going? That's a very interesting question mark. It's a very, very pertinent question. It can go a lot of ways. Who knows? One possibility is that we may see something on the order of the financial big bang that we saw in Japan. I mean, one of the possibilities, in today's news, a large property developer in China, their stock fell. It's already in the single digits, but it fell 30-something percent. The announcement was that BlackRock, one of our leading money managers here on this point, asset managers are more and more than just money, turned from doing a deal where they would acquire this large property developer in China. I think we might see, it depends on when, but I think we'll see more of those type deals. And I think if we can do it right and we don't decouple or separate or battle with China, there's a lot of things that we can do together that will help China and help Americans. Let me ask you, let's assume, let's say you're advising the President of the United States, what advice would you give to the President concerning this matter, how to proceed going forward? That's a big question. I will hypothetically play along. I would say to President Biden, thank you for your display of statesmanship, of leadership, exactly what one would expect from a very powerful nation, one that's confident. Just reach out, pick up the phone and call the other leader that you want to talk to. Fantastic job, I thought. All this stuff about who's going to call who first or all this petty stuff that gets reported in the news. I don't know if there's any truth to it or not. I know President Biden and his team are very, very busy. But those kind of moves are very important. So first of all, it's not advice, it would be a thank you. The second thing though is maybe this is advice and it's outside my peel house and outside my significance. I'm not significant enough to say this, but if he was listening to me, I would say I would strongly suggest consider replacing your Secretary of State. He's just not up to the job. That display that we saw in Alaska, the lack of protocol, lack of civility, it just, it did nothing except turn things back. It's not helpful. I'd also suggest him there are a lot of things that we could do, he could do, that would push us forward with China. That would be everything from addressing the situation with the Huawei CFO in Canada detained upon our wishes, just been hanging out for interminable period of time. We have so many other relevant things that this just doesn't get to that level. We've dealt with financial fraud, we've dealt with allegations of money laundering and dealing, trading with the enemy. This is just excuse, cut to the chase, give her back, let her go. If we need her to come back and face trial, just ask her to promise to do that and then have her come back. Let up on this blame game stuff, at least out of the White House. The US media and the rest of the world media, they'll take that up. We have another national election coming up. The person who's running for the government, for the president, for the Republicans, they'll definitely bang that drum again, but we don't need to do that at a White House. Let up on the Xinjiang thing. Human rights people will do that. We don't necessarily need to make that one of the key things. There's one really big thing that the president could do and that pertains to the financial markets as we're talking about it. That's the holding foreign company's accountable act that was passed in Congress and signed it law by President Trump last December. It's a ticking time bomb mark. It's something that's highly discriminatory. When you read it, it's very, very discriminatory towards Chinese. I think put those things on the table. Don't ask for anything in return. I'm not at that level of statesmanship, but don't negotiate. Let's just give a little and then see what comes back. I'm sure the Chinese will return with gifts of their own, offerings of their own. Ben, that's great. I hope that's what happens and maybe we'll have an opportunity to discuss this in more detail later. But thank you very much, Ben Lau. I appreciate your time and expertise in talking about the financial markets and we're still waiting for the answer to the question of is the party over. But thank you, Ben. Aloha. Aloha, Mark. Thank you very much.