Arbitrage in trade: small fortunes made by savvy Entreprenuers

When most people hear the terms, “China” and “trade,” they think of the billions of dollars in merchandise moving back and forth between multi national conglomerates, or more recently some may think of Donald Trump. While China and trade are intimately connected to both of these notions, there is another fascinating arena in which China and trade are opening up incredible opportunities for savvy entrepreneurs at a micro-level. Due to tariffs, pricing laws, and other multi national rules, certain items in China cost significantly more than they do in America and other countries. While many think of luxury goods like Louis Vuitton and Apple, the wide schism in pricing creates arbitrage opportunities in healthcare, mid level clothing apparel, and custom goods.

In the early 2000’s, this trend was diametrically opposed. Smart Americans with the use of the internet could navigate early iterations of websites like Dhgate and Alibaba, two major Chinese online retailers, and buy items in bulk. They would then resell these items, like headphones, batteries, knockoff jerseys and toys, on American websites and capture profit in the difference in pricing. While these opportunities are still there, the more profitable move is now for individuals, usually Chinese nationals, to buy items in America and sell them back to China.

One of the reasons that there is a market for smaller entrepreneurs is that many of these items that are sent are considered gray market or even black market, meaning there is a legal risk to partaking in a venture. Since larger, more established companies don’t want to assume this risk and potentially clash with the Chinese government, brave and risk-seeking businessmen seek to exploit this opportunity. The market dynamics are such that no one can truly scale, as size would be a deterrent to profit. Eventually, if a person or company gets too large they will attract the scrutiny of retailers or the Chinese government.

One of the most notorious areas where this exists is the luxury car market. Cars like the “Jaguar F-type S convertible parked in front of a Pasadena, California, dealership sells for $89,000—but it can go for quadruple the price in China thanks to high demand for everything luxury, especially cars,” according to the Daily Beast. In order to  derive a profit, individuals in America and abroad will recruit straw men and women to go into dealerships and buy cars, or lease them and immediately sell the lease to a third party. After this, they will collect a commission for purchasing the car ranging from low four figures to low five figures, and put it onto a shipping container. There, the true business mastermind figures out a way to navigate the murky shipping laws and somehow get the car into China. This will either be sold to a dealer or an individual at an incredible markup, but still well below the market price that the same Jaguar or Range Rover would sell for in China.

Luxury Cars in China

This practice was especially popular in the early 2010’s, but as of late car dealers have caught on to this and put safeguards in place to prevent such actions. Now, depending on the dealer, especially those in states with no sales tax, some individuals who purchase cars will have to sign agreements not to ship their cars overseas. This is just one area where business people have figured out a way to derive profit from mismatches in pricing.

Since cars represent such a large dollar amount in one transaction they were a favored product to bring over as the payout on the effort per individual item sold was so high. Other cottage industries like vitamins, powdered milk, and athletic gear have all given rise to individuals setting up as middlemen between America and China. The problem with this strategy’s viability as a long term business is that the inefficiencies are either solved by better government relations or China cracks down on such sales by regulating transactions more intensely.

Currently, another booming trade area between individuals in America and end users in China is personal shopping for luxury goods. This is also taking place in England, due to the fall of the pound, but China is predominantly trying to crack down in the United States first. These shoppers are called, “haiwai daigou,” which can be translated to personal shopper. Since there is a major price discrepancy between America and China in terms of luxury brands, the members of the wealthy Chinese class will pay Chinese Americans to purchase items and ship them back.

This is another area that the Chinese government is trying to slow down as it hurts native sales within the country. According to CNN,  China’s “General Administration of Customs has stipulated that all individuals engaged in ‘cross-border e-commerce’ must provide a list of imported and exported items to customs.”

Enjoying Luxury Goods

As the government and brands figure out new ways to stop the import, savvy entrepreneurs will continue to find new areas to exploit on a micro level of trade. The question is how long will this game of cat and mouse last, and whether or not any one individual will figure out a way to consolidate market share.

Faraday Future’s Billion-dollar Electric Vehicle Plan Postponed

The financial tension of the Chinese tech company LeEco has escalated and sprawled overseas. Faraday Future, a California electric vehicle (EV) builder mainly funded by LeEco, is under a cloud of suspicion about the company’s cash flow and the production capability.

Faraday Future’s Teaser Video

On Nov. 17, Nevada State Treasurer Dan Schwartz questioned the financial condition of Faraday Future, which was expected to invest in a $1-billion electric vehicle factory in Nevada but missed three months of payments. But Faraday’s China team responded in a statement that the Nevada factory has never been halted and will start the second phase of construction next spring.

The Nevada state treasurer doubted the business model of LeEco. “This is a Ponzi scheme,” Schwartz told Sina Tech Media. “You have a new company that has never built a car, building a new plant in the middle of the desert, financed by a mysterious Chinese billionaire. At some point, as with Bernie Madoff, the game ends.”

Faraday Future signed a contract with the Nevada government to invest in the factory, with the state providing more than $200 million in incentives. But Faraday didn’t pay $21 million due in September according to Aecom, the prime contractor for Faraday’s car factory. “The state has not suffer fiscal loss yet, but it is time consuming and reputation influence,” said Schwartz in another interview with Caixin Media on Wednesday.


Faraday Future Factory Overview

Faraday claimed the company had enough capital for the Nevada factory. According to the Chinese media Sina, Yueting Jia, the CEO of LeEco, attracted 10 investors from his classmates in Cheung Kong Graduate School of Business and raised $600 million from those entrepreneurs. The purpose of the funds is not clear.

In October, Jia allegedly sent an alarming letter to all his employees and admitted the cash crunch caused by overstretched business. After Jia’s letter went public, LeEco’s stock market flopped. “We have frozen all the original employment,” said Kevin Zheng from the supply chain department of Faraday Future.

There have long been worries about LeEco’s expansion into almost everything, consisting of interconnected LeEco hard- and software. The ecosystem includes streaming-content services, smart bicycles, smart TVs, cloud-computing, smartphones, smart-apartments, and automobiles.

The letter came three weeks after a massive press event in San Francisco’s Palace of Fine Arts. LeEco claimed to tackle the U.S. market by a variety of products such as smartphones and TVs. Faraday Future’s EVs are also in the portfolio of products LeEco wants to introduce to the global market.

The original plan was for Jia to drive Faraday Future’s concept car across the red carpet onto the stage. But it turned out he ran out himself. “The car was broken during the sloppy transportation from our office to San Francisco,” Zheng recounted. Another car from the filming scene in London was transported instead and only displayed after the event.


LeEco EV Strategic Map

Faraday Future, with its headquarters located in an automobile industrial area in Gardena, CA, served as a significant part of LeEco’s EV strategy. Faraday Future now has up to 1,000 employees. Its design and engineering team will also help LeEco’s Chinese EV brand LeSee, which is based in Beijing with its plant in Zhejiang province.

The two companies will target consumers from different levels. Faraday Future aims at the high-end market and the EVs produced by LeSee in China will be more affordable. Zheng said that Faraday Future wants to target “high-tech fans and wealthy people’s second cars.” The first production car will be priced around $80,000 to $100,000, equivalent to Tesla’s Model S. Faraday Future also signed a cooperation deal to build electric vehicles with Aston Martin in the future.

Beyond sharing market risks by different level products, the U.S. market “will help us establish a global brand,” Zheng said. The connection between Faraday Future and LeEco has remained ambiguous till now because the “made (and designed) in America” marketing package made Jia’s EV plan convincing. Zheng said Chinese investors tend to trust the technology and management team from the mature automobile market in the U.S.

The “Our Team” section of Faraday Future’s webpage only shows a few VPs, who worked previously in other automakers including Tesla, BMW, Audi, and Ferrari. “Faraday Future has been hiding in plain sight,” the Clean Technica reported. But the incorporation papers filed with the California secretary of state’s office revealed its CEO was Chaoying Deng, a corporate director at LeEco’s subsidiary LeVision Pictures. Ding Lei, CEO of LeSee, participated as the main role of Faraday Future.

As the main funder, LeEco faces challenges if it wants to continue supporting Faraday Future. The current EV market faces a “chicken and egg” problem. The profit returns are expected to be slow and even Tesla has not made money yet except for a few quarters. The market requires pre-investment in charging facilities and the incentives to the consumers. This is why governments in many countries provide rebate policies to the EV makers. But as the Chinese government plans to phase out of the subsidies before 2020, both LeSee and Faraday Future will benefit less than what they could obtain from the confident investors. Jia expects to raise money by loans, which will be released by three phrases – Series A, Series B, and Pre-IPO placement. LeEco is estimated to raise a total investment of $7.9 billion before 2022. Except Jia’s classmates in Cheung Kong Graduate School of Business, Faraday Future needs more investors to buy the company’s story and trust its production capability.

After all, Faraday Future faces fierce competition. In California’s EV market, there are mature auto companies with massive dealership networks and existing customers such as Tesla and Audi. Other start-up makers are leaping into this competition, such as NextEV, launched by Tencent, another Chinese internet behemoth.

Faraday Future believes in its unique strategy to win this game. Selling services will be a big part of the company’s business model. “We envision this like a smartphone. The revenue starts once you get the device in the owners’ hands. We’re looking at subscriptions and apps and other opportunities,” said Nick Sampson, Faraday’s vice president of research and development.

Rather than hearing about Faraday’s future business strategy, the Nevada state treasurer is more eager to see the first production car manufactured by the plant.

However, Faraday Future has comforted the plant’s prime contractor Aecom. “We remain fully committed to our client and our employees working on this project, and we look forward to the facility’s successful delivery,” said Brendan Ranson-Walsh, the vice president in the global external communications department of Aecom. According to an official statement, Faraday Future is temporarily adjusting its construction schedule with plans to resume in early 2017.


The fall of Hanjin and Soon-sil Gate


On August 31st, South Korea’s largest container carrier declared bankruptcy.  LA Times reported on September that Hanjin’s unfortunate bankruptcy has to do with over supply of ships, low demand for capacity, and slow trade growth. The revenue from trade has been decreasing over the years but the demand for mega-ships has made it difficult for Hanjin to maintain its business as shipping company.hanjin-bankruptcy-is-the-tip-of-the-iceberg-for-flailing-shippers-la-times Using Bloomberg’s words on September 16, Hanjin “and its customers are being asked to pay more than usual to bring freight into U.S. ports, creating backlog that could keep goods off shelves during the holiday shopping season.”

How did this happen? Since the financial crisis of 2008-2009, the shipping industry lost a great amount of money. For Hanjin’s case, it lost $1.1 billion in 2009. In 2010, China’s GDP growth slowed down and it affected the globe.  China’s slowed economy definitely dampened growth of Hanjin as well because China has been one of the major trading partner with Korea; South Korea makes $142 billion from export to China.  Ever since then, Hanjin has been going through a rough phase in its business. According to Journal of Commerce, Hanjin’s profit has been decreasing to the point where it had more than $5 billion in debt, and spot rates decreased significantly for Asia-Europe and Trans-Pacific.

On this year’s Spring, Hanjin attempted to get financial support from Korea Development Bank but the deal was pulled off in the middle. On April, Hanjin lost its control of operations to KDB and the company filed for court receivership in Seoul 3 days ago. Though it has been very gloomy for South Korea for having its major shipper declaring bankruptcy, there are some rumors rising recently that makes the country even more depressing. Recently, there has been a scandal involving South Korea’s president, Geun-Hye Park. Although the investigation is still on going, Korea Times published an article that there may have been connection between Geun-Hye Park’s scandal and KDB’s rejection to bail out Hanjin in Spring.

7301842751474883086The entire story of this newly found scandal is very complex because it dates back all the way from 1970s. To summarize the scandal, the recent , investigation conducted by South Korean intelligence agency found out that president Geun-Hye Park has been controlled by her mentor Soon-Sil Choi. According to LA Times, Choi has been using president to “pressure corporations to cough up millions in donations to dubious foundations [. . .to use] like a personal ATM.” Further, a vast number of government’s classified documents were found in Choi’s personal computer with no encryption.

In other words, South Korean president has been a puppet to a wealthy civilian. Back to the Hanjin’s bankruptcy, Korea Times suspects if the fund that was planned to be used for bailing out Hanjin was used for Choi’s personal use instead. According to Korea Times article, there has been statements that the decision-makers in Korean government was positive about cash injection to Hanjin through KDB until March. The article quoted from Joongang Ilbo daily (Korean Newspaper) that there was “invisible hand” cut in and suddenly stopped the process of attempt to save Hanjin from bankruptcy. Joongang Ilbo suspects that Choi disrupted the bail out because Hanjin’s support on Mir and K-Sports (the dubious foundations Choi has been using as her personal ATMs) was not satisfying to her. Whereas LS Group, CJ group, and Doosan Group made donations more than a billion won each, Hanjin was only able to donate a lot less than each of those organizations.

Though the government strongly denies this allegation, the Korean people are losing their confidence in Korea’s economy and politics. On November 1st, Choi was detained in Korea and the scandal is going under further investigations. It is very unknown if the allegation on Choi-gate resulted a failure of saving Hanjin from bankruptcy; however, one thing is clear. With Hanjin fallen and Choi-gate on going, Korea is facing a gloomy era.

Is A Rising China More Appealing Than U.S.?


“I miss the price of my hair service in Beijing,” said Yuyuhou Li, a graduate student from the University of Southern California studying Strategic Public Relations, after her recent pricy experience in Korean Town. The total cost of having her hair dyed was “about $280, including tips.” In other words, having her hair dyed once in Los Angeles equals to three hair-dyeing appointments at a similar salon in Beijing.

No wonder it seems that living in America is quite expensive, at least in most Chinese people’s eyes. China’s economy is growing at an impressive pace. In the past decade and half, China has risen from ranking second in the world in nominal GDP, to pulling itself from poverty at least in its southern coast. “Made-in-China” label is being used worldwide and the grand hosting of the Beijing Olympic Games shows China’s economic power. Even the great Uncle Sam started to fear the rising eastern star.

Meanwhile, in the hopes of receiving a better education and a better life in the future, Chinese students are rushing to pursue academic degrees in the United States. The most recent figures, from the 2014-15 academic year, show that 304,040 international students in the US hailed from China – far more than from any other country, a 10.8% higher than previous 2013-14 academic year.



Faced with the army of ambitious up-and-coming Chinese professionals, are Americans worried? Yes, they are. The loss of jobs is one of the top three problems that are rated as a very serious problem by approximately 60 percent of the American public, according to a survey in 2015.


Undoubtedly, China is in need of fresh blood for a consistent and steady growth. On the one hand, China is experiencing its reorganization and optimization in industrial structure from labor-intensive industry to high-tech industry. Without those young talents, the process will be much slower. On the other hand, China’s rising wages calls for increasing productivity, which cannot be achieved without technological advancement. Therefore, enticing young talents to come back and contribute is significant.

However, a massive loss of talent for China is endangering the long-term development of the rising country. An estimated number of 2.64 million Chinese have moved overseas to study since 1978, but only 272,900 students returned to China over the forty years, according to the Ministry of Education. Moreover, a 2014 report by Oak Ridge Institute shows that 85 percent of the 4,121 Chinese students who received doctorates in science and engineering from American universities in 2006 were still in the U.S. five years later. The stay rate was 98 percent a decade earlier, which actually marks an improvement.

Such a brain drain seems to indicate that living in the States are more appealing than living in China, especially for a young and upcoming generation. How to make a decision when choosing a country to live and work? Living in an affordable place and working in a promising place are two important factors.

Living Cost & Purchasing Power Parity (PPP)

Pick up an apple from a Walmart in Shenzhen, one of the most developed coastal cities in China, and read the price tag carefully. Those lovely red apples are sold at ¥4.98 (=$0.75)per 500g. Now let’s move the scene to a Walmart in Los Angeles, where a large price tag reading $2.47/lb ($2.24 per 500g) sits on top of those made-in-America apples.

It is not uncommon to see an almost triple price difference between consumer products made in the most developed cities in China and those produced in America. A box of 12 cage-free eggs are sold at ¥12.9(=$1.93)in the Shenzhen Walmart, while eggs in the LA Walmart are more than double that price. Not only groceries, but also basic necessities such as toilet paper and laundry detergent suffer from the huge price gap. For example, Tide detergents of the same size in both China and the US do not break the spell of the three-times price difference.

Both Shenzhen and Los Angeles are coastal cities with a high volume of port trade and technology-intensive industries. However, as the chart below is shown, people would need around ¥35,143.95 ($5,266.80) in Los Angeles to maintain the same standard of life that they can have with ¥21,000.00 ($3123.60) in Shenzhen (assuming you rent in both cities). As the chart below shows, Shenzhen’s living cost is higher than Beijing’s, but still falls way behind Los Angeles’.


(Source: Numbeo)


Purchasing Power Parity (PPP) plays a vital role in evaluating the living cost in the respective country. PPP is arguably more useful than nominal GDP when assessing a nation’s domestic market because PPP takes into account the relative cost of local goods, services and inflation rates of the country, rather than using international market exchange rates, which may distort the real differences in per capita income.

According to the International Monetary Fund, China’s economy surpassed the U.S. in purchasing power for the first time in 2014 and continued to rank in first place in 2015.



With the same amount of money, you can enjoy more goods and services in China than in the United States. For example, Yuyuhou Li can buy the same detergent and enjoy similar hair dyeing services in both Shenzhen and Los Angeles; but in China, where labor and rent are lower, dyeing her hair and purchasing basic daily necessities cost much less than she pays in the U.S.

This round, China beats America by a huge margin.

Per Capita Personal Income

“If I am making money in dollars, living in the United States won’t be that expensive,” said Yutian, Li, a graduate student studying in USC with a major in computer science. There’s no doubt that computer science is one of the most well-paid jobs in the United States. But earning dollars and spending yuan is very tempting because the exchange rate between the yuan and dollar is more than 6:1.

“You earn a lot less money in China, but you can save more,” said Robert Little, who used to teach English at the University of International Business and Economics in Beijing. “America is much more expensive to live in because the cost of living is much higher,” he added.

The National Bureau of Statistics of China reveals that the average per capita personal income in Shenzhen was 73,492 yuan (=11,010.45USD) in 2014. The latest data shows that the average per capita income in Los Angeles County is 42,042 USD, almost 4 times higher than in Shenzhen.

If we divide the items sold at the Walmart in both cities by the average per capita personal income, interestingly, the percentages are so similar.

  Los Angeles Shenzhen
Apple 0.006% 0.007%
Egg 0.01% 0.018%
Toilet paper 0.03% 0.03%
Tide detergent 0.02% 0.03%
Hair dyeing 0.67% 0.82%


But what causes Los Angeles’ cost of living to run ahead of Shenzhen’s? Although the overheated property market in China has driven the prices up and up, rent prices in Shenzhen are 50.93% lower than in Los Angeles. “My living cost per month is about $3,000,” said Jake Davidson, a senior from Los Angeles studying accounting at USC.  According to Jake, he has to pay $1,600, almost half of his living cost, for his rent. In that case, people living in major cities in the United States such as Los Angeles and New York actually suffer more renting pressure.

However, Shenzhen’s hair dyeing services, when compared against average incomes, run higher than Los Angeles’. The comparatively high percentage meets a current trend of more expensive service industry in China’s big cities.


Opportunities Matter   

“I prefer to work in the United States,” said Caixin Yang, a sophomore who comes from Chongqing City and now studies economics in America. For her, the United States has more advanced and mature financial systems and markets. “China is under transformation and everything is in a mess,” she said.

The same answer goes with Yuyuhou Li, who thinks highly of a well-established public relations career path in America. “Although the living cost is really high here, especially in LA, working in the United States represents a more stable life,” she added.

In spite of skyrocketing living cost, especially the rent in the United States, Chinese students are eager to earn a degree in the United States. What entices Chinese students who receive education in the United States to choose to make a life in a foreign country even though China has become the second largest economy? Free work culture, decent income and better welfare treatment could be the answer.

“High living cost is not something I value if I choose to stay in the United States or in China,” said Yiling Jiang, 23, studying communication management at USC. He values personal development, opportunities, lifestyle, family, and friends when judging which country is more appealing. Not only Yiling, but all of the five interviewees studying in USC with footprints in both China and America agreed that the U.S. living cost is high but not a huge problem. In fact, the highly rigid bureaucratic working ethics, complicated relationship (guanxi) and unfair career treatment are three main factors that prevent young professionals coming back to China.

In addition, as living environment worsens, China’s most well-educated have begun fleeing the country. Caixin Yang also mentioned her concern in her interview about the long-lasting severe pollution in some Chinese metropolitan cities such as Beijing, the Capital of China.

At the same time, there is still a number of Chinese students who pursue degrees in America prefer to go back to China. Yutian admitted that current American life is more attractive in terms of advanced education and career training, but in the future, living in China will be more appealing to him, as the country’s pace of change is accelerating.

“China has a lot more potential in development and I am willing to be a contributor in this process,” said Yutian Li.




How the Grinch (and Hanjin) stole Christmas

When Hanjin Shipping, the world’s seventh-largest container shipping line, filed for bankruptcy on August 31st, it put ports and retailers around the world into panic mode. By filing for bankruptcy, this meant that all Hanjin ships were either banned from docking in ports or were to seized by creditors.

The crisis caused major disruption to the global supply chain, as 89 ships carrying $14 billion in goods were left out at sea with no plans of being offloaded because to the company’s inability to pay docking fees. The effects of Hanjin’s bankruptcy on global trade were seen immediately, as the World Container Index reported that in the week following the ruling, rates on routes like Shanghai to Rotterdam were up by 39%. Furthermore, Hanjin accounts for 2.9% of the global market share and 10% on the Asia-to-Europe route.

For retailers and customers around the world, the question then became… how long will this last?




Hanjin’s collapse came at a pivotal time of the year, as retailers had already begun preparing for the holiday shopping season. Traditionally, goods begin shipping from Asia at this time in order to be on shelves for Thanksgiving, and with 89 ships stuck at sea this could cause major disruptions to the global supply chain.

So who’s stocking will be empty on December 25th?

According to analysts at CitiGroup, of the $14 billion worth of goods trapped on the ships, toys were expected to be the most affected good for retailers, along with apparel, handbags, washing machines and televisions. Additionally, Samsung claimed that it had $38 million of good stuck on two Hanjin ships in the U.S and would have to charter 16 planes to move the goods if the ships were unable to dock.

James Van Horn, a restructuring specialist at McGuireWoods LLP, estimated that, “the cost of shipping goods from Asia to the U.S. has almost doubled as a result of Hanjin’s bankrupcy.” This is because the inability of retailers to receive their products could drive up prices, as customers needing to shop for the holidays would now see them as “scarce” products. Furthermore, Van Horn predicts that the higher cost of stocking shelves could mean that stores across the US would hire fewer temporary workers and have a shortened Christmas shopping season.


The economic implications of Hanjin’s bankruptcy pose serious threats to retailers across the world, as they have already invested capital to produce the merchandise. Therefore, having goods sit on container ships can offset inventory planning and force retailers to suffer major losses due to their inability to sell their products. These effects can carry over onto the next season, as brands try to recuperate their sales.

In a statement about the bankruptcy, Jonathan Gold, VP of Supply Chain and Customs Policy for the National Retail Federation, said that “retailers’ main concern is that there is millions of dollars worth of merchandise that needs to be on store shelves that could be impacted by this.”

Only time will tell what happens for retailers this holiday season, but retailers and customers alike can only hope that whatever is on Santa’s list this year wasn’t stuck on a Hanjin ship.