Old Banknotes Can’t Be Swept Out Easily in India; Neither Can Old Problems

On Nov. 8, the Narendra Modi government surprised India with a declaration banning 500- and 1,000-rupee notes (Rs500 and Rs1, 000) to tackle black money and corruption. The demonetization policy may be well intentioned, but it has brought up unintended consequences over the domestic economy in India.

Rs500 and Rs1, 000 were India’s two biggest notes that and accounted for 86 percent of the money in circulation by value. According to the announcement, all citizens will have until Dec. 30, 2016 to exchange the old banknotes at bank branches. People seeking to replace more than Rs250,000 (about $3,650) must explain why they hold the cash. Those who fail to do so must pay a penalty.

Due to the large number of notes and the short replacement period, Indian banks and ATMs have long queues as people rush to exchange old notes for new ones. The government can’t print enough new notes to fulfill the demand. Till Dec. 10, the banks have received Rs12.4 trillion as deposits but only released Rs4 trillion back into the system as of 5 December.

People queue as they wait to exchange or deposit their old high denomination banknotes in Jammu, India. Photograph: Mukesh Gupta/Reuters

As a normal economy influence, the lack of cash led to a soft inflation on the market. Food inflation in November softened to 2.11 percent from 3.32 percent a month ago, according to data released by the Central Statistics Office. Retail inflation also decreased from 4.2 percent a month ago to 3.63 percent.

However, the demonetization of high-value currency notes has had a negative impact on the Indian economy. The lack of electronic bank accessibility and wireless payment in India has magnified the effect of insufficient cash on the business activities of investors and consumers. The overall industrial output decreased by 1.9 percent compared to before demonetization, according to the industrial production data.

There are worries about the money liquidity problem. “The Reserve Bank of India is likely to outline measures to manage the systemic liquidity, which would be of interest to the banks, and provide some timeframe by which cash liquidity would increase, that would be of significance to the public,” said Naresh Takkar, managing director at ICRA Ltd., the local unit of Moody’s Investors Service.

The original goal for the government’s demonetization policy is to tackle black money — cash that is not declared to avoid taxation or that is obtained via corrupt practices. But according to the New York Times, the vast majority of black money in India isn’t money at all. It’s held in gold and silver, real estate and overseas bank accounts. The requirement also stimulated a new black market where people can break old notes into smaller ones by illegal couriers.

Demonetization alone can’t tackle the issues of black money and corruption. More actions toward improving policies for administration transparency, tax regulation and the modern online bank tracing system are needed.

Work Cited:

India pulled 86% of its cash out of circulation. It’s not going well.


Cash-Crisis India Looks Likely to Cut Rates


In India, Black Money Makes for Bad Policy


How India’s Cash Chaos Is Shaking Everyone From Families to Banks


New note ban rules and regulations as of 14 December


Economic Implications of Normalizing Relations Between the U.S. and Cuba

In 1961 the U.S. severed diplomatic ties with Cuba. As of December 2014, the U.S. and Cuba started to restore formal diplomatic relations for the first time in more than half a century. The U.S. moved to relax restrictions on trade, commerce and financial transactions with Cuba, though the comprehensive trade embargo for years is unlikely to be lifted at once.

Since the 1960s, the U.S. administrations have maintained the policy of economic sanctions of Cuba. Cuba depends primarily on three suppliers to meet its import needs. In 2014, Venezuela was the leading supplier of Cuban imports, with 35 percent share. The EU supplied 23 percent of total Cuban imports, while China accounted for 11 percent. Venezuela, the EU, and China together accounted for 69 percent of total Cuban imports in 2014. By contrast, before initiating trade restrictions, the United States alone accounted for 70 percent of Cuba’s total imports in 1958. In 2014, the U.S. share was just 3 percent.

As the political relation normalized in 2014, the trade advancement is still feeble to see. The total amount of Cuba imports from the U.S. in 2015 was $180 million, down 40% ($119 million) from 2014 and down 51% from 2005. The top export categories in 2015 were meat, food waste, grain and chemical products. The agricultural products importing from the U.S. totaled $150 million, which is the leading import category.

Compared to Cuba’s import, there was no goods export to the U.S. in 2015. The EU still remains the leading partner of Cuba’s export destination.

But after the Cuba policy changes announced by the President in December 2014, the U.S. government made some regulatory changes to allow the importation of certain goods and services produced by independent Cuban entrepreneurs. The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) and the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) have made five sets of amendments to their respective Cuba sanctions regulations. OFAC introduced a provision in January 2015 authorizing the importation of certain goods and services produced by independent Cuban entrepreneurs.

Other changes are expected to benefit the economy in both countries. American banks can now do business with Cuban customers without brokering through a third nation. It means Cuban Americans can send money to family members in back in Cuba easier than before. In 2015, Annual funds sent from the U.S. back to Cuba nearly doubled to $1.4 billion.

US citizens are now able to use their credit cards in Cuba. They can also take home up to $100 in alcohol and tobacco from the island. Still, most US travelers to Cuba will continue to be family members, academics, journalists, cultural ambassadors, and medical professionals. But US citizens don’t need to obtain permission from the US government as previous required. About 150 thousand Americans traveled to Cuba in 2015, up from 91 thousand the year before.

Though two countries has made progress toward trade and commerce, the future remains ambiguous. Fidel Castro, Cuba’s communist leader who had been in power for five decades, died on Nov. 25, 2016. Two days later, the U.S. President-elect Donald J. Trump warned that“If Cuba is unwilling to make a better deal for the Cuban people, the Cuban/American people and the U.S. as a whole, I will terminate deal.”

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.


Misused Policy: China’s Electric Vehicle Subsidy Fraud

The Chinese government has poured 33.4 billion yuan in subsidies since 2009. The government decided to establish a world-leading industry and increase jobs and exports, and to reduce oil dependence and the urban pollution. The incentive policy offers subsidies to encourage the companies that build electric cars, plug-in hybrids and fuel-cell vehicles to produce and sell electric vehicles (EVs). But a report from the Ministry of Finance of China exposed that at least five automakers defrauded the government for a total of 1 billion yuan ($150 million) in subsidies aimed at promoting EVs in September 2016.

Since some incentive regulations were vague and under weak supervision, speculators learned how to reap the benefit from a poorly crafted subsidy system the government had launched. For example, a big portion of the subsidies flowed into unqualified or non-existing cars made by dishonest companies. One of the bus manufacturers involved in the scandal was the Higer Bus in Suzhou, which received about a half billion yuan in subsidies through sales inflation. The five companies defrauded an average of 25,000 yuan per car, according to the government report.

In some cases, the manufacturers sold unqualified or faulty cars to related parties (for example, the companies’ own leasing subsidiaries). After the companies received the subsidies from the government, the buyers returned the cars. In other cases, the makers installed dysfunctional batteries or even one battery in different vehicles.

The high profit under the government support cultivated another deal model between the sellers and the buyers. An electric bus worth one million yuan would be priced at two million yuan. The buyers only needed to pay one million yuan, but the sellers forged a two million yuan receipt to apply for the government subsidy.


China saw a big boom of EVs in 2015

The government planned to phase out the subsidies on the EV industry from 2016 to 2020. The manufacturers stepped up the production by adding incomplete or unlicensed vehicles, especially in the end of 2015. The total number of EVs sold in the fourth quarter increased by 92,000 dramatically. The monthly production in December 2015 quadrupled compared to the number in December 2014. Higer Bus sold 2,000 EVs with 83.9 percent incomplete in December 2015, which amounted to one-fifth of the company’s yearly sales.

China’s EV Subsidy Criteria during 2013-2015

The policy designed to support the EV industry hurt the market instead. The vague criteria in the incentive policy lowered the threshold for receiving subsidies. Under the standard from 2013 to 2015, the amount of subsidies an EV could receive was mainly based on its range (mileage) or length. There were no rigorous standards for the vehicles’ technology and actual quality.

The subsidies have been blamed for attracting the ‘wrong crowd’ according to Zhang Zhiyong, a Chinese market commentator and auto-analyst based in Beijing. Many new players in the market decided to make EVs just to get the subsidies. They came not with previous manufacturing experience or R&D input, but with a gold-rush mentality.

China registered the largest amount of plug-in electric vehicles (PEVs) in the first quarter of 2016, yet ranks lowest on the Plug-In Electric Vehicle Index, which is a quarterly index tracking the production effectiveness and impact of the PEV market in different countries. “Despite having more than 200 manufacturers of new-energy passenger vehicles, buses and special-use vehicles, China still lags behind global leaders in terms of quality, reliability and key technology,” said Wang Cheng, an official at the China Automotive Technology and Research Center.


According to the subsidy policy from 2013 to 2015, a qualified minibus with a length of three to four meters can help its maker receive subsidies ranging from 300,00 to 600,000 yuan. To get the subsidy, the company didn’t even need to know how to manufacture the electric bus; the company only needed to buy a 20,000-yuan diesel-engine bus and install an electric battery.

Though unqualified EV companies have cheated on the subsidy system, it does not mean the government support is unnecessary. Government incentives for EV industy are common practice in several national and local governments around the world, such as France, Germany, Japan and the United States. EV programs in these countries also encourage the residents and local bus transit agencies, which target more relevant parties than just the car makers. For example, California established the Clean Vehicle Rebate Project, which allows residents to get up to $7,000 for the purchase or lease of an EV. The transit agencies can benefit from the program of Electric Vehicle Supply Equipment Loan and Rebate. “They are set up to encourage local agencies to purchase electric vehicles like those from BYD, which help the environment while growing jobs here in California,” said the PR spokesman Joshua Goodman from BYD USA, an EV bus manufacturer with its headquarter in Los Angeles, “the California Air Resource Board also offers several different incentives to us (the EV manufacturers).”

Foreign countries’ practice offers good examples that China can learn from. The leading industry does not contradict the support from the governments. But a germane policy is in need. The Chinese government is trying to improve its policy now . The regulators plan to impose tougher policies on incentives, such as stricter technology standards on manufacturers. The government also considers limiting the number of startup EV makers to a maximum of ten.

Works Cited:

Bloomberg News. China Swats ‘A Few Flies’ to Temper Electric-Car Maker Excesses. Web. 11 September. 2016.

An Limin, Bao Zhiming and Han Wei. China Hammers out Tougher Subsidy Plan for Electric Vehicles. Caixin News Online. Web. 30 September. 2016.

Sustainable Transport In China. New Policy on Electric Buses Published in China. Web.

Bloomberg News. 95% of China’s Electric Vehicle Startups Face Wipeout. Web. 28 August. 2016.


Chinese buyers, L.A. markets

Chinese residential developers in L.A. are expecting Chinese buyers to constitute up to 40 percent of their clients. Since 2014, Chinese real estate companies have been involved in at least seven of 18 land deals in Los Angeles.  Greenland, a Shanghai-based real estate company, bought a property called “Metropolis” in downtown L.A. near the 110 freeway. This mixed-use project with three towers and 1500 residential units is now under construction. Greenland, the property owner, has the marketing skills to attract the Chinese buyers. The realtor for the Metropolis project said 75 percent of units in one tower had already been sold. Many of those units are going to buyers from China.


The Metropolis project model 

First, Greenland targets Chinese buyers through real estate agents from both China and the U.S. The L’ands Corporation is a Beijing-based company and has years of experience selling luxury houses in China. The advertisements for the Metropolis condominiums have appeared during the Beijing company’s marketing to Chinese buyers. “We are quite confident about the overseas market because more and more Chinese clients consult with us about houses in the U.S., especially California,” said Eason Wang, one of the sales agents in the L’ands Corporation. After Wang posted the Metropolis information in his Wechat account (a Chinese popular social networking account similar to Twitter), several customers were interested, and Wang planned to put the potential buyers in contact with the Los Angeles partner — Douglas Elliman. The main roles of the Chinese real estate agents are the advertiser, the promoter and the connector between the Chinese buyers and the L.A. market. Only the U.S. real estate agents are authorized to sell American houses. The L’ands Corporation will help the potential Chinese buyers arrange the property visits with Douglas Elliman’s L.A. branch in Greenland’s office near the Metropolis project. Douglas Elliman’s team for Greenland, of course, has several Chinese employees who can speak fluent Mandarin.


A screenshot of L’ands Corporation house selling advertisements in Wechat

Greenland, the company behind Metropolis, tries to make its properties more attractive to potential Chinese buyers by linking ownership to citizenship.

It’s called the EB-5 Immigrant Investor Program. According to the U.S. Citizenship and Immigration Services, foreign investors are eligible to apply for permanent residence if they invest $500,000 in a company like Greenland in a way that helps create or preserve 10 permanent full-time jobs for qualified U.S. workers. Greenland will return the money to investors once the properties they invested in are sold. The Chinese buyer gets to stay in the U.S.



In 2015, more than $25 billion from China flowed into residential real estate in the United States. Chinese consumers bought more U.S. properties than people from any other country. “People move with capital nowadays. If you go to a university in the U.S., you will also consume goods including investment in property. It’s the mobility of capital,” said Yasheng Huang, associate dean of the MIT Sloan School of Management.  “The houses built by Chinese real estate companies could easily own the Chinese buyers’ attention and trust.” But behind the big boom in American real estate investment are worries about the depreciation of China’s currency and an economic slowdown. “There are right reasons for capital movement such as increasing globalization, the mobility of capital and the ability of entrepreneurs,” Huang said. What he worried about were the “wrong reasons” for capital movement such as the lack of confidence in the future of China’s economy.




New Trends of Housing Market In July

The marriage between the famous Chinese movie star Baoqiang Wang and his wife garnered much attention recently not only because of their public feuds on Weibo and other personal social accounts, but also their apparently poor housing choice.

This 2,315 square feet house was bought for $1.2 million in December 2013, but the price of this property is estimated $1.01 million, shrinking by 15 percent, according to Zillow, a property website.

They are not alone. The nationwide existing house price in July also fell 1.4 percent to $244,100.

The U.S. housing market, however, has been showing signs of a split personality lately, with existing home sales dipping but new homes sales surging.

Prior Consensus Consensus Range Actual
Existing Home Sales – Level – SAAR 5.570 M 5.520 M 5.420 M to 5.650 M 5.39 M
Existing Home Sales – M/M Change 1.1 % -3.2 %
Existing Home Sales – Yr/Yr Change 3.0 % -1.6 %

Existing Home Sales of July, 2016

Source: Econoday

Home sales statistics are significant because the housing market is a major piece of the economy and its health is indicative of many other factors such as the employment rate.

The national 30-year mortgage rate remained stable and dropped slightly after the second quarter, so it could not explain the falling existing home sales.

Existing home sales

A possible explanation for the trend could be low inventory levels in many parts of the country. “Severely restrained inventory and the tightening grip it’s putting on affordability is the primary culprit for the considerable sales slump throughout much of the country last month,” National Association Retails chief economist Lawrence Yun said.


Total housing inventory at the end of July dropped to 2.26 million, which was 5.8 percent lower than a year ago, and year-over-year change declined for 14 straight months. Supplies were not sufficient for the market demands.

For new house constructions, the supply decreased by 7,000 from June to July, bringing the July total to 233,000. Monthly supply fell sharply to 4.3 months at the current sales rate from 4.9 months in June. In July last year, this number was 5.2 months.

But new home sales climbed more than 12 percent in July compared to June. More than 650,000 new houses were sold in July. It seemed like lower interest rates and supply worked better in boosting new home sales than existing home sales.

New home sales


What else can explain this different trend between new and existing house sales?

Price could be one factor. The median price of new houses fell 5.1 percent (more than the 1.4 percent decline of existing home price) to $294,600. The price is 0.5 percent lower compared to July last year.

Another change worth attention is the big public builders shift in focus to lower-priced and smaller homes, which the industry calls the entry-level product.

According to the National Association of Home Builders (NAHB) and U.S. Census data, home size is shrinking for the first time since the recession. Median single-family square floor area fell from the first to the second quarter of this year by 73 square feet.

NAHB’s chief economist Robert Dietz said normal post-recession home size would increase because credit tightens and more wealthy buyers rule the market. But recent small declines in size indicate that this trend has ended and size should decrease as builders add more entry-level homes into the inventory.

More first-time buyers consider location, neighborhood and traffic hours more important than home size. Besides, affordability is their priority.