The liquidation incident reflects the risks of the U.S. financial market

Wall Street’s hedge fund liquidation incident has recently attracted the attention of global investors. A hedge fund called Archegos was forced to liquidate its position because of its leverage to “borrow money to stock stocks”, which affected the multinational banks that financed him. The loss of tens of billions of dollars caused panic in the global market. Chinese investors are paying special attention to this matter, and the main reason is that a large part of the hedge fund’s “gamble” is the so-called Chinese concept stocks, which makes many people’s brains fill in a picture: Is it a Chinese concept stock? Rumors caused this liquidation?

What needs to be explained first is that hedge funds are just a type of institutional investors in the stock market; moreover, not all hedge funds are speculators who are accustomed to “borrowing money, putting leverage, and gambling.” Looking at the problem from a professional perspective and paying attention to the health of the US financial system, one must question the multinational banks that have lent money to “gamblers” and have suffered huge losses: Goldman Sachs, Morgan Stanley, Wells Fargo, UBS and Credit Suisse of Switzerland, and Japan’s Nomura. Obviously, it is the problem of risk control in the US banking industry that makes financial gamblers able to get enough chips to give it a go. What’s more frightening is that the US financial market has become over-virtualized. Derivatives have become more sophisticated on the surface, but the hidden financial leverage has become higher and higher. This provides tools for financial gamblers and increases the “penetration of regulators”. “The difficulty of assets and funds.

It is precisely because of the natural gambling nature of some hedge funds and the negative impact of the derivatives market that after the subprime mortgage crisis, the US government tried to tighten the supervision of family trusts and hedge funds through the “Dodd-Frank Act”. However, the implementation of the bill is constrained by many financial vested interest groups. US regulators also “inadvertently” cut corners in order to improve market liquidity, which directly led to this liquidation incident.

Banks that finance gamblers are also to blame. Everyone should still have the impression that during the Spring Festival, a “junk stock” game station in the US stock market was repeatedly hyped by speculators, and there are no lack of financing institutions behind both sides of the transaction “long and short”.

Demon stock speculation and fund liquidation are all chaos in the stock market. From the central bank’s perspective, the Fed’s super quantitative easing policy has made the capital cost of major banks almost zero, and financing for stock speculative institutions is a high-yield business. It is not difficult to understand the internal risk control with one eye closed.

It can be seen that the ultra-loose monetary policy in the United States and the regulatory bills that have not been strictly implemented have created systemic risks in the financial market, which eventually led to this liquidation event. Obviously, this “pot” should not be backed by China Concept. After all, the regulatory issue of the China Concept Stock Accounting Standards has long been not news. Both listed companies and regulatory agencies in China and the United States are actively coordinating to reduce the impact of technical issues of accounting standards on market valuations. In recent years, it has been vilified by politicians with bad intentions in the United States, and the number of new Chinese concept stock IPOs has not decreased but increased each year, which precisely shows the rationality and wisdom of the business communities of the two countries.

As for political and business speculators who are arguing about Sino-US relations and fanning troubles in the financial market and public opinion, they have more ulterior motives. Technically, in 2021, the United States is facing rising inflationary pressure, and the financial market responds to the risk of asset price bubble bursting. In the past two months, the risk of falling prices of Chinese concept stocks is much lower than that of many U.S. stocks that were hotly speculated last year. For example, the famous large-cap star Tesla, which once went from the highest price of $900 per share in early February of this year, was just one. It fell to 540 US dollars per share in the month.

In the final analysis, the recent chaos in the US financial market is not about financing Chinese high-tech companies. On the contrary, the US real economy has long been unable to give the stock market enough IPO investment targets. In the past two to three decades, Chinese assets with growth potential went to the U.S. to go public for financing, which greatly eased the asset shortage of U.S. financial investment and consolidated its position as a global leader in the U.S. capital market. It is a win-win “funding, Assets, capital” cooperation.

With the construction of China’s multi-level capital market, especially the accumulation of China’s private capital, the Chinese people have money in their hands, and many high-quality companies no longer have to travel far to the United States to raise funds. Therefore, it is the US financial system that should be more concerned about the risks of Sino-US financial cooperation. Only by continuously maintaining a properly regulated market environment, supplemented by a normalized monetary policy, can the U.S. capital market remain attractive to global high-quality assets and maintain Wall Street’s global financial status.

For China, on the one hand, it must learn the lessons of the US stock market, strictly control commercial banks’ financing for stock market speculation, strictly control the stock market leverage ratio of various investment funds, implement the risk control rules for securities companies’ margin trading and securities lending, and develop derivatives appropriately. In the OTC (over-the-counter) market, we must not allow depositors of commercial banks to flow into the stock market for speculation.

On the other hand, the best way to resolve the disputes over Chinese stocks and curb the “fraud subsidies” of follow-up speculation and technology is to encourage multi-level capital markets to closely serve technology companies and use modern financial service inventions to transform and serve the real economy. In particular, it actively encourages listed traditional industrial enterprises to achieve business model transformation and upgrading through mergers and acquisitions of high-tech targets. In recent years, the facilitation of the issuance of additional stocks, the creation of the science and technology innovation board, and the reform of the registration system are all important manifestations of the steady progress of the supply-side structural reform of the stock market in this regard.