The Blog

A CRASH COURSE ON CHINA’S YUAN

From the AxSA Staff

#AxSAKnowledge 

As a trade war looms between the United States and China, the news out of Beijing is particularly interesting. Officials with the People’s Bank of China acknowledged that they are considering a devaluation of the yuan (or the renminbi (RMB)), in an effort to stymie the impact of the Trump tariffs on their exports to the United States. The strategy is mystifying, and if it actually executed, it just might work for them.

 

To call China a trade giant is an understatement. It is actually a trade behemoth that manipulates masterfully (more on the latter point in a second), exporting over $2 trillion dollars in goods and services globally. Consumer, commercial, and industrial markets in the United States, of course, make up significant destinations for those exports. In fact, sticky geopolitics notwithstanding, the United States and China share a pretty robust trade relationship. In 2016, trade between the two countries totaled nearly $650 billion. And, yes, for that same year, China did benefit from a roughly $385 billion trade surplus, relative to the total value of goods and services exported to China from the U.S.

Part of what gives China its major advantage when it comes to trade is the low cost of production. Businesses look to a number of considerations when choosing where to manufacture their goods: a stable political and economic environment; access to capital markets; a viable infrastructure; a competent workforce; and reasonably low costs to doing business. To that end, China stepped up its game – and it did so quickly. In 1990, China produced less than 3% of world’s manufactured goods, but now its output is more than one quarter of that. Decision-makers have been drawn to China for all of the typical considerations – but, most importantly, because of the low costs. And this is so, despite China’s spotty record on human rights, its murky rule of law (if you can even call it that), and even its laxed enforcement of intellectual-property rights.
So how has China kept the costs of doing business there down so significantly? Well, we can answer that question in two unflattering words – currency manipulation.

The yuan, China’s currency, is pegged to a basket (or formula) of 13 major currencies, with the U.S. dollar now representing just under 25% of the weight of its basket. In order to remain an attract destination for the production of goods, the Chinese smartly realized that it had to keep, both, its currency from appreciating in value and its economy from freely heating up as a consequence of all of this new business.

 

The strategy that China uses to maintain some control is often referred to as the “impossible trinity”. No country can have free capital flows in its economy, a fixed exchange rate, and control of its monetary policy, at all times. China enforces strict capital controls in its economy. For example, citizens of China and ex-pats working there cannot freely exchange their yuan for any foreign currencies. And that is an important fact to remember when you think of the Chinese consumer, who is not spending much of the money that he has earned after working long hours in that demanding economy. (Even if you hear a lot of glamorous stories about young Chinese splurging on European cars or pricey flats, just know that it’s not everyone. In fact, the Gross Savings Rate as a percentage of China’s GDP is 50%, making the average Chinese household far, far more frugal than its American counterpart.) Consequently, as the people of China save more and more, that money gets invested into more projects (like real estate) and production capacity, even beyond what is necessary to meet domestic demand. In the beginning, much of that money went into building factories, and those factories exported their excess production to markets willing to receive cheaper goods, thus creating the types of trade surpluses that we now see with the United States and the European Union.

The trade surpluses also create another phenomenon – the rabid accumulation of foreign reserves. China should naturally be awash with money from foreign businesses and consumers, and under normal circumstances, that money should have help to fuel an sharp appreciation in the value of the yuan. But to manage this phenomenon, the China government has made a practice of stepping in. The People’s Bank of China routinely prints an ever-greater supplies of yuan to buy up the foreign reserves and control the exchange rate. Price controls and bank lending restrictions are commonly implemented as ways of governing growth in its domestic markets.
Up until the middle of this decade, China was the fastest-growing economy on the planet, with annual upticks in GDP of 10% or greater. But all of that money could not go into building new factories. After all, global markets were only so big, and Chinese officials knew that they could only allow the outcry against their trade dominance to get so loud. Hence, China followed its impossible, but seemingly successful, trinity with other forms of global activity. For example, in order to maintain its penchant for trade-led growth, China’s central bank dabbles in foreign currency markets daily, taking significant positions in currencies like the dollar, in order to keep those currencies higher in value to the yuan, and it follows up its intervention into those markets with the issuance of bonds, so as to prevent the domestic money supply from increasing too significantly. Those positions don’t just sit idle; China puts its foreign reserves to work. In the case of the dollar (the world’s reserve currency), China uses it when making oil or other commodity purchases in the Middle East or in other developing countries. It also uses those dollars to make substantial project investments around the world, like its audacious Belt & Road Initiative, which would be the largest inter-modal system spanning three continents, and it uses those dollars to routinely buy U.S. treasuries, which is, quite frankly, the most sensible way for China to hold most of its dollar reserves, now standing over $3 trillion, as of February, 2018.
China has proven itself masterful at a game that goes beyond simply shipping goods across oceans, and it would be reasonable for even the casual observer to believe that China does not plan to lose any trade war that President Trump has initiated. By devaluing the yuan – a readjustment of its peg to other currencies – China could essentially be giving exporters a subsidy that undermines the Trump tariffs, and in the process, it would do little to no damage to its own well-managed, domestic economy. Conversely, the same practice could not be used by the United States to usurp China’s retaliatory tariffs.
The best solution, at this point, is not to ratchet up tensions with talk of new tariffs. Indeed, barriers create more barriers, and once instituted, they will be difficult to bring down. No, this best solution is for the more pragmatic members of the Trump administration to work with the Chinese, if necessary, through quiet channels, in order to save face and resolve this matter. After all, no one wants a trade war that will only drain millions from the American middle class and put our two countries on an adversarial path. The reality is that United States and China, though some are reluctant to admit it, are interdependent on one another. It is time that we all begin to act like it.
(c) 2018, Axiom Strategy Advisors, LLC. All rights reserved.
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DIVERSITY MATTERS – AND HERE’S HOW YOU CAN MAKE IT WORK

By the AxSA Staff

14 November 2017

The best-performing and most adaptive businesses are typically very diverse ones. That is because #organizations that make diversity an integral part of their #culture benefit greatly from a freer flow of ideas, while also operating in more open and exploratory ways. These diverse businesses do a better job at strategic thinking, trendspotting, problem-solving, structuring opportunities, and even identifying and managing risks, largely because #groupthink does not narrow the judgment of their leaders.

Unfortunately, for so many smaller businesses and their #decisionmakers, embracing the notion of #diversity can be daunting, if only because a diverse talent pool can rattle the current #workplace culture and unsettle the perspective of staid #managers.

“We weren’t ready,” explained an AxSA who requested to be unnamed. Though the business manager wanted to protect her anonymity, she agreed to allow use of her story for the purposes of this missive. Her family-owned restaurant hired its first outside manager – a middle-aged, white male with ten years of experience – in 2012. Almost immediately, there were problems. “You would have thought that being people of color or people who knew something about prejudice, we would have been more accepting, but what happened exposed a lot of prejudice, both, in our ownership and in our staff.” That manager lasted only eight months, and quit following a racially-charged argument with another worker in the kitchen. An EEOC complaint followed quickly.

Decision-makers hoping to make diversity work to their advantage must start with the right mindset, lest a faulty attempt at diversity can have negative consequences. Here are some pointers:

○ Dispense with preconceived ideas, and keep an open mind
○ Seek out the most qualified candidates for job positions, ideally, from the start of the business
○ Create a culture of inclusion and mutual respect
○ Encourage openness, #teamwork, and the exchange of ideas
○ Actively mediate clashes based on cultural assumptions, and make clear that the company frowns on intolerance
○ Acknowledge that others might have good ideas that differ from your own
○ Be patient, and listen to those who might express their ideas in unfamiliar accents or styles

Contention often prompts decision-makers to think that diversity initiatives may not be worth the headache, but a diverse workplace demonstrates a significant degree of managerial and cultural maturity. And that diversity can bring benefits. For one thing, it resists conformity and encourages new #ideas in a time when creativity, innovation, and #performance shape the success of every #business.

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Setting Goals

When it comes to setting goals, we hear frequently someone paraphrasing that instructive quote by superstar athlete Bo Jackson: “Set your goals high, and don’t stop [until] you get there.” Those words – or maybe a variation of them – seem simple and inspiring to most of us. But there is an ugly truth that follows them. You see, while everyone of us is an expert at setting lofty goals, the truth is that a disappointingly high number of us never achieve them, usually because we just give up on them.

That is not an easy fact to digest, particularly in times like these, when it is sexy to call ourselves entrepreneurs, or when we speak and post so boldly about how hard we are grinding, or when we drown ourselves in memes, literature, podcasts, and pricey workshops for much-needed motivation. But it is true. Too many of us are not living up. In fact, just consider one 2015 statistic from U.S. News & World Report: by now, just a few short weeks into this new year, approximately 80% of all resolutions made on or before January 1st have already fallen by the wayside. So much for bright, new beginnings.

As we all know from personal and professional experiences, setting the goal is one thing, but keeping that goal in focus is no easy feat. It requires that you marshal skill sets and reallocate resources in a way that reflects new priorities. Time may be needed. Discipline may be needed. Effort may be needed. Talent may be needed. Money may be needed. And – to be fair to ourselves, let’s face it – all too often, something in that mix may be at a low level or not present at all. Consequently, while you really may have wanted to accomplish this new goal, it could seem that your current reality has not afforded you much room to make it possible.

When it comes to keeping your goals in focus, we understand the challenges many people fact. And so, we recommend the following pointers:

  • It’s okay to set a lofty goal – but keep your feet on the ground.
  • Err on the side of specificity. The more detailed the goal, the strategic you can in its planning.
  • Make sure that the goal is measurable. Being able to track your progress in a quantifiable manner is important.
  • Understand your reality gap. That is, you should comprehend the distance from where you are in your current reality and, as it pertains to the goal, where you would like to be. This will help you establish a realistic timetable for the achievement of the goal.
  • Have a clear understanding of your “why”. Ask yourself some probing questions. For what purpose do you want to achieve this goal? How important is that purpose in your current scope of priorities? And after this goal, what comes next?
  • Know what is needed to achieve your goal.
  • Take stock of the resources necessary to commence work on, and maintain progress towards, the goal.
  • If something is lacking, determine where you can get it, and how long it might take you to do so. Then adjust your timetable accordingly.
  • Plan and write a lot.
  • Transform the initiative that you will undertake into a comprehensive plan, wherein you will have a clear understanding of the goal, the timetable for its completion, the utilization of resources, and your milestones.
  • Use those milestones, such as deadlines or mini-goals, to keep you accountable to your plan and to track the progress to your larger goal.
  • Writing everything down. The practice of journal-keeping will help you to visualize your goals in words and diagrams.
  • You need a support system.
  • Identify someone with whom you can share you goal and be open about your progress. Be sure that it is someone with whom you can be transparent and from whom you can take constructive criticism.
  • There are going to be a lot of negatives. Know them. Avoid them.
  • Do not procrastinate. Without knowing it, you can become your own worst enemy, finding one excuse after another to put off what you need to do, and then, at the last minute, you may be able to deliver your best work.
  • Do not be easily distracted by people, events, or things that arouse your attention in the short term and that usual have no connection to your efforts. Remember that time waits on no man or woman, and you are not afforded the luxury of tacit commitment when it comes to achieving your goals.
  • Do not be swayed by the negative opinions of others. Your goals are your own, and they must stay that way. When someone outside of your circle of influence offers an opinion about a goal or efforts that do not pertain to them, ignore the person, and continue to do your best to achieve your goal. After all, there is no better victory than to suffocate them under the sheer tonnage of your success.
  • Get to work.
  • Do not wait for permission to get started. There is no one there to give it.
  • Commit the time that it takes to achieve your goal within the reasonable timetable that you have set for yourself.
  • Adhere to your deadlines and mini-goals.
  • Use proper time management, to take control of how your time gets used each day.
  • Make your work a habit, until and even after you have reached your goal. It only takes 21 days of consistent effort to turn your effort into a routine that can yield results upon which more effort can be exerted.

The goals we set for our lives are usually meant to improve us. We see them as avenues for new opportunities and growth. But most times, we can lose focus of these goals and why they matter, and with quiet disappointment, or with a bevy of excuses, we just give them up.

Fortunately, none of us should wait for a new year or a new week to start setting new goals and commencing the work to make them real. Indeed, any moment can be our turning point. We simply have to set specific goals, understand their importance, and have the courage, the desire, and the foresight to achieve them.

Now believe. Then start doing.

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Structuring your Fundraising Efforts

When structuring a fundraising effort for a company, entrepreneurs have a lot of intricate details to consider. Structuring the size and price of the offering of equity, of course, is profoundly important, and often enough, a significant stack of documents must be prepared for the consideration of investors. Indeed, there is benefit for cutting corners during this process. And while entrepreneurs afford attention to these details, this consultancy must stress that entrepreneurs must give equal attention to the psychology of the investors.

It is important to remember that, all too often, the entrepreneur and the investor come to the table with different perspectives. For entrepreneur, the company may be the realization of a dream, and his attachment to its success may be driven more by emotional than anything else. Meanwhile, the investor, though committed to seeing the company success, has a greater obligation to the money that he has invested in it.

For his part, whether he is investing his own money or that of limited partners, the investor is basically putting his money to work, with the hope that the investment in this company will grow in value and net him more money in the future. And in a world where investors are bombarded with so many different investment opportunities – from new business ventures to real estate to cryptocurrencies – returns matter. Investors know that, if they want to make the most of their capital, they must put their capital into opportunities that seek and achieve alpha.

Consequently, for an investor, some key questions are very simple ones:

  • How much money do you need?
  • How will you be using this money?
  • What will I get in return for investment in this venture?
  • What are the projections for the growth of this venture?
  • What is the exit strategy?
  • How much money will I make from this investment?

To be sure, the lion’s share of the return on investment may not come before the investor exits the company. However, there are ways that the investor can realize some returns before that time. Here are just a few of those:

  • Dividends – The company can routinely pay out to its shareholders any profits or surplus capital not likely to be reinvested in the company.
  • Fees – The investor can negotiate a deal to be compensated for effort. For example, the investor can be paid to serve on the company’s board of directors, or he can be paid a management fee to provide services to the company.
  • Incentives – Pursuant to the terms negotiated in the deal, the company may be obliged to pay the investor a predetermined percentage of profits (a “kicker”) or a multiple of the investment over a given time.
  • Interest – In the event that the funds raised are categorized as a convertible note, rather than as an equity investment, the company shall be obligated to make interest payment to the investor. Contingent on the terms of the deal, the investor may have the option to convert the note into equity.

When structuring the deal, the entrepreneur must give serious attention to the role that the exit strategy might play. An investor might shy away from a venture that do not present a clear exit strategy. Therefore, the entrepreneur is well-advised to be adaptable. Don’t be too married to a venture, no matter how much time and effort has been put into it; don’t allow ego to block the bigger picture. To an investor, where there is no exit strategy, the entrepreneur might seem to be more interested in building a vehicle to support his own lifestyle than building a company that could be sold off to return a windfall to everyone involved.

The following are a few of the options for exit strategies that the entrepreneur might consider presenting during the fundraising effort:

  • IPO – While an initial public offering might sound titillating, the odds of a business ever selling shares on a stock exchange are quite slim. In fact, only one percent of the 27 million companies in this country are publicly-traded company. Most others are small businesses that – although success, in their own right – do not have the capital or preparedness to meet the market and regulatory requirements.
  • Acquisition – This is the most likely of options, as exit strategy goes, and there are multiple avenues to consider. For example, an entrepreneur and/or the company can put together a package to buy out an investor. Alternatively, funds from a subsequent and bigger round of investment can be used to buy out the investor. And what’s more, the entire company can be sold off to a financial or strategic buyer.
  • Redemption – Prior to placing his investment, an investor might negotiate the right to demand the repayment of his investment (and additional proceeds, where applicable), should the company be found in breach of specified covenants, including, but not limited to, meeting performance expectations. Typically, a redemption is considered a clause of last resort, but it may afford an investor the comfort necessary to take part in an investment opportunity.

Unlike a bank, an investor brings a lot more to the table than just capital. He usually avails his know-how, network, and other strategic resources to the benefit of the company, because he has every reason to help the company grow. Understanding this, an entrepreneur can benefit greatly from aligning the right investor for his business venture, so long as he fully understands the motivations of that investor. After all, growing the company is one thing; helping the investor to realize his return on investment is another.

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