Future of P2P: implications of MGM vs Grokster ruling

The Supreme Court in US ruled on Monday, see details in EFF, and Village Voice.

1) it only affects USA. Canada, e.g., is still a free country for P2P.

2) Betamax is still sacred. Hollywood will have to prove "intent", which can be tricky for some

3) It is widely believed that Bit Torrent will be safe, because it always declares the purest and most innocent intent.

4) some P2P will be proved of 'guilty intent', some will not. the future will be messy and costly for Hollywood. see this, e.g.

5) other legal circumvention will be invented, a few examples:
a) separate the technology supplier from the advertising revenue generator, with a contract paying the technology supplier a revenue proportional to that of the advertiser.
b) one technology supplier for several off-shore advertisers, hence insulating the technology supplier (who also has customers who share only legal contents -- therefore the technology has substantial use which respects copyrights )

6) other technology innovations to mask content and user IP address identifications


China's migrant worker: unlimited labor supply?

To understand how China was able to maintain such a stable and cheap source of labor one has to understand a little about China's demography, geography and society.

There are 1.3bn people in China, about 0.4-0.5bn in urban (depending on definition -- and increasing) and 0.8bn in rural areas according to official statistics. According (and thanks to) David (DOR) the working population is 58% of the population or 752M (not sure how many migrants are included in this number), urban employment is 265M (likely to be based on 'official residence', i.e. not including migrant workers). Recent estimates put the number of migrant workers to around 130M, which means the real urban working population is close to 400M vs about 350M(up to 480M) in the rural! This observation has a few implications:
  • The total number of urban working population has already surpassed that in rural
  • With improved productivity in rural area, the total number of workers needed is likely to stabilize at certain number (maybe between 300-400M?), since the total area of arable land is unlikely to increase (in fact, more likely to decrease due to further industrialization and improved productivity, worker to hectare ratio in agriculture will also change slowly) and population growth is more or less contained
  • In the past 12 years wages have only risen by 1%/year, mainly because there has been virtually unlimited supply of labor from the rural, but...
  • Lastly but most importantly, there cannot be an unlimited supply of cheap labor from rural China (according to Dali Yang). The labor cost in China has to rise when the new supply from rural can no longer meet the growth in demand, which is about where we re today. There has already been early reports in Guangdong in 2004 that for the first time since 1980 local factories have difficulties recruiting new workers (see here and here). So the wages have to rise and hence all costs in China, which will be followed by inflation, and maybe currency appreciation as well?


p.s. When I was making business trips in China, I often took some time to learn about the lives of the people there. In the beginning I talked to taxi drivers, as a way to kill time during traffic, and also to understand their lives, hence the market I was trying to study (I started as a strategy consultant, with clients from different industries). Later, I began to talk to other staff I met in the hotel and various establishments such as restaurants. I found these conversations very educational, both to me as a person and also in understanding the business implications. I was also able to form my own longitudinal studies of the lives of the lower middle class in China during the past 10 years.

As it turned out, many of these people I talked to are the so-called "migrant workers", which generally referred to people who came from the less developed (mostly rural) areas to cities to find jobs. The more I got to know them, the more I sympathize with their situation. They have no insurance or benefit, working 70-80 hours a week, no proper holiday, no job security and are discriminated by city residents (e.g., a typical phrase for mismatching is "migrant worker marrying colleague graduate girl"(大学生嫁了民工), synonymous to the derogatory "toad eating swan meat"(癞哈蟆吃天鹅肉)). Technically it was illegal for them to stay in the cities and they were often persecuted by the police before the Sun Zhigang incidence during the SARS period in 2003, in which a college graduate from rural Hubei was beaten to death by police in Guangzhou. Only after that incidence has been widely reported in the media (including the internet) the the "Custody and Repatriation" rule were formally abolished and migrant workers were officially permitted to live and work in the cities.

If you want to know more about the lives of these migrant workers, Wall Street Journal has run two very good articles about the life of the migrant workers. An abstract can be found here.

RMB according to bigmac index

The Economist has been using the Bigmac Index as a reference point for comparing currency exchange rates. They claim that it has been working pretty well, ridding the drawback of the official forex rate which does not reflect purchasing parity (PPP) while compensating the PPP definition by including local cost factors such as labor and rent. Most important of all, bigmac (as claimed) has the "exact" quality across the world, and therefore can be looked at like a commodity item for price comparison, while retaining various valuation factors of social production cost elements (such as labor, rent, etc.).

Now how does RMB perform in this measure? (source: The Economist)
______Bigmac price
Year US/USD China/RMB X-rate undervaluation(%)
1997___2.53_____9.7____ 8.31_____ -54

It can be seen that there has been less than 10% change in the bigmac exchange rate from 1997 to 2005. If, as widely believed at the time, RMB was over-valuated in 1998 after the Asian financial crisis, how can one argue that RMB is under-valuated today? Even if one assumes that the valuation was fair in 1997/1998, RMB was only undervaluated by 10% (=59/54-1) today. The bigmac rate might be inaccurate, but it is a good indicator for longitudinal comparison for the same currency. (e.g. price will usually be adjusted if there is an overshooting correction in the exchange rate such as that in SE Asia and S America)

One may argue that RMB has been under-valued all the time (by 50%+), then why is China the only target chosen for 'currency manipulation' accusation? Based on the 2005 table, many countries has similar "under-valuation" as China's. e.g. Indonesia (-50), Philippines (-50), Thailaind (-52), Hundura (-38), Paraguay (-53), Argentina (-46), Qatar (-78), Russia (-52), Ukraine (-53), Egypt (-49), etc. Selective discrimination in trading is not allowed in WTO, I thought. What about Oman (+109), Iceland (+118), Kuwait (+142), Switzertland (+65), Denmark (+50)? Should they be suing US (and everybody else in the world) for currency manipulation? To be fair, yes, RMB is definitely undervalued, but it was just as undervalued as it was in 1997/98 when there was a huge pressure for DEVALUATION. Nothing much has changed in terms of trade or economic balance in the world since then. What has changed between these years are (1) the weight of China trade in the world equation has increased (2) the productivity and product quality in China has increased, and (3) product category widen. A change in exchange rate does not change these economic fundamentals. In other words, changing the RMB exchange rate by, say 10%, is not likely to change the world's trading flow much.

Maybe it is Uncle McDonald's fault? Should Uncle McDonald be sued for dumping in China, Qatar and Ukraine? It is hard to imagine McDonald's, as a business operation which prices its products rationally, is giving away bigmacs in China. So I should probably accept that McDonald's is pricing competitively and reasonably, and therefore, the bigmac index reflects a rational business decision of a major profitable international corporation. Then if McDonald's is not complaining about currency manipulation and Ukraine is not complaining about McDonlad's dumping, perhaps there isn't much we should do to change the RMB peg?


RMB revaluation - the commodity peg scenario

This has become one of the most discussed and speculated topic.

The consensus is that revaluation is inevitable, and is only a matter of time.

But how will it be changed? There are a few scenarios:
a) widening the exchange rate gap, say, to 3%, 5%, etc. (widely viewed as the most likely)
b) artificial adjustment of the exchange rate (as done in (pre-)1994, arbitrary and invites speculation)
c) re-define the peg into a basket weighted by various currencies (e.g. include Euro, Yen, etc), such that at the date of change the two definitions yield the same valuation for the Yuan - not too different from what many countries were doing before the 1997 crisis . But the Singapore proxy is the most likely one, as China has good faith in Singaporean system. There will virtually be no change at the date of de-coupling (not to reward speculator), and the new basket will be weighted by China's trade (mainly import) volume.
d) re-define the peg in other ways - see below, the implementation will be similar to (c) above, no significant change in value at first, only shift of peg. "crossing the river stone by stone" (摸着石头过河).
e) let it float freely -- not too likely in near future, before the various banking problems are fixed

The Commodity Standard

Among these scenarios, a variation of (d) advocated by Stephen Ng Sheong Cheung in early 2004 (published in The HK Economic Journal) is particularly interesting. It is a redefinition of the peg, but not to the dollar, instead, to a basket of commodities, including oil, steel, corn, etc. The basket of commodities are chosen such that it represents, and is weighted by China's import of raw materials. The number of commodities should be chosen so that it includes the top 5-10 commodities, with a wide enough variety (e.g. to include food, fuel and metals). In theory, one can also add commodities/goods China exports as a negative weight element, though that would make the scheme more complicated.

This is essentially a variation of the Gold standard widely used in the world prior 1971 (the price of gold relative to its industrial application is way overvalued, compared with, e.g. silver or palladium), with some twists. The reasons this works include

  • The commodity portfolio represents China's import portfolio, so a change in commodity price will be reflected in the change in China currency. It saves importers in China the cost of hedging, hence saving business costs across factories in China. The hedging job will be up to the Central Bank, which needs to purchase the commodity futures or physical resources based on the estimated import demand. What it does is analogous to backing up the monetary supply with the commodity basket (rather than gold).
  • The scheme with a basket of commodities is a lot more feasible to implement today, vs pre-1970s, because it is a lot easier to calculate a complicated index and there is a much larger and more liquid market where one can trade today. Therefore, it is also easy for the Central Bank to hedge the commodities to back up the currency.
  • It makes the speculator's job a lot more difficult, because one then has to attack the whole range of commodities in the global market to attack the Yuan "peg". Oil price, e.g., is not easy to be manipulated by George Soros ,or even by George W Bush.
  • This scheme does not tie the interest rate (and hence the economy) in China to that of the US. So the economy in China will be allowed to go its own way. Instead, the scheme reflects the reality of China's needs in trading.
  • However, one should note that Central Bank "intervention" is still needed, because it has to stock up enough futures contract to "back up" the currency. I used quotation marks for "back up" because it is not really a "commodity standard" system and the bank notes are not fully (100%) backed up. Because RMB is still not fully exchangeable to a foreign currency, one only needs to back up the amount that is allowed to be exchanged. So this system is more difficult to maintain if the exchange is fully open.
  • An additional benefit is that by doing this one also automatically imposes certain disciplines in monetary supply, well, almost.

The caveats

  • Note this scheme is still artificial. What it does is to have the currency board (or Central Bank) trying to anticipate import demand. In a free floating scheme the value of a currency should be tied to the goods a country is exporting, instead of importing. e.g. Without a currency board the value for Kuwaiti and Russian currency should rise as the oil price rises, and Yuan would rise if the prices of clothes and furniture rise but fall if oil price rises. But there are reasons why the imported commodities are chosen even though it seems counter intuitive and requires a lot of intervention from the currency board. This will be explained later in the "implication" section.
  • While this system makes a lot of sense, except for the caveat above, for it to be applicable to other countries a true 'commodity standard' may be needed. e.g. The full backup is certainly doable for HK, where the Monetary Authority has enough cash to back up all issued notes. But it does not make too much sense as raw materials are not the crucial import for HK, and consumer goods do not have a good price reference as commodities
  • (edited to add) as pointed out by Brad sister, an interruption in supply (or miscalculation by the currency board) will make the management challenging and costly. Although the country has to pay the price when supply is interrupted, it should not be the currency board's responsibility to forecast the prices for import goods. But then is this worse than pegging to one single foreign currency?

The implications:

  • Speculator: RMB is not up for speculation. However, if China does pursue this option, the demand for commodity will be squeezed and a long position will likely to be a smart choice. The long on mining companies and currency in metal and oil exporting countries will also make sense. In fact, China will become a major force influencing the commodity prices, or competing for these natural resources, which is what she should have done regarding oil and steel many years ago
  • Chinese businesses (and foreign invested manufacturing facilities): the commodity prices will be a lot more stable in RMB, because now the price of oil and steel are synchronized with the RMB
  • The average Chinese people: their purchasing power does not change a lot when commodity prices change. The currency will be effectively appreciated.
  • George W Bush: there is no need bullying China to appreciate RMB, because by going into Iraq and failing to suppress oil price, RMB will be appreciated by definition. On the other hand, the only way to change the RMB valuation is by changing the commodity price it is pegged to. The good news for US is that USD and RMB are unpegged. The seeming "bad" news is that RMB will not be appreciated, since a continuity in valuation on the date of re-definition will be ensured.

In reality, a basket of Currency is more likely to be adopted first (too much risk as no one tried the commodity peg before and China does not have the expertise to manage complex financial derivatives). As China will be "crossing the river stone by stone" (摸着石头过河).

--- draft June 2nd

Sun Bin - The crippled strategist


This is the first post in my blogging trail, or trial, in which I would like to introduce Sun Bin (孙膑). Sun Bin was one of the greatest strategist in history. He was crippled as he lost his knee-caps, but he was anything but lame. He also wrote his own Art of War.

He was said to be a descendant of the renowned Sun Tze. His brilliance outshined his classmate Pang Juan (庞涓). Pang became jealous and tricked him, which resulted in his loss of knee caps in the State of Wei (魏).

Sun managed to escape to the State of Qi (齐), and re-started his career there, advising Tian Ji (田忌). He demonstrated his brilliance by helping Tian to win a horse racing against The King of Qi.

The problem was fairly simple. But it was remarkable he solved it 2500 years before operation research was invented.
Tian had 3 horses, let's call them A, B, C.
Horse A was from the top breed and the fastest, B the middle breed, and C the slowest.
Tian and the King gambled by holding 3 races. It usually started like this: Tian's A breed vs King's A breed, and so on. Every single time Tian lost by split seconds in all 3 races.
When Sun heard about this. He told Tian Ji if he listened to him, he would definitely win the next race.

So what was Sun's trick? You are welcome to post your solution as a comment or email me to ask for the answer.

(Today this problem is still widely applicable in a number of a places, e.g., the Thomas/Uber Cup in Badminton World Team Champions. It is also a classical problem in game theory)

Among his well known ploys are:
Tian Ji Sai Ma (Horse Racing for Tianji 田忌赛马)
Wei Wei Jiu Zhao (Besiege Wei to Rescue Zhao 围魏救赵)
Jian Zao Huo Di (Reducing Stove To Fool Enemy 减灶惑敌)
Jin Chan Tuo Ke (Shedding Shell Like a Cicada 金蝉脱壳)