Riding the wind of rebirth

By 1996, although the situation of insufficient national foreign exchange reserves had begun to improve, the embarrassing situation had not yet been resolved.

The awkward situation is not due to a lack of foreign exchange reserves, but rather that the growth rate has not kept pace with the country's GDP growth rate of 10 percent per year for more than a decade.

In other words, the foreign exchange gap that the country needs for economic activities has not shrunk, but rather expanded. It's like a steamed bun with a small opening before it's cooked, but it's not very noticeable. Once it's cooked and expands, the opening actually widens.

This situation can only be resolved after more comprehensive opening up, especially after joining the WTO and achieving greater trade freedom. Currently, it can only be replenished from the $100 billion reserve base, which is very difficult.

The country is still focused on economic development, so this $100 billion is mainly used to determine the scale of foreign trade. The size of the pool determines the amount of flow, and the amount of flow determines the turnover of business. Exceeding the warning line may cause a financial crisis. Therefore, there is a proportional relationship between them. Reserves will become a prerequisite for restricting the scale of foreign trade, which determines the export capacity. Therefore, the proportion that can be allocated to scientific research institutions for technology introduction is very small.

This has become a pain point for places like bases and post offices.

So when Zhou Zhi proposed that payments could be made in US dollars and that the margin pool could be filled with US dollar loans, Liu Yushu knew that the matter was basically settled.

Everyone will work their hardest to make this a success.

Zhou Zhi actually knew that was pretty much the case, but he still decided to give Liu Yushu a heads-up: "Sister Liu, what we have here can only be considered an experiment. After the whole mechanism is established, the next step you should consider is the Hong Kong dollar channel."

"Why?" Liu Yushu asked.

“Because we can only be considered as Brother Li’s vanguard, he is now waiting for us to succeed and then follow suit,” Zhou Zhi said. “At that time, the cooperation between Yangtze Communications and the two units will be on a larger scale than it is now. The earlier you get involved, the easier the work will be in the future.”

"I understand." Liu Yushu smiled and said, "Thank you, Elbow, for providing such important information."

On the way back after seeing Liu Yushu off, Mai Xiaomiao said with a smile, "They really take the rules to the extreme, and they will take advantage of any loopholes they can."

“Yes,” Zhou Zhi said, “Isn’t this how it is in finance all over the world? Exploiting this loophole now is actually harmless, but if a country is exploited by others because of a financial loophole…”

At this point, he suddenly stopped.

"Thinking back to the European currency crisis?" Mai Xiaomiao now knew some of Zhou Zhi's secrets. Mainly, when they were debugging the quantitative trading model, Li Laosan couldn't help but brag to Mai Xiaomiao that the currency crisis was a big fish the two brothers caught, and even laid the foundation for the basic scale of AXA Fund and its subsequent development.

"No, it's something else I was thinking about," Zhou Zhi said. "Because Sister Liu mentioned the urgency the country has for foreign exchange reserves, I thought about the relationship between foreign exchange reserves and the scale of economic development."

"Xiao Miao, what if there's a situation where a small country has relatively low foreign exchange reserves but has absorbed too much foreign debt in the money market, and has also pegged its local currency to foreign currencies? If a bank run occurs, wouldn't it destroy the country's economy?"

"Won't those countries control it?" Mai Xiaomiao asked, linking arms with Zhou Zhi as they strolled under the moonlight. "Knowing that too much foreign debt will lead to an inability to repay it, why do they still borrow so much foreign debt?" "They learned it from some countries," Zhou Zhi said. "But they didn't learn it completely."

“Oh, right,” Mai Xiaomiao recalled a fact: “They learned from the US. The US has a lot of foreign debt, but we haven’t seen an economic collapse, have we?”

“That’s because no financial power has the ability to create a run on US Treasury bonds,” Zhou Zhi said. “It’s like I’m a wealthy man, and I have twenty dollars in my hands. If I invest half and use the other half as collateral, then I can only do business worth ten dollars.”

“Now, with this initial twenty yuan, I can borrow ten yuan, and then I will have thirty yuan in hand. Of these thirty yuan, I will still keep ten yuan as a minimum, so the investment amount can become twenty yuan.”

“Even if the creditor comes to collect the debt, I’m not afraid, because I only borrowed ten yuan. Besides the investment, I still have ten yuan as a safety net. I’ll use the remaining ten yuan to pay back the creditor, and I can still keep my twenty yuan investment.”

"But if I use this initial twenty dollars to borrow another twenty dollars, or even use that borrowed twenty dollars to borrow another forty dollars, and then keep ten dollars as a safety net, I can invest the remaining seventy dollars..."

Mai Xiaomiao understood: "If the creditor comes to collect the debt and you only have ten yuan left in principal, you won't be able to pay off the sixty yuan in debt. Then this glamorous boss of yours will have no choice but to go bankrupt."

Zhou Zhi was both amused and exasperated: "I would never do such a thing."

"If you can't do it, why do you think others can?" Mai Xiaomiao laughed. "Besides, it's a country. In a country, do you think no one would think of the situation you described and allow their finances to have such a big flaw? I don't believe it."

"Xiao Miao, are you underestimating the efforts, determination, and even risks that developing countries have in order to embark on the path of development?" Zhou Zhi sighed inwardly, recalling the crisis that had occurred at his doorstep in his previous life: "Or perhaps, the greed in people's hearts?"

“Whether it exists or not is easy to investigate,” Mai Xiaomiao said. “Why don’t we talk to Third Brother and have Xiaozhi run a model? Anyway, we’ve collected detailed data from financial markets all over the world for our high-frequency quantitative trading model, so we can check and see if any countries are really that stupid.”

“That’s right! We have the data now, so why are we still speculating here?” Zhou Zhi breathed a sigh of relief. He had managed to come up with an excuse, and now he could use it as a pretext to begin the preliminary work for the financial crisis: “I’ll call Third Brother in a bit and tell him our ideas. I’ll ask him to come up with a requirements document, and we’ll turn it into a model and give it to Xiao Zhi to run around with.”

"Elbow, if such a situation really existed, what would happen to those countries?" Mai Xiaomiao asked.

"Then let's do as you said, go bankrupt."

"Really? Won't the investors also suffer losses? Those who provided the external debt. They wouldn't want that to happen, would they?"

"Why can't it happen?" (End of Chapter)