Chapter 2554 - Subsequent Issues
"My personal recommendation regarding this paper cotton incident is simple: pretend we never saw it," Chu He said.
Li Shan and Zou Biao stared at him in astonishment. A speculative crisis of this magnitude—a financial storm—and his advice was to look the other way?
"This..." Li Shan sputtered. "It's such a significant matter."
"I'm not being alarmist. This is actually the consensus view among financial circles." As Chu He spoke, Ren Youzi nodded in agreement.
"But cotton is a livelihood essential. This kind of behavior amounts to cornering the market and disrupting supply. Surely it could be prosecuted as an economic crime..."
"Economic crime prosecution isn't the problem. But this doesn't really qualify as cornering the market," Chu He replied. "And the risk is considerably less severe than you gentlemen imagine."
Paper cotton trading wasn't true market manipulation. It differed fundamentally from the "Two Whites and One Black" campaign in Shanghai just after Liberation. Spot cotton circulation remained unaffected—prices were simply high and supplies scarce, but there was no hoarding. The real issue with paper cotton was unregulated speculation.
"Secondly, the greatest risk in futures trading isn't the sale of delivery receipts themselves—it's that these receipts operate on margin, allowing traders to leverage themselves to extreme heights at the trading center. Guangzhou's paper cotton market hasn't adopted a margin system; it requires full cash payment for warehouse receipts. So there's no high-leverage trading to worry about. Third, proper futures operations allow for risk hedging—you can't only buy long; you must also permit shorting. You need both bulls and bears to achieve true hedging..."
Seeing that both men across from him wore expressions of utter bewilderment, Chu He abandoned further explanation and cut straight to his conclusion: "In any case, you only need to understand that this paper cotton business won't trigger a serious financial crisis. Many people will certainly lose their fortunes, but the damage will remain confined to them and their immediate circles. It won't significantly impact the broader financial market. In this regard, I must acknowledge that traditional strict lending practices have actually helped contain the crisis."
"So you're saying this won't cause widespread turmoil?"
"There will be some turmoil, certainly, but nothing severe. It won't threaten social stability—you can rest assured on that point," Chu He said. "By our estimates, the total capital involved in paper cotton speculation shouldn't exceed 150,000 yuan. Relative to the cotton textile market's overall scale, it's not particularly large."
"150,000 yuan is already a staggering sum!" Zou Biao exclaimed. "Many people in this city earn only two yuan a month!"
"People earning two yuan a month don't have the capital to enter this game in the first place. To participate, your household needs to produce at least a hundred yuan on demand—especially in recent months, when no warehouse receipt has been priced below fifty yuan."
Fifty yuan was a significant sum not just for ordinary Guangzhou citizens and villagers, but even for mid-level naturalized citizen cadres. The speculation's scale was considerable by any measure.
"Even so, this round of speculation has grown substantial. I believe we should establish a state reserve system to reduce the risk of such incidents in the future..." Zou Biao said. In the 18th century, cotton and cloth were undeniably strategic materials—perhaps second only to grain, but no less critical than coal and iron. For such strategic goods, state reserves offered the most effective means of managing abnormal price volatility.
"...Establishing national reserves makes sense both politically and economically. Consider this paper cotton affair: when the market collapses, if the state reserve steps in with large-scale purchases, it wouldn't represent an economic loss. Cotton prices will continue rising in the long term. When the time comes, the reserve could release supplies to the market at a slight premium, or at par—either approach works."
Li Shan watched Chu He and Ren Youzi's expressions carefully. Both listened attentively, nodding occasionally, but their subtle expressions betrayed complete dismissal of Zou Biao's proposal.
"Strategic material reserves are certainly reasonable in principle, but honestly, there's no necessity for them now, and they wouldn't solve any problems," Chu He said. "They might even create new ones."
"Why?"
"First, this paper cotton crisis doesn't affect supply—as we've already explained. It's merely a primitive, crude futures market; this isn't the same as cornering. State reserves can certainly regulate market order effectively, but that requires having supplies to reserve. If current supply barely covers production needs, what exactly would we store? Expanding cotton supply sources matters far more right now than stockpiling. Only after we've secured stable sources and the market has surplus cotton to spare can we discuss state reserves. At present, shipping capacity from the South Seas, India, and Northeast Asia is limited. These regions haven't yet developed the specialized cotton cultivation they would in later eras. Planting area and output remain unpredictable, with no reliable cotton suppliers to speak of. So state reserves can't be established in the short term. And once created, such reserves become yet another massive bureaucracy—storage inevitably means enormous losses, requiring a complete inventory auditing system. The Senate's current state grain reserve system is already stretched thin. Adding cotton is out of the question."
Ren Youzi continued: "Why must everything require state reserves? If factories sign long-term agreements or forward contracts directly with plantations, market fluctuations should have almost no impact. During economic upswings, some small businesses going under isn't a major concern—someone will absorb them soon enough. If we truly must give everyone a means of speculation and hedging, we still need to establish proper futures contract mechanisms. Frankly, given the current situation, there's little necessity for a futures market at all."
Chu He added: "At this stage, if we pursue futures trading, the focus should remain on forward transaction price agreements aimed at physical delivery—not leaping straight to a futures exchange. Once leverage enters the picture, all bets are off. Take too large a step and you'll tear something."
Li Shan and Zou Biao found themselves thoroughly lost amid the two men's eloquent discourse, yet they couldn't formulate any concrete rebuttals. After all, they hadn't come here to debate.
"Fine. You've made your arguments. But specifically, how do we 'not intervene'?"
"First, ban paper cotton trading outright. Then investigate all warehouse receipts currently circulating. Those issued by entities without physical shops, or by people not even in the cotton-cloth trade—purely fictitious receipts—that's economic fraud. Prosecute it as such. Those who purchased these receipts are victims. When the criminals are caught, recover the stolen funds and return them proportionally. Of course, full recovery is unlikely—the victims will simply have to consider it an expensive lesson."
Naturally, regardless of whether the criminals could even be apprehended, recovering all stolen funds remained pure fantasy. Li Shan smiled wryly: "That's quite an expensive tuition!"
"If it weren't expensive, how would it count as a lesson?" Ren Youzi continued: "For warehouse receipts legitimately issued by cotton-cloth merchants, regardless of the ultimate market outcome, those merchants are the final clearing entities. When receipts come due, require them to honor their obligations. If they can't, treat it as bankruptcy—a civil economic dispute. Adjudicate according to relevant statutes. Of course, we'll give them an opportunity to negotiate with receipt holders and buy back the paper at an agreed price—how that goes depends on the negotiations."
"So in the end, it all comes to nothing," Li Shan said. "Another tuition payment."
"Naturally. Speculation always carries tremendous risk," Chu He replied. "Paper cotton has neither a compliant issuing entity nor a margin system to guarantee delivery. It could absolutely be classified as fraud. The trouble is, this problem isn't really about futures per se—the entire corporate governance system and our fiscal-financial framework are severely lacking in relevant laws and regulations."
He had been mulling over this problem for some time. Now the topic drew out his thoughts.
"Consider, for instance, the current push for company registration. We've essentially introduced the modern limited liability company system without the corresponding corporate governance requirements. Questions of apparent authority, shareholder rights, bona fide third parties, equity transactions—all massive pitfalls.
"This isn't directly related to paper cotton, actually. It's more that after this financial risk began emerging, I suddenly felt we should take stock of Guangzhou's corporatization reforms as a whole.
"The current reforms—so-called limited liability companies, foundation legal persons, religious legal persons, and so forth—are actually quite dangerous given our present circumstances.
"Several fundamental issues embed enormous risks.
"First: as large numbers of commercial entities become legal persons, especially with the introduction of 'limited liability,' where is the corresponding bankruptcy and liquidation system? With multi-layered shareholding structures and no comprehensive commercial registration or data accumulation, how do you pierce the corporate veil? How do you identify the actual controllers? The risks of money laundering, tax evasion, and legal violations will rise dramatically. Especially if bureaucrats establish multiple layers of shell companies to engage in insider trading, or simply shift funds from left hand to right, converting public money into private gain—investigations become extraordinarily difficult. Are we to rely entirely on Cheka for internal inquiries?
"Second, lending risk: in an era without sound credit systems, collateral-based lending works well enough. But what about companies mutually guaranteeing each other and committing loan fraud?
"Third, commercial registration data cannot possibly interconnect across regions. Once you leave Guangzhou, verification becomes essentially impossible. So how do you resolve identity issues in commercial contracts? How do you handle apparent authority disputes? You might suggest verifying seals and signatures—but these things in the Ming Dynasty are virtually unrestricted in replication. How do you address that? In traditional commerce, people knew each other personally. Now with legal personhood, how do you identify clerks or account managers?"
(End of Chapter)