5. Implications and Policy Recommendations for China
long-term bonds by three notches and Moody and Fitch also downgraded AIG by two notches. By the new rating and share price, AIG must pay an additional margin of US$ 32 billion within 15 days to guarantee the safety of its derivatives contracts worth US$2 trillion. To avoid the chain reactions caused by the default of derivatives contracts, AIG held emergency consultations with the New York Federal Reserve Bank and ratings agencies that led to a final agreement on September 22 to acquire a loan of US$ 37 billion from the Federal Reserve to avoid its bankruptcy10 Under the negative • information, derivatives trading brought both international insurance companies and the Federal Reserve into jeopardy.
US financial institutions possessed tremendous financial derivatives contracts before and after the crisis. By the end of 2015, the nominal value of derivatives contracts held by Bank of America amounted to US$ 42.2 trillion, and Citibank held derivatives contracts worth US$34.99 trillion. With a small amount of margin, US financial institutions possessed tremendous initial derivatives contracts to engage in derivatives trading with 50 times leverage. They not only control interest rates, exchange rates and share prices in a certain future period but control the future prices of oil, metals and ores on the commodity futures markets, turning them into instruments to lock up market prices and seek windfall profits. The real controller of the entire derivatives market now appears to be the Federal Reserve. In derivatives contracts with a notional value of US$ 30- 50 trillion ( with annual variations) disclosed by Citibank during 2007-2015, 75% d were m. terest rate swaps 11 an m. terest rate volatility was controlled by the Federal Reserve. After leaving the US Federal Reserve, Ben Bernanke became a senior adviser to Cidatel, which is one of the big four hedge funds and the only fund company in the United States that can engage in hedge fund transactions as market maker to implement the US global financial strategy. This strategy now appears to have continuously pushed up the US stock market, attracting international floating capital to fuel the US economy. By manipulating the price volatility of international bulk commodities and creating pressures on the currencies of emerging economies, this strategy sent emerging economy governments into passive and unfavorable positions.
After three decades of development, derivatives trading turned the U. S. into an economic casino and global financial markets into a financial casino despite resistance by France and Germany. After the storms of the global financial crisis, this financial casino is once again tamed by the Federal Reserve and turned into a financial "weapon of mass destruction" against other countries and regions. As Warren Buffett put it in 2008, no one is willing to profiteer from selling short on his own country. But selling short on other countries is quite frequent. The rollercoaster volatility of China's stock, bond and futures markets alarmed the Chinese public about the gambling nature of financial markets. However, Chinese authorities expect to create a wellfunctioning financial market ( including a derivatives market) to ensure a certain degree of pricing power for China in the international financial market.
Judging by the current situation, however, not only is this expectation likely to fall short but China may pay a heavy price in an asymmetric financial war as well. Indeed, the US government does not wield dominant control over its economy, which is over-reliant on financial markets and lacks momentum of growth. Yet instead of repeating the boom-bust cycle as had been previously the case, the US economy is now able to transfer its domestic 1° For a detailed account of the process, please refer to AIG Annual Report 2008, Form10-K, pages 1-2. u See Citibank's annual reports 2007-2015 (derivative nationals page).