General Zhao arrived in Hong Kong five and a half weeks before Dragonstrike was launched. He entered as a civilian. Phillips sent his car to meet him at the airport. Instead of a meeting at First China's downtown headquarters in Central district on Hong Kong island, the General was driven to Phillips' house on the Peak. It was set well back from the road and was overlooked by no one. Phillips was there to welcome the General personally.
`I'm sorry I couldn't be at the airport to meet you,' Phillips said with ritualistic politeness, `but you said in your fax that you did not want attention drawn to your visit. Anyway, welcome and how are things in Beijing?'
`Cold,' General Zhao said, somewhat stiffly. `I don't have much time. As you know I'm returning to Beijing tonight. Shall we get down to business? We at Multitechnologies have decided to broaden our involvement in financial markets. We have decided that we want to trade currencies and oil and that we want you to be our agent. It is vital, Damian, that we and indeed China are in no way connected to the activities I am about to commission you to execute on our behalf. Do you understand?'
`Completely.'
`Good, well, let's move on, then,' he said.
General Zhao proceeded to outline to Phillips Multitechnologies' plan to play the foreign exchange and oil futures markets. He gave him a list of international banks — mostly second and third-line institutions keen to increase their involvement in foreign exchange — with whom he would parcel out his currency trades. His purpose was to accumulate US dollars and sell the Japanese yen. To buy dollars he had to sell another currency, and he wanted First China to borrow yen and sell them for dollars. Phillips thought that although the yen had not been particularly strong lately it would have to fall a considerable amount: for an investor to make much money out of selling it he would have to expect the yen to fall sharply so that when the time came to pay back the loans in yen — either prematurely or at maturity — the price of yen would have fallen to well below the initial purchase price. This is precisely what the General appeared to believe. However, he could not be seen doing it. Therefore if on any given day he bought $100 million through one bank, he should sell $20 million through another. His net accumulation would be $80 million, but the market would see him as trader, as a buyer and seller. When Phillips questioned the investment strategy all the General said was that First China would be indemnified. In all he wanted First China to have accumulated by mid-February debts own as `yen-shorts' — between $1.5 billion and $2 billion in yen-short positions. With the yen trading around to the dollar, these debts should amount to about bn.
Similarly, though on a smaller scale, First China was to build up a large position in the oil futures markets in London and New York. In the jargon of the financial markets, the General wanted First China to go `long' of the dollar and oil and `short' of the yen. The oil trade would, however, have to be for much smaller amounts. Though the markets were large they were purely private markets with little overt government interference. Zhao said he did not want to get involved in problems of counterpart risk. `The whole operation would be blown apart if we try to collect on a deal and find we have bankrupted Morgan Stanley,' he said, adding with a rare note of levity, `as pleasurable as such an outcome might be.'
Having explained the purpose of the transactions Zhao then told him how he wanted First China to account for the trades. This entailed parking the proceeds of all transactions in companies registered in the British Virgin Islands (BVI). There were seven banks he was authorized to deal with, but there were fourteen BVI companies for the currency trades. This was to enable the segregation of purchases and sales of foreign currency with each bank, and meant that transactions could be ring-fenced if the prying eyes of regulators should spot something unusual. If one of the banks asked First China who its client was First China could truthfully answer that it was acting for a private investor operating out of the BVI with a company called Bright Future, or the like. If a regulator got wind of something and wanted to freeze assets the fallout would be limited to one company. The oil futures trades would be held in one BVI company, although First China would trade in its own name on the International Petroleum Exchange in London.
As General Zhao sat down on the first morning of Dragonstrike he was in expansive mood. He explained to the President in meticulous detail his contacts with First China and the trades they had been making with the banks over the previous four weeks. He opened the satchel that was resting on his lap and produced a small stack of spreadsheets. These showed each British Virgin Islands company and the size of its position against the yen. Over the period First China had been able to build up for Multitechnologies a short position in the yen of some billion. Multitechnologies would make big money if the yen weakened to around to ¥160 to the dollar. Phillips had accumulated yen at an average cost to Multi-technologies of. It was currently trading around to the dollar.
`Did anyone detect us?' the President asked.
`No, we don't think so,' said Zhao. `There was a speculative report over the Bloomberg financial wire about First China. Their activity in the foreign exchange market in London had been noted. But Phillips handled it well. The overall operation went without incident. Sir, it is worth remembering that average daily turnover of foreign exchange is $1.2 trillion. In Tokyo alone the dollar/yen and dollar/euro trades are nearly $20 billion. So our activity, especially as we're buyer and seller, largely went unnoticed.'
`Profits?' the President murmured.
`We think the yen could fall by 20 per cent or more during the course of this conflict,' Zhao said. `That's a billion profit when we close the short position. But it's a conservative estimate; the yen could go a lot further, given the Japanese hypersensitivity about oil. The beauty of the deal for us is that when the yen begins to fall we will be one of the only buyers of yen in the market. It won't be at all difficult for us to cover our positions.