China – the biggest paradigm shift in a century?

By Steen Jakobsen,
Chief Economist & CIO / Saxo Bank
  • The 19th National Congress of the Communist Party of China starts next week
  • It will be the single biggest event this year, of unprecedented significance
  • Xi will cement his position and secure his legacy at the Congress
  • China is changing and has changed more than the market gives it credit for
  • Under Trump, the United States has abdicated its global role
  • What we are witnessing is a geopolitical reality show
  • The rise of China and the decline of the US will spawn a new FX king!
great Hall
 The 19th National Congress of the Communist Party of China will take place at Beijing’s Great Hall of the People, starting October 18.Photo: Zhao jian kang / Shutterstock.
The 19th National Congress of the Communist Party of China kicks off next week in Beijing and promises to be the single biggest event this year for financial markets and the international balance of power. This makes it a true paradigm shift – an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way. That’s exactly what this Congress will be and it’s the reason why it is of historic significance for each and every one of us and for the global economy.
Let’s throw some context around this. China already leads the world in credit creation, growth and now in most technology fields. My take remains that President Xi will focus on quality over quantity, that reducing pollution is the number one social issue in China and that the Party is taking more and more control. The net output will be:
  • Lower than expected growth for the next 18 months (while China converts its economy from export engine to one of productivity gains – President Xi wants 2010 GDP per capita doubled (Rule of 72= 72/7% GDP per year = 10 years) which means an objective of 7% growth per year, but most of this will be productivity driven which means investment first (hence lower growth), then higher.
  • Reduction of pollution = electrification of cars –  by 2030 100% of cars will be electric vehicles – this will catapult China to leadership in battery technology, E-engines, and pollution reduction. (Don’t forget that from 1900 to 1910/13 the US went from 100% horse carriages to 100% cars!)
  • High ratio of R&D and innovation to gain leadership. China is already dominant, but will be even more so in E-commerce, payments and fintech. (See McKinsey report below).
  • Slow gradual openness in capital account, more access to the market for foreigners and a big focus on converting global trade from USD to CNY.
  • Weaker CNY post-congress.
  • Major negative credit and growth impact on the rest of the world.

Change comes much faster than we human beings like – our brains are simply not designed to accept quick changes, and one of the few shortcomings of the brain is that it likes (and uses) the recent past to extrapolate the future. We think in a linear fashion but world the evolves in a super log-normal way. An excellent example is seen in the pictures below from New York in 1900 and 1913. Notice the difference in street traffic in the space of just 13 years.

I think the next 13 years will surpass those years in way back then in New York in terms of change, dynamics and how we act, analyse and live.

NYC 1900
NYC 1913
The upcoming 19th Party Congress is highly anticipated but we technically know most of what will be said courtesy of the modus operandi of The Party and the excellent work by Charles Panton(*) “predicting” the President Xi speech at the 19th Chinese Party Congress. Turns out most of  it is “given” and here is my copy-and-paste from Charles Panton’s work:

(*) Charles Parton worked as a diplomat in both the British and EU services, spending much of his career in China. Since retirement, he has set up his own consultancy, China Ink, as well as being London Director of China Policy and Special Adviser on China to the House of Commons Select Committee. He is shortly to return to Beijing as Internal Political Adviser to the British Embassy.

  • …a constant theme of Xi Jinping’s speeches is the need for innovation.
  • …he (President Xi) was in charge of the drafting of the report delivered to the 18th Party Congress by his predecessor Hu Jintao.
  • The deeper purposes of the Congress and the report are to reaffirm the Party’s importance to itself and to the nation.
  • “Ecological Construction‟, added “Making Great Efforts to Promote Ecological Progress”. Neither addition is surprising, given that Party legitimacy would be threatened by popular dissatisfaction if areas such as education, health, social security, as well as pollution and food safety, were not put higher up the political priority list.

There are likely to be 13 major sections….(See table below for 16th,17th and 18th Congress comparison…)

The Past Five Years. To judge from the past, this section will aim to set a positive tone in order to remind the Party and people that only the Party could have achieved China’s rise.

Party Theory and Ideology. This section is likely to be relatively short. It will restate the principal tenets of “Socialism with Chinese Characteristics” and the need for and benefits of reform and opening up. Xi has spent much of his first term emphasising the importance of ideology and continuity with the Party’s roots, so even if shorter, this section will be hard hitting.

Xi Jinping Thought, Theory or Concept? This congress may well see the apotheosis of Xi’s “important series of speeches” into “Xi Jinping Thought”, “Xi Jinping Theory” or the plain “Four Comprehensives”, Xi’s contribution to the CCP’s canon of Marxist-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Three Represents (of Jiang Zemin) and the Scientific Outlook on development (of Hu Jintao). The academic prophet, gazing at the Party’s liver to predict the future, will pronounce on the importance of the difference between an “ism”, “Thought”, “Theory” or just a simple description (as Jiang and Hu gained). In practice, what actually matters is that Xi is more powerful than his two predecessors at the start of a second term and may become more so than Deng: at the level of policymaking and personnel, he is getting his way, even if at the level of implementation and down among those who hold real power in China, the 2,862 Party county secretaries, his writ runs less effectively). But for what it is worth, I think that we shall be hearing of “Xi Jinping Thought”. Interestingly, an article in Research on Party Building magazine, a monthly publication on communist theory, published an article in its July edition on “Xi Jinping Thought”.

Building a moderately prosperous society in all respects. Traditionally, this short section looks forward to the big tasks of the next five years, mainly in the area of the “Five Constructions”(economic, political, cultural, social and environmental). It is likely also to remind cadres of the importance of themes dear to Xi Jinping’s heart, such as poverty alleviation, innovation, Belt and Road Initiative, corruption and Party discipline. And judging by the meetings of late July, the main theme, not surprisingly, will be稳中求进 “progress amid stability”, a phrase we shall see often.

The environment and ecology. This was a new section in the 18th Congress Report reflecting ecology’s rise to become one of the five “constructions” and its addition to the Party constitution. Quite apart from the lamentable state of the environment itself, a major driver for inclusion was the threat to social stability: according to some Chinese academics, around half of protests involving over 10,000 people had an environmental cause. (This is a new key in our opinion!)

Party building. This is always a lengthy and important section, hardly surprising, given that this is, after all, the Party’s congress and given that “comprehensively [and] strictly govern the Party‟ is one of the “Four Comprehensives”. The 18th Congress report was much harder and more urgent than its predecessors on ideals, faith in Party ideology, working for the people, corruption and discipline. This report is likely to be harder still. Over his first five years Xi has not just launched an unending and deep war on corruption, but also carried out a series of campaigns to instill discipline and cut abuse of public funds by cadres. It is traditional to have a section on intra-Party democracy and Party unity; we can expect the former to be more by way of lip-service, the latter to feature prominently. Xi will undoubtedly recommit to the war on corruption and is likely to doff his cap in the direction of the new National Supervision Commission, which is due to start work in earnest next March. Nor should it be forgotten that the Party Congress elects a new Central Commission for Discipline and Inspection.

16th-18th
chart
Charles Parton concludes:

“…but it will give an idea of how he views progress towards those reforms, the priority of tasks needed to ensure their full delivery over the next five years, his political thinking, and perhaps his perception of problems. Foremost among those are implementation (by officials) and trust (of the people). Xi and Premier Li Keqiang have spent much time in the last few years railing against vested interests and failure to implement set down policies. Trust from the people in the Party is in short supply. One of the purposes of the Report is to show the people that it is right to entrust governance to a single party. Most people buy the line that under the CCP China has taken back its rightful place in the world; they are less persuaded by the claim that the Party rules in their, rather than its own, interests. That could be a worry if economic or environmental factors set back further progress towards prosperity’”.

It’s important to understand that the “economic plan” for China in the next 5 years is already in place as the 13th five-year plan was initiated in July 2016 – there are a mere 219 pages to read up for you…. (Link – China Five-year plan).

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Here are a few takeaways:
  • Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, and the Scientific Outlook on Development; and put into practice the guiding principles from General Secretary Xi Jinping’s major addresses.
  • The Chinese Dream of the rejuvenation of the nation and the core socialist values have gained a firm place in people’s hearts. China’s soft power has continued to become stronger. Notable achievements have been made in military reform with Chinese characteristics, and new steps have been taken to strengthen and revitalise the armed forces. A new phase has begun in the all-around strengthening of Party self-governance, and significant headway has been made in improving Party conduct and building a clean government. New heights have been reached in China’s economic strength, scientific and technological capabilities, defense capabilities, and international influence.
  • However, the need has become more pressing to improve the quality and efficiency of growth and transform and upgrade the economy. As the economy is experiencing a new normal of growth, there is a clearer trend toward a more advanced form of growth, improved divisions of labour, and a more rational structure. With the structure of consumption being more rapidly upgraded, broad market space, a strong material foundation, a complete industrial structure, an ample supply of funds, and abundant human capital, along with the cumulative effects of innovation that are beginning to show, our overall strengths are still notable. A new style of industrialisation, information technology adoption, urbanisation, and agricultural modernisation are experiencing deeper development, new drivers of growth are in the making, and new areas, poles, and belts of growth are becoming stronger. All-around efforts to deepen reform and make progress in the law-based governance of the country are unleashing new dynamism and bringing new vitality.
  • Maintain a medium-high rate of growth. While working to achieve more balanced, inclusive, and sustainable development, we need to ensure that China’s 2010 GDP and per capita personal income double by 2020, that major economic indicators are balanced, and that the quality and efficiency of development is significantly improved. Production will move toward the medium-high end, significant progress will be made in modernising agriculture, information technology will be further integrated into industrialisation, advanced manufacturing and strategic emerging industries will develop more rapidly, new industries and new forms of business will keep growing, and the service sector will come to account for a greater proportion of GDP.
  • Achieve significant results in innovation-driven development. We will pursue innovation-driven development, ensure that business startups and innovation flourish, and see that total factor productivity is markedly improved. Science and technology will become more deeply embedded in the economy, the ingredients needed for innovation will be allocated to greater effect, major breakthroughs will be made in core technologies in key sectors, and China’s capacity for innovation will see an all-around improvement. Fulfillment of these goals will help China become a talent-rich country of innovation.

The focus on innovation and the progress of it is somewhat surprising, at least to me:

McKinsey & Company’s report “China’s digital economy – a leading global force” is almost shocking!

China

Note: China has gone from 0.4% in 2005 to 42% in 2016, in mobile payment the Chinese do 11x more than the Americans, and most surprising of all, in Global Unicorns (start ups > $1 bn) China has 34 vs. US 46 but mostly the same valuation!

In terms of investment China is also already a global leader:

China

The context here is that China is 1/3 of the global growth impulse (source: IMF) and indirectly 50% of credit  – our own Christopher Dembik tracks the China Credit Impulse, which is the flow of credit:

credit impluse

This chart leads real economy by 9-12 months in other words. Nine months from now in mid-2018 China will be in severe slowdown, one which I believe China is creating through control of the banking system in order to to set up the release of productivity investments, where China comes from a level which is 20-30% of the US. The next five years will be one big technology R&D and innovation drive under “Chinese Characterstics”.

chart
 Source: Bloomberg LLP

Note: We see growth in 5.5% in 2018, 6.0% in 2019, and the current account @ 0% of GDP.

chart

Note: The slowdown in China is already dominant – add Credit Impulse and we have a negative contribution to global growth.

curency

Note: CNY is low down as a basket, but higher vs. USD “naked”. Overall China’s basket will have to drive lower in value to the tune of 1-2% per year.

This is all part of the plan and something President XI will be more confident in after the congress which will see him solidify his power.
Conclusion

China is changing and has changed more than the market gives it credit for – the typical Anglo-Saxon economist keeps his focus on banking system and debt, but unlikely the western world, China can accelerate growth through the release of productivity. The US, under President Trump, has chosen to “retire” from the global economy on the fundamentally flawed concept of America First while China is growing its importance, probably best illustrated by this chart:

chart

Source: Connectopraphy

Now China also wants a new world order in commodities. China will allow exporters to avoid USD payments for CNY or…. gold! A new gold standard? (LINK: Crude, Gold, CNY)

headline
 Source: Nikkei Asian Review

China is enjoying US indecision on foreign policy, which seems to be driven by indecision, spur of the moment changes and randomness. Opposite this sits China, with its One Belt, One Road, Asian Development Bank and the Shanghai Cooperation Organisation – there are in excess of three billion people in this alliance – and with Pakistan and India joining in 2015 that number will be four billion by 2050.

The future belongs to the countries and companies which can command the consumers, no one is better placed than China (and India).
We are witnessing a geopolitical reality show where one hegemonic power, the US, almost voluntarily is giving up its dominance.
The result is clear to me:
King Dollar is dead, long live King CNY!

– Edited by Clare MacCarthy

Source: https://www.tradingfloor.com/posts/macro-digest-china-the-biggest-paradigm-shift-in-a-century-8983318

Steen Jakobsen is chief economist and CIO at Saxo Bank

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Buy Oil With Gold-Backed Currency—Bypassing US Petrodollars

In a second ground shaking move in a week, China has moved to introduce yuan denominated oil futures contracts. Settlement may be in yuan or gold. This has huge long term ramifications for the US dollar as world’s reserve currency.

The other move this week was the US Federal Reserve signally their intention next month to start reducing it’s balance sheet assets by $10 billion per month. Again, the long term ramifications for this is enormous but will not felt immediately.

By Jay Syrmopoulos via The Free Thought Project

In a direct challenge to U.S. imperialism, China’s yuan-denominated contracts – backed by gold -will let oil exporting countries bypass using the U.S. petrodollar.

Beijing, China – In an effort to hedge against U.S. hegemony, and what could be a global game-changer, the world’s top oil importer, China, is preparing to denominate crude oil futures contracts in Chinese yuan to be convertible into gold. The move would allow oil exporting countries to bypass benchmarks denominated in U.S. petrodollars — creating what will almost certainly be the most critical Asian oil benchmark, according to a report by Nikkei Asian Review.

Typically, crude oil is priced in relation to Brent or West Texas Intermediate futures, both denominated in U.S. dollars.

The move by the Chinese will allow oil exporting countries such as Iran and Russia to bypass U.S. sanctions by trading in yuan instead of U.S. dollars. The move is a direct result of the U.S. proclivity to use the dollar as a weapon against countries that refuse to bend to the imperial will of the United States. To make the yuan denominated contracts more appealing, China intends to make the yuan fully convertible to gold on the Shanghai and Hong Kong exchanges.

“The rules of the global oil game may begin to change enormously,” said Luke Gromen, founder of U.S.-based macroeconomic research company FFTT.

According to a report by OilPrice.com:

Last month, the Shanghai Futures Exchange and its subsidiary Shanghai International Energy Exchange, INE, successfully completed four tests in production environment for the crude oil futures, and the exchange continues with preparatory works for the listing of crude oil futures, aiming for the launch by the end of this year.

Yuan-backed oil and gold futures mean that users can be paid in physical gold, said Alasdair Macleod, head of research at Goldmoney, a gold-based financial services company based in Toronto.

While some potential foreign traders have expressed reservations that the contract would be priced in yuan, according to analysts who spoke to Nikkei Asian Review, backing the yuan-priced futures with gold would be appealing to oil exporters — especially to those that would rather avoid U.S. dollars in trade.

It is a mechanism which is likely to appeal to oil producers that prefer to avoid using dollars, and are not ready to accept that being paid in yuan for oil sales to China is a good idea either,” Macleod said.

These recent moves by the Chinese are part of a larger de-dollarization strategy by other world powers intent on creating a more multipolar global framework.

As we reported in July, the formation of a BRICS gold marketplace, which could bypass the U.S. Petrodollar in bilateral trade, continues to take shape as Russia’s largest bank, state-owned Sberbank, announced that its Swiss subsidiary had begun trading in gold on the Shanghai Gold Exchange.

Russian officials have repeatedly signaled that they plan to conduct transactions with China using gold as a means of marginalizing the power of the dollar in bilateral trade between the geopolitically powerful nations. This latest movement is quite simply the manifestation of a larger geopolitical game afoot between great powers.

report by the Centre for Research on Globalization clarifies the implications of these most recent moves by the Russians and the Chinese in an ongoing drive to replace the US petrodollar as the global reserve currency:

Fast forward to March 2017; the Russian Central Bank opened its first overseas office in Beijing as an early step in phasing in a gold-backed standard of trade. This would be done by finalizing the issuance of the first federal loan bonds denominated in Chinese yuan and to allow gold imports from Russia.

The Chinese government wishes to internationalize the yuan, and conduct trade in yuan as it has been doing, and is beginning to increase trade with Russia. They’ve been taking these steps with bilateral trading, native trading systems and so on. However, when Russia and China agreed on their bilateral US$400 billion pipeline deal, China wished to, and did, pay for the pipeline with yuan treasury bonds, and then later for Russian oil in yuan.

This evasion of, and unprecedented breakaway from, the reign of the US dollar monetary system is taking many forms, but one of the most threatening is the Russians trading Chinese yuan for gold. The Russians are already taking Chinese yuan, made from the sales of their oil to China, back to the Shanghai Gold Exchange to then buy gold with yuan-denominated gold futures contracts – basically a barter system or trade.

The Chinese are hoping that by starting to assimilate the yuan futures contract for oil, facilitating the payment of oil in yuan, the hedging of which will be done in Shanghai, it will allow the yuan to be perceived as a primary currency for trading oil. The world’s top importer (China) and exporter (Russia) are taking steps to convert payments into gold. This is known. So, who would be the greatest asset to lure into trading oil for yuan? The Saudis, of course.

All the Chinese need is for the Saudis to sell China oil in exchange for yuan. If the House of Saud decides to pursue that exchange, the Gulf petro-monarchies will follow suit, and then Nigeria, and so on. This will fundamentally threaten the petrodollar.

“In 2014 Russia and China signed two mammoth 30-year contracts for Russian gas to China. The contracts specified that the exchange would be done in Renminbi [yuan] and Russian rubles, not in dollars. That was the beginning of an accelerating process of de-dollarization that is underway today,” according to strategic risk consultant F. William Engdahl.

Russia and China are now creating a new paradigm for the world economy andpaving the way for a global de-dollarization.

“A Russian-Chinese alternative to the dollar in the form of a gold-backed ruble and gold-backed Renminbi or yuan, could start a snowball exit from the US dollar, and with it, a severe decline in America’s ability to use the reserve dollar role to finance her wars with other peoples’ money,” Engdahl concludes.

About the Author

Jay Syrmopoulos is a geopolitical analyst, freethinker, and ardent opponent of authoritarianism. He is currently a graduate student at the University of Denver pursuing a masters in Global Affairs and holds a BA in International Relations. Jay’s writing has been featured on both mainstream and independent media – and has been viewed tens of millions of times. You can follow him on Twitter @SirMetropolis and on Facebook at SirMetropolis.
Source: https://truththeory.com/2017/09/13/china-moves-new-world-order-will-buy-oil-gold-backed-currency-bypassing-us-petrodollar/

The Structure of Collapse: 2016-2019

Charles Hugh Smith writing on his blog Of Two Minds:

The end-state of unsustainable systems is collapse. Though collapse may appear to be sudden and chaotic, we can discern key structures that guide the processes of collapse.

Though the subject is complex enough to justify an entire shelf of books, these six dynamics are sufficient to illuminate the inevitable collapse of the status quo.

1. Doing more of what has failed spectacularly. The leaders of the status quo inevitably keep doing more of what worked in the past, even when it no longer works. Indeed, the failure only increases the leadership’s push to new extremes of what has failed spectacularly. At some point, this single-minded pursuit of failed policies speeds the system’s collapse.

2. Emergency measures become permanent policies. The status quo’s leaders expect the system to right itself once emergency measures stabilize a crisis. But broken systems cannot right themselves, and so the leadership is forced to make temporary emergency measures (such as lowering interest rates to zero) permanent policy. This increases the fragility of the system, as any attempt to end the emergency measures triggers a system-threatening crisis.

3. Diminishing returns on status quo solutions. Back when the economic tree was loaded with low-hanging fruit, solutions such as lowering interest rates had a large multiplier effect. But as the tree is stripped of fruit, the returns on these solutions diminish to zero.

4. Declining social mobility. As the economic pie shrinks, the privileged maintain or increase their share, and the slice left to the disenfranchised shrinks. As the privileged take care of their own class, there are fewer slots open for talented outsiders. The status quo is slowly starved of talent and the ranks of those opposed to the status quo swell with those denied access to the top rungs of the social mobility ladder.

5. The social order loses cohesion and shared purpose as the social-economic classes pull apart. The top of the wealth/power pyramid no longer serves in the armed forces, and withdraws from contact with the lower classes. Lacking a unifying social purpose, each class pursues its self-interests to the detriment of the nation and society as a whole.

6. Strapped for cash as tax revenues decline, the state borrows more money and devalues its currency as a means of maintaining the illusion that it can fulfill all its promises. As the purchasing power of the currency declines, people lose faith in the state’s currency. Once faith is lost, the value of the currency declines rapidly and the state’s insolvency is revealed.

Each of these dynamics is easily visible in the global status quo.

As an example of doing more of what has failed spectacularly, consider how financialization inevitably inflates speculative bubbles, which eventually crash with devastating consequences. But since the status quo is dependent on financialization for its income, the only possible response is to increase debt and speculation—the causes of the bubble and its collapse—to inflate another bubble. In other words, do more of what failed spectacularly.

This process of doing more of what failed spectacularly appears sustainable for a time, but this superficial success masks the underlying dynamic of diminishing returns: each reflation of the failed system requires greater commitments of capital and debt. Financialization is pushed to new unprecedented extremes, as nothing less will generate the desired bubble.

 Rising costs narrow the maneuvering room left to system managers. The central bank’s suppression of interest rates is an example. As the economy falters, central banks lower interest rates and increase the credit available to the financial system.

This stimulus works well in the first downturn, but less well in the second and not at all in the third, for the simple reason that interest rates have been dropped to zero and credit has been increased to near-infinite.

The last desperate push to do more of what failed spectacularly is for central banks to lower interest rates to below-zero: it costs depositors money to leave their cash in the bank. This last-ditch policy is now firmly entrenched in Europe, and many expect it to spread around the world as central banks have exhausted less extreme policies.

The status quo’s primary imperative is self-preservation, and this imperative drives the falsification of data to sell the public on the idea that prosperity is still rising and the elites are doing an excellent job of managing the economy.

Since real reform would threaten those at the top of the wealth/power pyramid, fake reforms and fake economic data become the order of the day.

Leaders face a no-win dilemma: any change of course will crash the system, but maintaining the current course will also crash the system.

Welcome to 2016-2019.

Source: http://www.oftwominds.com/blogjune16/collapse6-16.html

Figuring out the Value of Yuan

John Mauldin looks at the true value of Yuan and its impact.

Recent Chinese stock market volatility has had more to do with China’s currency than its stocks. Donald Trump and other politicians (yes, he is one) often assail Beijing for devaluing its currency and acquiring an unfair advantage.

First, the Chinese have actually been manipulating their currency upwards. While countries in the rest of the world have been letting their currencies devalue against the dollar, China has maintained an effective dollar peg until very recently. And then the “move” that seems to have everybody in a dither was only about 4%. To be fair, what really had the markets worried was that this move might presage an effective devaluation. And considering that China has watched the euro, the yen, and nearly every emerging-market currency drop anywhere from 30 to 50% against the yuan – a rather painful experience for its export sector – the Chinese have been quite patient.

Beijing think it can boost exports by manipulating its currency lower? I don’t think so. Remember how their business model works. Unlike, say, Saudi Arabia, China doesn’t simply extract resources from the ground and export them. Chinaimports raw materials, transforms them into finished goods in its factories, and then exports those goods. Their gain lies in the value added in the manufacturing process.

That means that China can’t grow exports without also growing imports. Pushing the yuan lower helps, but it’s a relatively inefficient tool for reducing the trade surplus.

Cheapening the currency has another consequence China doesn’t want. It makes imported products more expensive for Chinese consumers. The country’s abilities are growing fast, but it still depends on outside sources for many important goods. Making them cost more doesn’t help build the consumer-driven economy Beijing says it wants.

For those reasons and more, China Beige Book has a contrarian view on the Chinese currency. They believe Beijing wants the yuan to rise, not fall. So what is happening with all these interventions the Chinese authorities are making in the currency market?

The first point to remember is that the adjustments have all been quite small – far smaller than the hoopla suggests. For all the clamor that erupted last year, the yuan fell just over 4.5% against the dollar. That’s quite a lot if you are leveraged 10x, as currency traders often are, but for most merchants and consumers the change was hardly noticeable.

Recall all that happened in 2015. Aside from the stock market fireworks, China won acceptance of the yuan into the IMF’s reserve currency basket. It also watched the Federal Reserve finally make a first, tentative move toward higher rates and a correspondingly stronger dollar. If all that couldn’t crush the yuan, it’s not clear to me that anything will.

 

The second point is critical: China controls its currency by both central bank action and subtler tools. They have immense power to nudge the currency up or down. Tightening and loosening the controls is like turning a volume knob. They can crank the yuan up or turn it down.

Presently they are clamping down harder than usual in order to deter speculation. Much of this is happening under the radar, one business and industry at a time. Nevertheless, people are starting to feel the consequences.

Source: Mauldin Economics

 

 

 

Understanding the Chinese Transition

John Mauldin looks at the latest happenings in the Chinese Economy and their significance.

China Beige Book’s fourth-quarter report revealed a rude interruption to the positive “stable deceleration” trend. Their observers in cities all over that vast country reported weakness in every sector of the economy. Capital expenditures dropped sharply; there were signs of price deflation and labor market weakness; and both manufacturing and service activity slowed markedly.

That last point deserves some comment. China experts everywhere tell us the country is transitioning from manufacturing for export to supplying consumer-driven services. So if both manufacturing and service activity are slowing, is that transition still happening?

The answer might be “yes” if manufacturing were decelerating faster than services. For this purpose, relative growth is what counts. Unfortunately, manufacturing is slowing while service activity is not picking up all the slack. That’s not the combination we want to see.

Something else China Beige Book noticed last quarter: both business and consumer loan volume did not grow in response to lower interest rates. That’s an important change, and probably not a good one. It means monetary stimulus from Beijing can’t save the day this time. Leland thinks fiscal stimulus isn’t likely to help, either. Like other governments and their central banks, China is running out of economic ammunition.

One quarter doesn’t constitute a trend. Possibly some transitory factors depressed the Chinese economy the last few months, and it will soon resume its “stable deceleration” course. It is hard to imagine what those factors might have been, though. The data is so uniformly negative that it sure looks like something big must have changed.

What does this economic weakness say for Chinese stocks? Probably nothing. It should be clear to all that the Chinese stock market is completely unrelated to the Chinese economy. They don’t move together, nor do they move opposite each other. They have no consistent connection at all – or at least not one we can use to invest confidently. I went to Macau when I was in Hong Kong a few weeks ago, just to observe the fabled fervor with which the Chinese gamble. The place did indeed have a different “feel” than Las Vegas does. I’m not the only one to think that the Chinese stock market is just an outpost of Macau, but one in which leverage and monetary stimulus can overload the system.

Let me say that there are real companies with real value in China. But the rules on the ground, not to mention the accounting, make it a particularly treacherous market to invest more than your own “gambling money.”

Source: Mauldin Economics

Chinese Economy braced for a Reality Check

Valentin Schmid evaluates the Bank of America Report on the Chinese Economy.

The Chinese regime still has considerable power over the markets. After a 7 percent crash of the Shanghai Composite on January 4, it managed to reverseanother 3 percent drop on January 5.

So, in the very short term, all is well. In the long term and even in 2016, Bank of America sees big problems ahead for the Chinese economy. According to their analysts, the regime has to fight multiple battles at once and will ultimately lose to market forces.

“We judge that China’s debt situation has probably passed the point of no-return and it will be difficult to grow out of the problem,” states a report by Bank of America’s chief strategist David Cui.

The report points out that a spike in private sector debt almost inevitably leads to a financial crisis. China’s private debt to GDP ratio went up 75 percent between 2009 and 2014, bringing total debt-to-GDP to about 300 percent. Too much to sustain.

This is “a classic case of short-term stability breeding long-term instability. It’s our assessment that the longer this practice drags on, the higher the risk of financial system instability, and the more painful the ultimate fallout will be,” Cui writes.

For the coming crisis, Cui believes China will probably have to devalue its currency, write off bad debts, recapitalize the banks, and reduce the debt burden with high inflation.

After the events of last August, and after the International Monetary Fund finally included China in its reserve currency basket, the regime completely abandoned the stable currency objective and let the yuan drift lower. The regime promises reform, and even follows through in some cases. But if push comes to shove, it resorts to central planning to mould the market according to its needs, with less and less success.

“It seems to us that the government’s policy options are rapidly narrowing-one only needs to look at how difficult it has been for the government to hold up GDP growth since mid-2014. A slowdown in economic growth is typically a prelude to financial sector instability,” writes Cui, and predicts the Shanghai Composite to drop by 27 percent in 2016.

Source: Bank of America Report

 

The Great Sovereign Debt Crisis Coming Soon

Starting in Europe and reaching public consciousness when Japan implodes before engulfing the USA and remaining Liberal-Democratic nations.

The Great Sovereign Debt Crisis of the 21st Century is steadily gaining momentum. The forces of deflation have been steadily building since 2000 and the stage is set over the next 6-12 months where the reality of public plundering of the means of production comes home to roost. The weight of public and private debt, government regulation and leverage, fraudulent economics and fallacious political thinking that assumes that if you keep taking and spending other people’s money you will never ever run out!

Yet this is exactly what is happening. The politicians have borrowed to deliver on promises they were never going to be around to see delivered. They’ve debased the their currency and now we have reached the problem that there is so much debt in the world that the world does not have enough income to service that debt.

Historically its happened many times before of course and yet we never seem to learn. Empires grow and prosper, politicians make promises, governments and people borrow and everyone takes for granted the wealth that has been achieved until finally, it all collapses. History records the rise and fall of civilizations on exactly this premise. It’s always government and the self-seeking of leaders that cause civilizations to self-destruct.

While we observe the rise and fall of empires due to reasons of currency debasement or war, we can also observe that these are merely the mechanisms that cause the problems. Behind them lies the cyclic nature of humanity. Deep in the limbic system of the human brain reside deep impulses that play out at individual and aggregate levels.

We might look back at the Tulip Mania Bubble of the Dutch Golden Age (1634-1637) and wonder how people might have been so crazy as to invest in tulips. The Tulip Mania occurred on the back of a Europe-wide debasement of coins (1619-1622) used to finance war. Yet they did and future historians will look back at early 21st century share, commodity, real estate prices and wonder “how could they have been so blind?”TulipPricesDebasement of the currency has occurred this time by closing the link between gold and paper money and the massive printing of money that subsequently occurred. Each era brings the usual excuse “this time its different”. But the same debasing of money, the same political hubris, the same grasp for political power create the same drivers that cause the boom and the bust.

We watch at the moment the European debt drama playing out in Greece. Other nations sit on the edge of potential debt crises including Spain, Portugal, Italy, Puerto Rica and various cities of the US. This is just the beginning. Soon we shall see the debt crisis spreading to northern Europe, Japan, China and the US. Its about sovereign debt of course, the debt accumulated by generations of politicians spending other people’s money.SouthSeaIn Japan they experienced this in the early 1930’s when massive money printing operations inflated their economy. It resulted in the assassination of the Finance Minister and Prime Minister, the establishment of the military as the power brokers of Japanese politics and the beginnings of the build up for for WWII. That didn’t end well for the Japanese people.

Between 1740 and 1783, the French experienced it with the massive indebtedness of the monarchy, high taxes, high levels of regulation and cronyism led to the French Revolution, Napoleon and a final defeat in 1815.

Pax Romana followed a similar path where eventually the debasement of the currency and accumulated debt caused the empire to implode. To look at Pax Americana is to see an identical script unfolding. Massively unsustainable debt levels, vast militarization, endless monetary debasement, constitutional decay and subjugation of citizens by taxation, regulation and blatant spying signal, as it has in many previous civilizations, the demise of this short lived empire.

Using financial markets as a barometer we observe markets in major topping patterns, working out of main trends. The next 3-6 months will prove critical in determining if the Great Sovereign Debt Crisis has truly arrived or if there is still enough gas in the tank for one last sprint before the weight of debt, regulation and political hubris bring down the liberal – democratic nations of the world. dow-jones-100-year-historical-chart-2015-08-07Once again the cyclic nature of human egress and regress is playing out at individual and aggregate levels and from where we stand, major and minor cycles of human endeavor are changing direction. Crisis bring danger and opportunity for those so prepared.

At $200 Trillion The World’s Debt Cup Overfloweth

by Bloomberg Business

The world economy is still built on debt.

That’s the warning today from McKinsey & Co.’s research division which estimates that since 2007, the IOUs of governments, companies, households and financial firms in 47 countries has grown by $57 trillion to $199 trillion, a rise equivalent to 17 percentage points of gross domestic product.

While not as big a gain as the 23 point surge in debt witnessed in the seven years before the financial crisis, the new data make a mockery of the hope that the turmoil and subsequent global recession would put the globe on a more sustainable path. Government debt alone has swelled by $25 trillion over the past seven years and developing economies are responsible for almost half of the overall gain.

McKinsey sees little reason to think the trajectory of rising leverage will change any time soon.

Source: McKinsey

 Here are three areas of particular concern:

1. Debt is too high for either austerity or growth to cure

Politicians will instead need to consider more unorthodox measures such as asset sales, one-off tax hikes and perhaps debt restructuring programs.

 Source: McKinsey

2. Households in some nations are still boosting debts

Eighty percent of households have a higher debt than in 2007 including some in northern Europe as well as Canada and Australia.

Source: McKinsey

 3. China’s debt is rising rapidly

Thanks to real estate and shadow banking, debt in the world’s second-largest economy has quadrupled from $7 trillion in 2007 to $28 trillion in the middle of last year. At 282 percent of GDP, the debt burden is now larger than that of the U.S. or Germany. Especially worrisome to McKinsey is that half the loans are linked to the cooling property sector.

Source: McKinsey

via A World Overflowing With Debt – Bloomberg Business.

Source: http://davidstockmanscontracorner.com/at-200-trillion-the-worlds-debt-cup-overfloweth/

 

 

Which Global Hegemon Is on Shifting Sands?

Charles Hugh Smith writing for OfTwoMinds

Given that all the leading candidates for Global Hegemon are hastening down paths of self-destruction, perhaps there will be no global hegemon dominating the 21st century.

Which nation with aspirations of global dominance (i.e. hegemony) has these attributes?

1. The nation’s recent prosperity is based on a vast expansion of credit.

2. The nation has 100+ million obese/diabetic citizens.

3. The citizens have little say over central government policies that favor cronies.

4. The nation faces demographic headwinds as the number of people in the workforce declines and the number of retirees balloons.

5. Large regions of the nation suffer from chronic water shortages.

So, which Global Hegemon Is on shifting sands? Hmm, sounds like the U.S. is a match so far…. Let’s add a few more attributes:

6. The nation’s credit expansion has relied on a largely unregulated shadow banking system.

7. The nation is in the midst of an unprecedented housing bubble.

This could still be the U.S., but America’s unprecedented housing bubble popped in 2006–the current bubble is a mere echo bubble. Let’s add a few more attributes:

8. The nation is beset with unprecedented “external” environmental costs as a result of rapid and largely unregulated industrialization.

9. The nation suffers from large-scale desertification.

10. Over half the nation’s monied Elites have either left the nation or plan to leave and transfer their financial wealth overseas.

The only nation with aspirations of global hegemony that fits all these attributes is China. The conventional China Story holds that the 21st century will be China’s century, much like the 20th century was America’s.

But this story overlooks the vast demographic, health, environmental and financial problems built into China’s land, people, and Central-Planning systems of finance and governance.

Consider two charts drawn from John Hampson’s recent overview of Problems in China:

China’s shadow banking system, which provided the majority of the credit that fueled the current expansion, is imploding:

Not coincidentally, China’s unprecedented housing bubble is also imploding:

China’s system allows only a limited number of options for savings and investment; other than bank accounts that have lost money when real inflation is accounted for, the primary option available to households is real estate. As a consequence, an enormous percentage of the nation’s household wealth has been sunk into empty apartments which act as “savings.”

But a physical flat in a high-rise building is not a financial asset like a savings account: it is a physical object that degrades with time and whose value is set by supply, demand and the availability and cost of credit.

If the building is not maintained properly, elevators break down, pipes start leaking and fixtures corrode, and the value of an unmaintained building drops to zero in terms of habitability within a decade or so.

100 million apartments become an enormous mal-investment of one-time wealth as they slowly become uninhabitable due to poor construction and/or maintenance.

China has been building infrastructure at a break-neck pace for 30 years, and this has created the mindset that almost every structure will be torn down and replaced with something grander every 20 years or so.

As a result of this mindset, very few structures are maintained. Why bother if it will be torn down and replaced a few years down the road?

But tens of millions of apartments cannot replaced every decade or two.

In effect, China has squandered its one-time wealth generated by rapid industrialization, and absorbed the still-uncounted environmental and health costs of this industrialization that must be paid in shortened lives, higher healthcare costs and environmental cleanups for decades to come.

Few promoters of the China Hegemony-in-the-21st-century Story mention the estimated 114 million people in China with diabetes–over one third the population of the U.S.– or the roughly 500 million people in China with elevated blood-sugar levels that put them at risk of developing diabetes or related lifestyle diseases. China ‘Catastrophe’ Hits 114 Million as Diabetes Spreads.

How much of the nation’s surplus wealth will be devoted to fixing the environmental and health costs that are already visible? How much of the wealth is actually phantom wealth that will vanish as the housing bubble based on an unprecedented credit bubble pops?

The China Story based on demographics, health, environmental damage and financial Central Planning is a quite different one from the China will be the global hegemon in the 21st century story. Given that all the leading candidates for Global Hegemon are hastening down paths of self-destruction, perhaps there will be no global hegemon dominating the 21st century.

Source: http://www.oftwominds.com/blogsept14/empire-of-sand9-14.html

Guess which empire came to an end today?

 Spanish Hapsburgs

In the early 16th century, a priest by the name of Fray Francisco de Ugalde remarked to his king that Spain was “el imperio en el que nunca se pone el sol”.

In other words, the sun never set on the Spanish Empire.

And by the 1500s with its vast lands across the Americas, Africa, Europe, Asia, and even the South Pacific, Spain (technically the House of Habsburg) had become the first truly global superpower.

The Empire’s status was so great that its silver coin (the real de ocho or piece of 8) was used around the world as a global reserve standard… including in the US colonies.

It didn’t last.

Like so many great empires that came before, Spain was beset by unsustainable spending, constant warfare, debilitating debt, and an inflated money supply.

By the mid 1500s, the Spanish government was spending 2/3 of its total tax revenue just to pay interest. Spain defaulted on its debt six times in the next century.

It finally came to an end on today’s date in 1643, exactly 371 years ago.

Historians can literally circle the date on a calendar that Spain ceased being Europe’s dominant superpower; it was the day that Spain lost the Battle of Rocroi, and effectively the Thirty Years War against France.

Just days before, a four-year old Louis XIV had ascended to the throne to become the King of France after the death of his father.

And during his whopping 72-year reign, France replaced Spain as the global superpower.

(To put this reign in context, the longest serving monarch alive today is King Bhumibol of Thailand, who at age 86 has served for 67 years. At age 88, Queen Elizabeth has served for 62 years.)

For more than a century, commerce, art, and technology flourished in France. And some of the greatest intellectual minds in history published their works during this period.

I remember being told as a West Point cadet that in the early days of the Academy in the 1800s, the only two classes were French and Mathematics, primarily because all of the great textbooks were written by French mathematicians.

France had public healthcare and free hospitals. Great monuments to their grandeur. Colonies around the world. An awe-inspiring military.

And their influence was so great that foreign governments from Russia to Prussia spoke French internally.

Needless to say, this didn’t last either.

And like the Spanish before them, France overspent, overexpanded, and overregulated. They waged excessive warfare, and they managed their affairs as if the good times would last forever.

By the 1780s, the French debt had grown so much that they were rapidly devaluing the currency and borrowing money just to pay interest on what they had already borrowed.

Sound familiar?

The US is in a similar position right now, along with most of the West (including… France and Spain again!)

Like an aging prize fighter, there is no nation that can permanently maintain its status as the dominant superpower. And certainly no nation that can defy universal economic truths.

Powerful nations believe they can borrow indefinitely and dilute their currencies without consequence.

This simply isn’t true. Wealth and power shift. The world’s reserve currency changes. It’s been happening for centuries, and this time is no different.

We are all witnessing this change unfold again. And this isn’t some wild assertion.

Objective data from the Bank for International Settlements and the International Monetary Fund all show a clear decline in the dollar’s share of global reserves.

chart2 1 Guess which empire came to an end today?The US government’s own data shows a net worth of minus $16.9 trillion, over 100% of GDP in the red.

And even in their most optimistic projections, the government tells us that growth in debt will outpace growth in tax revenue.

Day to day, it’s easy to ignore these trends. But from a big picture perspective, it couldn’t be more obvious.

Just like the Battle of Rocroi in 1643, or the storming of the Bastille in 1789, there will come a time when future historians circle a date on a calendar and say, “That was the day the United States ceased being the dominant superpower.”

Perhaps it’s happened already. Or perhaps it will occur in a war yet to be fought.

But if history, common sense, and truth are any guides, that reckoning is quickly approaching.

Source: http://www.sovereignman.com/expat/guess-which-empire-came-to-an-end-today-14439/

Of Course China Wants to Replace the U.S.

thediplomat_2014-02-03_13-29-21-386x257zachary-keck_q
If China becomes the world’s most powerful country, it won’t be satisfied being America’s number two.

Over at The Week, Think Progress’s Zack Beauchamp has a provocative piece arguing that “China is not replacing the United States as the global hegemon. And it never will.” Specifically, Beauchamp posits that “China faces too many internal problems and regional rivals to ever make a real play for global leadership. And even if Beijing could take the global leadership mantle soon, it wouldn’t. China wants to play inside the existing global order’s rules, not change them.

The piece is well-argued and certainly worth a read. In particular, Beauchamp does us a service in combating the myth of the inevitability of China’s rise. He usefully points out that China’s economy faces a multitude of challenges that may prevent it from reaching the potential many currently foresee. He also points out that China faces powerful neighbors that won’t stand by idly if Beijing seeks to construct a new regional order, much less a global one.

Still, on balance, I think Beauchamp’s piece does more to confuse than to inform. The first issue is that even though he discusses the regional balance of power in the piece, his overall argument is that China will not be capable of replacing the United States as the “global hegemon.” Unfortunately, there are many who would claim that America is a global hegemon. However, that argument is preposterous under any reasonable definition of hegemony. It is true that in the post-Cold War (if not earlier) the U.S. has been the only power capable of projecting military power in any region of the world. But this has not allowed it to dictate the regional order of every continent as it largely can in the Western Hemisphere.

Moreover, even if America really is a global hegemon, this would just make it more unlikely that any rising power could replace it as a global hegemon. After all, America’s primacy in the post-Cold War era was only made possible because no other great power existed.  Since China’s rise won’t stop the U.S. from being a great power, unless the two go to war and China wins, Beijing’s relative power will be far less than America’s at the end of the Cold War. And of course, America’s relative power will also be far less than what it enjoyed in 1991.

There are other issues with Beauchamp’s analysis of China’s relative power. For example, he notes that “one analysis suggests China’s GDP may not surpass America’s until the 2100s.” To begin with, while possible, this view seems to be decidedly in the minority among serious economists. Even if China’s economy crashes before 2018—around the time many believe China’s absolute GDP will surpass America’s—it still seems likely that it will find a more sustainable economic model before 80 years pass. And given that China has about four times as many people as the United States, it could easily surpass the U.S. in absolute GDP terms in less than 80 years.

But even if China’s economy doesn’t surpass the United States, this hardly suggests it won’t present a major strategic challenge to Washington. Consider that, according to Paul Kennedy , in 1938 Japan’s share of world manufacturing was just 3.8 percent while America’s was 28.7 percent and the U.K.’s was 9.2 percent. A year earlier, according to the same source, the U.S. national income was $68 billion while the British Empire’s was $22 billion. Japan’s, comparison, was just $4 billion. Yet, in the initial battles of the Pacific War Japan decisively defeated the U.S., England, and the Dutch across the region.

Similarly, the Soviet Union’s GDP was only ever about half as large as the United States, and many times much less than that. This doesn’t mean that America and its allies didn’t face a real strategic threat in the Soviet Union during the Cold War.

The more egregious part of Beauchamp’s case, however, is his contention that China does not seek to challenge the U.S.-led order. In his own words: “Even if this economic gloom and doom is wrong, and China really is destined for a prosperous future, there’s one simple reason China will never displace America as global leader: It doesn’t want to.

He goes on to explain: “China is content to let the United States and its allies keep the sea lanes open and free ride off of their efforts. A powerful China, in other words, would most likely to be happy to pursue its own interests inside the existing global order rather than supplanting it.

Beauchamp isn’t alone in holding this view, which has many faithful adherents in the West. In fact, not too long ago it was the running consensus in the United States, as well as the foundation of U.S. China policy in both the George W. Bush and the early Barack Obama administrations.

One place where this view has not been very popular is in China itself. Indeed, far from being happy to allow the U.S. Navy to keep its sea lanes open, Chinese leaders have been warning about their country’s “Malacca Dilemma” for over a decade now. They have also been actively trying to reduce America’s ability to cut off China’s energy and raw material imports. As they should be—it would be irresponsible for China’s leaders to allow their country’s economy to be at the mercy of a potential competitor if they have the realistic opportunity to allow China to secure its own shipping lanes. This is doubly true in light of the fact that the U.S. has been known to impose sanctions on many countries, including China itself after Tiananmen Square.

But the issue goes much deeper than that. In fact, it goes to the heart of the Chinese Communist Party’s legitimacy at home. At its core, the CCP’s claim to power is based on its ability to restore China to its past glory. Again, neither China nor its leaders have ever made any secret about this. For example, the CCP has always emphasized that it saved China from its “century of humiliation” at the hands of the Western and Japanese colonial powers.

Similarly, since coming to power in 2012, Xi Jinping has repeatedly stressed that, because of the CCP’s rule, the “great rejuvenation of the Chinese nation” is now within China’s grasp. As Zheng Wang points out , the term “rejuvenation is deeply rooted in Chinese history and the national experience.

Wang continues:

“As proud citizens of the ‘Middle Kingdom’ the Chinese feel a strong sense of chosenness and are extremely proud of their ancient and modern achievements. This pride is tempered, however, by the lasting trauma seared into the national conscious as a result of the country’s humiliating experiences at the hands of Western and Japanese imperialism. After suffering a humiliating decline in national strength and status, the Chinese people are unwavering in their commitment to return China to its natural state of glory, thereby achieving the Chinese Dream.

Thus, the CCP would lose all its legitimacy at home if it voluntarily subordinated China to the United States despite being the more powerful country. The CCP treasures its grip on power above all else, and therefore it should come as no surprise that it has already ruled out taking this risk.

Source:  http://thediplomat.com/2014/02/of-course-china-wants-to-replace-the-u-s/

Prepare for a new gold standard

By Thanong Khanthong

China continues to hoard gold en masse. In June, China imported 104.6 tonnes from Hong Kong. That would bring China’s gold imports from Hong Kong to 1,160 tonnes since the beginning of this year. Officially, China reports its total gold holdings at around 1,000 tonnes. Yet speculation is widespread that it could be holding somewhere between 7,000 to 10,000 tonnes, surpassing the United States’ 8,113 tonnes. China is apparently preparing to adopt an impending gold standard.

Yao Yudong, a member of the People’s Bank of China’s Monetary Policy Committee, recently penned an article in the China Securities Journal, in which he called for a new Bretton Woods system. This would help stabilize the global exchange rates. By implication, he is calling for a return to the gold standard.Under the old Bretton Woods system, the US dollar was the global reserve currency, fixed to gold at US$35 per ounce. This is known as the gold standard system, based on which paper currencies were issued. But President Richard Nixon ended this gold standard in 1971 by floating the US dollar outright.By doing so, the world moved into the fiat currency system – or paper money system. Ever since, the dollar has been printed out of thin air. But the US has also been able to guard the dollar as the world reserve currency. This fiat currency system has given rise to huge debts, an expansion of the banking system and financial markets, and has become the mother of all volatility.Now China is attempting to challenge this fiat currency system. It is no secret that China would like to float the yuan to become an international reserve currency. But China will not bank on the fiat currency system to do so. It is now pegging its yuan to the US dollar tightly. When the timing is right, China will de-link the yuan from the US dollar and fix it to gold instead. This will have far-reaching implications for the global financial system, creating further dislocations and crisis on a global scale.

Also, China has been entering currency swap contracts with other countries to bypass the US dollar. It has currency swap agreements with Brazil, Russia, Iran, Australia and the UK, to name a few. This scheme is developing fast to supplant the dollar with the yuan.

So it is not a surprise that China is building up its gold reserves in preparation for a big bang revolution of the global financial system.

Even with the strong demand for gold from China, Russia and India, gold prices have continued to be hammered down. Gold prices peaked at almost $1,900 per ounce in September 2011. Now, gold prices are struggling to keep to the $1,300 level. Many commentators, from Mexican billionaire Hugo Salinas Price to former US assistant secretary for the Treasury, Paul Craig Roberts, believe that the gold price squeeze is the work of central planners, who would like to protect the value of the dollar.

We are now seeing a battle in the gold market, which reflects a broader currency war. The central planners are holding down the gold prices, while China, Russia, India and other central banks and funds are accumulating physical gold in preparation for a big change. This seesaw battle will continue until the great unravelling.

Interest rates are on a rise. If the US Federal Reserve fails to get control over the bond market, we are going to witness a crisis. Then gold will shine again as China and other countries move to adopt a gold standard to replace the fiat currency system. By that time, history will have been rewritten.

Source: http://www.nationmultimedia.com/opinion/Prepare-for-a-new-gold-standard-30212197.html

China’s credit boom is spiralling out of control, warns Fitch

China’s massive credit boom is rapidly growing to unsustainable levels and over-extended financial institutions risk being pushed over the edge by rising interest rates, according to rating agency Fitch.

China's massive credit boom is rapidly growing to unsustainable levels and over-extended financial institutions risk being pushed over the edge by rising interest rates, Fitch has warned.
According to Fitch’s calculations, annual new credit in China climbed to 21 trillion yuan (£2.15 trillion) in August, up from 19 trillion yuan in August 2012, the fifth year that net new credit has exceeded more than one-third of GDP. Photo: Reuters

Fitch warned that China’s credit-fuelled expansion continued unabated, despite talk of contracting credit.

“To the extent people think there’s deleveraging underway, or growth is coming back in a strong way – nothing has really changed,” said Charlene Chu, senior director at Fitch Ratings. “The bottom line is we continue to be in the middle of this very large credit boom.

According to Fitch’s calculations, annual new credit in China climbed to 21 trillion yuan (£2.15 trillion) in August, up from 19 trillion yuan in August 2012, the fifth year that net new credit has exceeded more than one-third of GDP.

“It is difficult to see how a situation in which credit – already twice as large as GDP – continues to grow by twice as fast can be sustainable indefinitely,” the report said.

The rating agency calculated that even in a positive scenario – where credit growth slowed by 2 percentage points to 12pc annually, while nominal GDP held steady at 11pc, the country’s credit-to-GDP ratio would rise to 250pc by the end of 2017, almost double pre-crisis levels in 2008.

Fitch said a more realistic scenario would result in ratios above 270pc by the end of 2017.

It said that while China’s “solid policy record” and large state-owned corporate sector meant it was in a better position to manage high leverage because it had greater control over the system, it added: “no financial system can sustain rising leverage indefinitely.

Fitch highlighted that much of the new credit was being used to roll-over existing loans, which would not create growth. It said problems could arise if financial conditions tightened, leaving borrowers struggling to service debts and leading to defaults or a crisis.

The rating agency also warned that the interest rate being paid by borrowers on loans was “substantial and climbing”. According to Fitch, total interest due on debt has risen to 12.5pc in 2013, from 7pc in 2008. Fitch warned the figure could rise to 22pc in 2017.

“Such high interest and debt may ultimately overwhelm borrowers – leading to spending cuts, slower growth, and financial sector asset-quality issues,” Fitch said, adding that this could undermine efforts by the Chinese government to expose itself to market forces, such as liberalising interest rates.

Several analysts, including the International Monetary Fund (IMF), have warned that the explosive credit growth that has helped to drive China’s economic rebound also posed a systemic risk to the financial sector.

In May, David Lipton, the IMF’s deputy managing director, said the rapid rise in lending increased the risk that some investments might be of poor quality and borrowers might default.

Separate data on Tuesday showed that house prices in China climbed 8.3pc in August on an annual basis, from 7.5pc in July, while prices in the country’s three biggest cities – Beijing, Shanghai and Shenzen – jumped 18pc.

The sharp rises have stoked fears that China’s property market is veering into dangerous bubble territory, though officials dismissed their concerns on Tuesday.

Liu Jianwei, an analyst with the official statistics bureau, said the headline numbers masked wide disparities between China’s regions. Mr Liu said while price increases averaged between 18 and 20pc year-on-year in China’s biggest cities, in some parts of the country prices had risen by just 6pc.

Blog Editor Comment: Austrian School of Economics postulates the bursting of this credit bubble will cause asset values to decline to the point where the bubble began.

Related Notes

Source: http://www.telegraph.co.uk/finance/china-business/10317867/Chinas-credit-boom-is-spiralling-out-of-control-warns-Fitch.html

China Is Ending Its “One-Child Policy” – Here Are The Implications

Zerohedge reports:

Back in 1978, the Chinese politburo enacted the “one-child policy”, whose main purpose was to “alleviate social, economic, and environmental problems” in China as a result of the soaring population. According to estimates, the policy prevented more than 250 million births between 1980 and 2000, and 400 million births from about 1979 to 2011. And while not applicable to everyone, in 2007 approximately 35.9% of China’s population was subject to a one-child restriction.

Regardless of the numbers, things are about to change: with the Chinese economy now having peaked and suddenly finding itself in rapid deceleration with excess credit growth providing virtually no boost to marginal growth, the Chinese government is forced to reexamine 35 years of social policy in order to extract growth from the one place where for nearly 4 decades it had tried to stifle: demographics.

According to the 21st Business Herald which cited sources close to the National Population and Family Planning Commission, China may relax its one-child policy at end-2013 or early-2014 (read end) by allowing families to have two children if at least one parent is from a one-child family. A plan for allowing all families to have two children after 2015 is also being reviewed.

According to Bank of America’s Ting Lu, the news is reliable and is in line with the bank’s view. BAC expects around 9.5 million babies to be born as a result of such reform. China’s A-share market welcomed the news on Friday with baby-related stocks up sharply.

To say that this is a paradigm demographic shift at the world’s most populous country is an understatement. And while we will provide further analysis in the days to come, here is Bank of America’s cursory assessment of what this will mean for the Chinese economy.

We are optimistic that an end to the one-child policy will soon be confirmed. In fact, in our report Post-leadership change reform: End of the one-child policy? (24 Jan 2013), we predicted that the window for the population policy reform could be 4Q13 around the ruling party’s annual meeting or 1Q14 around the people’s congress meeting. We believe that the reform-minded president Xi and premier Li will use the opportunity of abolishing the one-child policy to build up their authority, show their determination in making changes and convince the Chinese people that they do have a roadmap for reforms.

The estimated impact: Around 9.5mn incremental babies

If the 21st Business Herald news is confirmed, the demographic reform path (which we called “piecemeal path” in our earlier report) is more conservative than our baseline “middle path”, which is defined as allowing all families to have two children without any restrictions. So is this a big disappointment? Not really. This is because the one child policy now is only strictly enforced in urban areas and some developed rural areas where most couples of child-bearing age have at least one singleton (note China’s one-child policy started in the late 1970s).

According to the 2005 population survey, singletons account for 29.3% of Chinese aged 30 or under (the generation affected by the one-child policy). The ratio should be significantly higher in urban areas. Assuming 60% of people of child bearing age in urban areas are singletons, on top of the 36% families which are already allowed to have two children, we estimate 48% of urban families of child bearing age could benefit from the coming reform. Using census data, there are 79mn women of child bearing age (23 to 42) this year. 48% of 79mn is 38mn. Assuming 25% of them choose to have a second child, about 9.5mn babies would be born as a result of this reform to one-child policy.

While we touched on the main demographic reason for this paradigm shift toward population control back in January with “China Hits Key Demographic Ceiling As Working-Age Population Now Declining “, here is much more on this topic from a previous take by Bank of America:

End of the one-child policy?

We think China’s rapidly worsening demographics entail significant risks to its long-term social stability and economic growth if Chinese policymakers do not terminate the country’s one-child policy. The one-child-policy is very unpopular, and in our view has been long outdated; it is only supported by some smaller interest groups. For China’s reform-minded new leaders who will take office in March this year, we believe abolishing the one-child-policy could provide them with a means to build up their authority, show their determination in making changes and convince the Chinese populous that they do have a roadmap for future structural reforms.

Why China may soon end the one-child policy

Three factors lead us to believe that China may soon terminate its unpopular one-child policy: (1) Statistics point to rapidly deteriorating demographics which could lead to severe social and economic consequences in the future; (2) consensus for doing away with the one-child policy is well built up; (3) China’s new leaders could take ending the one-child policy as an opportunity to show their strength in their first year in office without taking on major interest groups. But before discussing why the one-child policy may soon be ended, we briefly go through the history and the current status of China’s one-child policy.

The current status of China’s one-child policy

“In 30 years, the currently pressing issue of population growth may have been eased, and a different population policy can be adopted.” – About Controlling China’s Population Growth, An open letter to Party and Youth League members from the Central Committee of the Communist Party of China, 25 September 1980. That letter marked the official start of China’s one-child policy. More than 30 years have passed and in our view the one-child policy has been much more successful in slowing China’s population growth than most officials at the time had expected. The National Population and Family Planning Commission (henceforth NPFPC) was in charge of the enforcement of the one-child policy in the central government, while at local levels usually deputy governors take responsibility for enforcing it.

 

The NPFPC has gradually loosened up the one-child policy, especially in rural areas. Currently, a second child is permitted if both parents are singletons. The rule is looser for rural families, which (with some exceptions) can have a second child if the first-born is a girl. Some provinces have even looser policies for rural families. For instance, in Anhui province, a rural family can have two children if one parent is singleton. There are also other exceptions for a second child, and minority ethnic groups are allowed to have two or even more children. Families which have more children than the policy allows are subject to fines under the name of social maintenance fees. The fee amount varies across the nation, but usually is at least 2-6 times of the higher of annual family income and average local household disposable income.

Worsening demographics

China’s population growth is rapidly decelerating. It rose by 0.48% to 1,347.4mn in 2011, significantly slower than the pace of 0.76% in 2000 and 1.45% in 1990. The falling population growth is a result of both a fast decline in birth rate, which in turn is due to the one-child policy and rising income per capita, and a slowly climbing death rate on an aging population. The birth rate dropped to 1.19% in 2011 from 2.11% in 1990 and 1.40% in 2000, while the death rate rose to 0.71% in 2011 after bottoming out at 0.64% in 2003. China’s current birth rate is similar to those of developed countries (1.1% in 2005-2010) but much lower compared to other less developed countries (2.5%).

Based on the trend, we think China’s population will likely peak by 2020 at below 1.4bn (far lower than NPFPC’s projection of 1.5bn in 2033) and will likely decline sharply afterwards. The United Nation estimates that the Chinese population will likely peak at 1,358mn in 2017, and decline to 1,319mn in 2030 and 1,130mn in 2050, which are 2% and 16% contractions respectively from now, in its low variant case.

Why the NPFPC has a different estimate?

China’s existing population policy is based on the NPFPC’s projection of population growth, which estimates that China’s population will peak at 1.5bn in around 2033. The key assumption of the NPFPC is that China’s total fertility rate (TFR) has stayed at 1.8 over the past decades and will stay at that level for years ahead, though all evidence seems to suggest that China’s TFR has been much lower than 1.8 since the mid-1990s. In hindsight, NPFPC’s forecasts of population growth have been systematically overshooting the actual numbers by a significant margin. In 2001-05, the Chinese population increased by only 40.1mn, far below the NPFPC’s forecast of a 62.6mn increase. In 2006-10, the Chinese population added 33.8mn, again much lower than the NPFPC’s projection of 52.4mn. In our view, the NPFPC’s forecasts have a poor track record.

What is China’s true TFR?

TFR is perhaps the most controversial demographic indicator in China. It is the average number of children born to each woman over the course of her life. By international standard, a TFR of 2.1 is required to keep a stable population. In 2005-2010, TFR was 2.52 globally, 1.66 for developed countries and 3.03 for less developing countries excluding China, according to the UN.

What is TFR in China? The NPFPC claims that China’s TFR has been quite stable at around 1.8 over the past 20 years. It believes such a TFR is suitable for China and that China should stick to its existing population policy to control population growth. The 2010 census suggests that China’s TFR has dropped to a suprisingly low 1.18 in 2010, down further from 1.33 in 2005 and 1.22 in 2000. In the past the NPFPC has often claimed that census data significantly underestimates the true TFR as a lot of families with more than one child choose to under-report their actual number of children and the NPFPC has revised up its TFR estimate to 1.8 regardless of the census data.

However, a consensus has been reached that China’s TFR is likely to have been 1.4 to 1.5 over the past decade, falling from 2.3 in 1980 and 5.8 in 1950. This is much lower than many developed countries, such as the US (2.07), the UK (1.83) and France (1.97), but similar to some other countries struggling to deal with a low fertility rate, such as Japan (1.31), Korea (1.29) and Germany (1.36). In sum, China’s TFR has stayed significantly lower than the replacement level of 2.1 for more than two decades, and we believe it is likely to drop further as GDP per capita grows.

 

The aging population and worsening age structure

The Chinese population has been aging fast. Three decades ago, the Chinese population was young with a median age of 22.4. The median age in China is now 34.5, still less than Korea’s 37.9, Japan’s 44.7, the US’ 36.9, France’s 39.9 and the UK’s 39.8, but much higher than other less developed countries at 24.5. The trend of aging is set to continue. The UN suggests China’s median age will rise to 53.4 in 2050, similar to estimates for Japan at 52.3 and Korea at 51.8 and significantly above estimates for the US at 40.0, France at 42.7 and the UK at 42.9 and other less developed countries at 34.4. We note that China is still a developing country. Its GDP per capita based on purchasing power parity was US$7,553 in 2010, only 16-25% of that pf the developed countries mentioned above.

At the same time, China’s age structure is deteriorating. In 2011, 9.1% of Chinese were aged 65 or over, up from 7.0% in 2000 and 5.2% in 1980, while the percentage of young age (0 to 14) declined to 16.5% in 2011 from 22.9% in 2000 and 35.5% in 1980. The share of elderly could further rise to 17.4% in 2030 and 29.3% in 2050, while the share of young may decline to 10.8% in 2030 and 9.1% in 2050, the UN suggests.

The baby boom in early 1960s and the one-child policy from mid-1970s have significantly lowered the dependency ratio (those not of working age to those of the working age of 15-64) in the past three decades – from 62.6% in 1982 to 34.4% in 2011. For comparison, it is quite similar to Korea’s 36.8% but much lower than Japan’s 56.2%. A low dependency ratio has allowed China to save more and grow its capital base in the past. However, this ratio has likely already bottomed out and could start rising on aging population. It could rise to 39.2% in 2030 and 62.3% in 2050, according to the UN. The old-age dependency ratio  (age 65+/age 15-64) could rise to 24.2% in 2030 and 47.6% in 2050 from 11.3% in 2010 and 8.7% in 1980. This means that in 40 years time only two workers will support one retiree, vs nine workers supporting one now.

Such an unprecedented pace of aging poses big challenges to China’s pension system. Traditionally, Chinese families have largely relied on their children after their retirement. However, after a 30-year enforcement of the one-child policy, every only-child will need to support two parents and four grandparents, which is likely to be too much of a burden. The retirees will have to depend on the national pension system. China needs to quickly catch up its pension system coverage to ensure social security, as currently only about a third of the population is covered. Furthermore, how to finance the pension system remains a big question as China’s labor force shrinks.

 

New leaders’ best, safest and easiest reform in 2013

As we explained in detail in China’s post-leadership transition reforms (16 Nov 2012), major structural reforms are unlikely in China before 2014 as the new leadership, especially incoming president Xi and premier Li, will have a mandate of a whole decade. Messrs. Xi and Li will most likely take the first couple of years to consolidate their power base and make allies. In our view, for the two leaders to aggressively revamp China’s institutions, time is likely to be required in order to amass the power base necessary to take on the vested interest groups.

Strong support, little resistance

However, despite the focus on solidifying power bases and maintaining short-term growth stability, in our view the new leaders might still start some reforms in areas with the least resistance and the strongest support. For politicians, barriers to reforms could stem from conservatives clinging to old ideas and vested interest groups. As mentioned above, there is significant support from scholars and social elites for reforming the one-child policy, and the resistance might be only from those with vested interests.

We might be able to learn something from recent history. A decade ago when Messrs. Hu and Wen took office, they abolished all agricultural taxes which had existed in China for more than 2000 years. At that time, the amount of revenue from agricultural taxes had become almost irrelevant (only 2% of total national tax revenue), but Chinese farmers had been strongly against these taxes. This time around, we believe that fine-tuning the one-child policy, which was started in the mid-1970s, could be the major reform to be introduced by the new government with a window of late-2013 to 2014.

Opportunity for new leadership

In our view, China’s new leaders could use reform of the one-child policy as an opportunity to show leadership in their first year in office without taking on major interest groups. Messrs. Xi and Li have displayed a sincere intendance towards reforms and have promised to give the Chinese people a roadmap for what they will do in coming years. The best way to convince the Chinese people of their determination, in our view, would be to start with easier reforms that impart significant meaning. In this regard, we believe there are few other reforms better suited that could be enacted in 2013 (or in  early 2014).

Source: http://www.zerohedge.com/news/2013-08-04/china-ending-its-one-child-policy-here-are-implications

Did China Just Fire The First Salvo Towards A New Gold Standard?


In a somewhat shockingly blunt comment from the mouthpiece of Chinese officialdom, Yao Yudong of the PBoC’s monetary policy committee has called for a new Bretton Woods system to strengthen the management of global liquidity. In an article in the China Securities Journal, Yao called for more power to the IMF as international co-operation and supervision are needed. While comments seem somewhat barbed towards the rest of the world’s currency devaluers, given China’s growing physical gold demand and the fixed-exchange-rate peg that ‘Bretton Woods’ represents, and contrary to prevailing misconceptions that the SDR may be the currency of the future, China just may opt to have its own hard asset backed optionality for the future; suggesting the new ‘bancor’ would be the barbarous relic (or perhaps worse for the US, the Renminbi). Of course, the writing has been on the wall for China’s push to end the dollar reserve supremacy for over two years as we have dutifully noted – since no ‘world reserve currency’ lasts forever.

 

 

Over the last two years, we have noted:

 

China Takes Another Stab At The Dollar, Launches Currency Swap Line With France“,

 

BOE and the PBOC announced a currency swap“,

 

Australia And China will Enable Direct Currency Convertibility“,

 

World’s Second (China) And Third Largest (Japan) Economies To Bypass Dollar, Engage In Direct Currency Trade“,

 

China, Russia Drop Dollar In Bilateral Trade“,

 

China And Iran To Bypass Dollar, Plan Oil Barter System“,

 

India and Japan sign new $15bn currency swap agreement“,

 

Iran, Russia Replace Dollar With Rial, Ruble in Trade, Fars Says“, “India Joins Asian Dollar Exclusion Zone, Will Transact With Iran In Rupees“, and

 

The USD Trap Is Closing: Dollar Exclusion Zone Crosses The Pacific As Brazil Signs China Currency Swap

 

As a reminder, we noted here:

 

The question why China has been scrambling to internationalize the CNY has nothing to do with succumbing to Western demands at reflating its currency to appreciate it and thus to push its current account even lower in the country with the shallowest stock market and the most bank deposits (i.e., most prone to sudden, abrupt bursts of inflation), nearly double those of the US, and everything to do with preparing the world for the “final monetarism frontier”, which will take place when the BOJ’s reflation experiment fails, and last remaining source (at least before Africa, but that is the topic for another day) of credit formation – the PBOC – finally ramps up.

 

As we pointed out a few days ago when we discussed the accelerating Chinese credit impulse and its soaring 240% debt-to-GDP ratio:

 

What should become obvious is that in order to maintain its unprecedented (if declining) growth rate, China has to inject ever greater amounts of credit into its economy, amounts which will push its total credit pile ever higher into the stratosphere, until one day it pulls a Europe and finds itself in a situation where there are no further encumberable assets (for secured loans), and where ever-deteriorating cash flows are no longer sufficient to satisfy the interest payments on unsecured debt, leading to what the Chinese government has been desperate to avoid: mass corporate defaults.

 

At that point it will be up to the PBOC to do what the Fed, the ECB, the BOE and the BOJ have been doing: remove any pretense of money creation via the commercial bank complex (even if these are merely glorified government-controlled entities), and proceed to outright monetization of de novo created assets, thus flooding the system with as much money as is needed to preserve the illusion of growth. Naturally, with the Chinese stock market having proven itself to be a horrible inflation trap (and as a result the bulk of new levered money creation goes into real estate), the inflation explosion that would result would be epic.

 

And that, in a nutshell, is the reason why China is doing all it can to prepare for the moment when capital flows will soar once the PBOC no longer has the option to extend and pretend its moment of entry into the global reflation race. Yes, it will be caught between a rock (hyperinflation) and a hard place (a very hard crash landing), but the fact that neither of those outcomes has a happy ending will hardly stop the PBOC from at least preserving the alternative. That alternative will of course be to be ready and able to hit the switch when the BOJ’s printer burns out, and someone else has to step in and fill its shoes in the global “money creation” strategy, which sadly is the only one the world has left.

 

Finally, the question then will be not if, or how long, the US Dollar will remain the world’s reserve currency, when even the Developed world is forced to admit the PBOC’s monetarist primacy over the Fed, but just how much unencumbered gold one has to hedge against what will be the final, global bout of hyperinflation, the one spurred by every single DM and EM central bank is forced to print for dear fiat status quo life, or else.

Source: http://www.zerohedge.com/news/2013-08-04/did-china-just-fire-first-salvo-towards-new-gold-standard

The Black Swan No One is Talking About

Graham Summers from GainsPainsCapitalwrites:

Another “growth story” is dying before our very eyes.

As I’ve warned my Private Wealth Advisory subscribers, China is rapidly approaching ZERO growth. This is not less growth, but ZERO growth as in full-scale economic collapse from the days of 12% GDP growth per year.

Over 95% of “analysts” are missing this, but it is a fact. If you ignore the ridiculous GDP numbers (which even China’s Premiere has admitted are a joke in the past) and look at more accurate metrics, it’s clear China is collapsing at an alarming rate. Case in point, Electrical consumption rose by just 2.9% in the first quarter of this year.

How on earth can you generate GDP growth of 7% when you electrical consumption is rising by just 2.9% is beyond me. And when you consider that China is experiencing this weak growth despite having pumped over $1 trillion into its economy in the same quarter (an amount equal to 14% of China’s total GDP) you begin to understand the scale at which things are imploding in the People’s Republic.

Check out the chart for China’s stock market: we’re about to take out the post-2009 “recovery” trendline. And this is while China is pumping trillions in new credit into its economy!

http://gainspainscapital.com/wp-content/uploads/2013/07/sc-51.png

This is a Black Swan that few are noticing. If you look around the mainstream financial media in the US, you see talk of Bernanke tapering, discussions of rising interest rates and even the occasional story about how Europe is not fixed. But you won’t find stories about China facing ZERO growth. There’s only one I’ve seen and it was published in the Telegraph, a British newspaper.

This is just the start. I warned Private Wealth Advisory subscribers in our most recent issue that higher rates were coming noting a collapse in bonds in Europe and the emerging market space.

This could easily become truly catastrophic. The world is in a massive debt bubble and the Central banks are now officially losing control. The stage is now set for a collapse that could make 2008 look like a joke.

Source: http://www.gainspainscapital.com

Presenting The World’s Tallest Skyscraper, Whose Construction Was Just Halted

Barclays via Zerohedge:
It appears reality is hitting home in the property bubble capital of the world. The so-called “Skyscraper Index” continues to show an unhealthy correlation between construction of the world’s tallest building and an impending financial crisis – for example, New York 1930; Chicago 1974; Kuala Lumpur 1997, and Dubai 2010.

As The Dubai Chronicle reports , the record-breaking Sky Tower in Changsha, China, has seen its budget surge from $625 million to $855 million and completion dates pushed back to April 2014, after originally being scheduled for completion at the start of 2013.

 

and here’s the dreamy video of what it will look like and how fast they were planning on building it...

As Barclays notes, often the world’s tallest buildings are simply the edifice of a broader skyscraper building boom, reflecting a widespread misallocation of capital and in impending economic correction.

(click image for large legible version)

 

Investors should therefore pay particular attention to China – today’s biggest bubble builder with 53% of all the world’s skycrapers under construction – and India – which with just two completed skyscrapers, now has 14 skyscrapers under construction.

 

Source: Barclays

More on the Skyscraper Index

Source: http://www.scribd.com/doc/155531810/Skyscraper-Index

China Maneuvers To Take Away US’ Dominant Reserve Currency Status

By RUSS WINTER via Zerohedge:Hangman“All warfare is based on deception.” – Sun Tzu, “The Art of War” (500 B.C.)“The message of this initiative is for China to consider whether or not China would open up its banking system and allow the strongest currency in the world, which is the Chinese yuan, to be the rightful and anointed convertible currency of the world.” – Thailand Deputy Prime Minister Olarn Chaipravat in an interview with Bloomberg

“An international monetary system dominated by a single sovereign sovereign currency has intensified the concentration of risk and the spread of the crisis.” — People’s Bank of China (2009)

It should go without saying that China and Russia have designs to end the U.S. Dollar hegemony free ride. This is fundamental to understand and will be a game changer. The impacts on the standard of living of these players will be profound and especially negative for the U.S. How and in what manner this plays out is the question. I strongly believe that the answer lies in two parts: letting the U.S. put a noose around its own neck and then at the appropriate time, kicking the chair out from under it.

The first part of the operation is now advanced and is described below. The second part involves China and Russia preparing its relative currencies to be accepted in lieu of dollars. It means making the yuan and ruble at least equal to, if not superior to, American dollars in world trade. As you can imagine, the U.S. — a country with a debt-to-GDP ratio approaching 110% — can ill afford this sort of challenge to its status as a reserve currency.

China has already advanced the Yuan as a principal exchange currency by incorporating a series of deal with other countries. Such arrangements are hardly mentioned by U.S. financial media, but they are going on constantly. So far, the People’s Bank of China (PBOC) has signed nearly 2 trillion yuan worth of currency-swap deals with 20 countries and regions, including Hong Kong. Here’s a breakdown of happenings:

I suggest that the kicking the chair out from USD hegemony involves at least partially backing the Yuan, and Ruble for that matter, with gold. China’s reserve assets were 30.2% of the world total at the end of last year. How much of this is already in gold?

China is secretive about the number, I think it’s because it had some catching up to do and it’s incorporating Sun Tzu-style principles, namely deception. The last time China revealed its gold reserve levels was in 2009 at 1,054 tonnes, which caught the market by surprise.

Another reference point is that China’s foreign exchange reserve increased from $2.2 trillion in 2009 to $3.4 trillion today. During that period, U.S. dollar reserves held by China fell from 69% to 54%.  If only 10% of that $1.2 trillion increase went to gold, then let’s see … At an average price of $1,200, that would be nearly 3,000 tonnes, bringing China’s total gold holdings up to 4000 tonnes. Conventional wisdom would point to between 3,000 and 4,000 tonnes. The U.S. supposedly has 8,133 tonnes in its reserves. Russia has doubled its gold reserve in four years.

China’s mines produce an average of 350 tonnes per year. During the last four years, it has produced 1,400 tonnes. Certainly, its domestic production went toward its reserve. Production estimates for 2013 are 440 tonnes. It should be noted, however, that from 2002 to 2009 China had produced approximately 1800 metric tonnes of gold, which strongly suggests that its figure of 1,054 tonnes for 2009 is understated and deceptive, maybe by a factor of two to three times.

Between 2011 and 2012, imports into China via Hong Kong surged to a total of 950 tonnes. Some, but possibly the majority of this ended up in gold reserves. Furthermore, no one talks about “illegal” gold imports smuggled into China, which may add to the total.

?This year, the gold grab has reached entirely new levels, no doubt just one of the “unintended consequences” of the gold short attack in the paper “market.” In the first five months of this year, China imported more than what it did for all of 2011, or 525 tonnes.

Another incredible number is the volume of ounces transferred out of the London bullion market (LBMA) in May. That month alone it increased to 28.2 million ounces. To put that in perspective: 28.2 million troy ounces translates into 877 metric tonnes of gold. The amount of physical gold delivered year to date on the Shanghai Gold Exchange is 1,198 tonnes. Again, it’s much more than one would expect of the appetite of institutions, banks and individuals. The “Chinese granny” investor story is overplayed and may be a bit of a decoy. Much of this are PBoC and their proxies.

In 2009, a Chinese state council adviser known simply as “Ji” said that a team of experts from Shanghai and Beijing had set up a task force to consider expanding China’s gold reserves. Ji was quoted as saying, “We suggested that China’s gold reserves should reach 6,000 tons in the next three to five years and perhaps 10,000 tons in eight to 10 years.

The numbers I’ve cited are consistent with China easily reaching the Ji gold holding of 6,000 tonnes this year. The kind of withdrawal numbers being reported out of the LBMA, Comex and GLD (418 tonnes YTD) suggest that the PBOC through it’s proxy, the State Administration of Foreign Exchange (SAFE), is involved in a physical gold raid of such magnitude that the 6,000-tonne target has been left in the dust. The great gold sale has facilitated a push heading closer to 10,000 tonnes.

More importantly, as long as gold prices remain suppressed, China will continue to be a large-scale buyer. Perversely, if gold prices remain low, it will serve to accelerate the timeline for China to take down USD reserve currency hegemony. The U.S. can ill afford a China gold reserve buildup of 1,000 tonnes or more a year, let alone raid 2,000 tonnes and at cheap prices.

Meanwhile, China reportedly is progressing well on its ambitious plan to recast large gold bars into smaller, 1-kilogram bars on a massive scale. The big gold recast project points to the Chinese preparing for a new system of trade settlement. In the process, they are constructing a foundation for a new gold-supported monetary system that will give them advantages to their trade payments.

Finally, higher gold prices are necessary if the U.S. wants to curb China demand and prevent an emperor-wears-no-clothes scenario on the home front. You see, once yuan becomes a currency fully backed by gold, the next logical step will be not just domestic but international pressure on the U.S. and others, like Germany, to lift the iron curtain and reveal whether the gold they claim backs their currency really exists. Then get ready for all hell to break loose.

Source: http://www.zerohedge.com/contributed/2013-07-22/china-maneuvers-take-away-us%E2%80%99-dominant-reserve-currency-status

What Do the Bank of Japan, China’s Government and the Fed Have in Common?

Graham Summers writing for GainsPainsCapital:

As we’ve noted in recent articles, the US Federal Reserve has blown another bubble in stocks and facilitating the exact same risk-taking behavior that brought about the 2008.

The Fed realizing that it’s done this, which is why it’s now trying to manage down expectations of future stimulus (see the multiple suggestions from Fed officials that the Fed might reduce QE before hitting its unemployment target).

The Fed is not the only Central Bank to have shifted tone.

Chinese authorities took a step to ease potential inflationary pressures Tuesday by using a key mechanism for the first time in eight months.

The move by the central bank to withdraw cash from the banking system is a reversal after months of pumping cash in. That cash flood was meant to reduce borrowing costs for businesses as the economy slowed last year—but recent data has shown growth picking up, along with the main determinants of inflation: housing and food prices.

The People’s Bank of China used a liquidity-draining tool in the interbank market that enables the central bank to borrow money from commercial lenders. It withdrew 30 billion yuan ($4.81 billion) by offering 28-day repurchase agreements, alternatively known as repos. The PBOC hadn’t offered repos since June.

The central bank is trying to send a message that it will not tolerate too-easy liquidity conditions,” Dariusz Kowalczyk, a senior economist at Crédit Agricole, ACA.FR +0.99% wrote in a research note.

http://online.wsj.com/article/SB10001424127887323495104578313541983212134.html

Investors are ignoring this story for the most part. This doesn’t bode well for the economy as China was the alleged growth story that pulled the world out of recession in 2009. China did this via a massive stimulus program equal to nearly 20% of GDP (not to mention a massive expansion of its banking system).

So if China is curbing its stimulus, the rest of the world will soon feel the impact.

Another Central Bank that has failed to engage in more monetary stimulus is the Central Bank of Japan. Despite, recently re-elected Prime Minister Shinzo Abe has been talking down the Yen and urging the Bank of Japan to act aggressively to raise the stock market and Japanese economy, the Bank of Japan didn’t announce any new QE or stimulus in its latest meeting.

The significance of this is tremendous. Besides the Fed, the Bank of Japan is one of the most profligate money printers in the globe. For the Bank of Japan to NOT announce any new QE despite extreme pressure from Japan’s prime minister is yet another warning that something major has changed in the financial system.

This will end very badly. The Fed and other Central banks have set the stage for another Crash. And this time around its hands will be tied as it has used up all of its tools just creating this bubble.

THIS is the reason Central Banks are beginning to shift their tones. They realize they’ve blown another bubble and that we’re likely headed for another Crash. And this time around the Fed will be totally out of ammo to stop it. Unlike 2008 which was just a warm-up, this will be the REAL CRISIS featuring full-scale systemic failure.

So if you have not already taken steps to prepare for systemic failure, you NEED to do so NOW. We’re literally at most a few months, and very likely just a few weeks from the economy taking a massive downturn, potentially taking down the financial system with them. Think I’m joking? The Fed is pumping hundreds of BILLIONS of dollars into financial system right now trying to stop this from happening.

Source: http://gainspainscapital.com/2013/03/01/what-do-the-bank-of-japan-chinas-government-and-the-fed-have-in-common/

The Failing Pretense of Growth

Wolf Richter for Zerohedge:

Hasbro, the second largest toymaker in the US behind Mattel, confessed that it would miss fourth-quarter revenue estimates. Christmas wasn’t kind. Despite “double digit growth in our emerging markets business,” as CEO Brian Goldner said, revenues fell by 2% for 2012 and by 3.8% for the quarter. But 4% inflation, preferably more, would have covered up that debacle.

The consequences are brutal. There will be a pile of restructuring charges, and 10% of the people will be axed—a collective punishment that the Romans used to dish out to lackadaisical legionnaires. They called it “decimation” (Latin for “removal of the tenth”). One in ten soldiers, determined by drawing lots, would be stoned or clubbed to death by his buddies. It did wonders for morale, and the whole empire collapsed.

Procter & Gamble, the consumer products giant with a myriad of ubiquitous brands, brimmed with optimism in its earnings call on Friday as CFO Jon Moeller praised its “growth strategy.” But in the end, sales grew only 2%, about the rate of inflation. It’s tough out there.

A decimation had already been announced last February: 10% of non-manufacturing employees, “roughly 5,700 roles,” he said. Not people, but “roles.” 5,500 of these roles were already gone. The rest would be gone soon. Ahead of schedule. But it still wasn’t enough. In November, P&G “committed to do more,” that is axe another 2% to 4% of “non-manufacturing enrollment,” but “any additional enrollment progress”—enrollment progress!—in fiscal 2013 would give P&G a “head start” for their 2014 to 2016 “enrollment objectives” [for a peculiar American conundrum, read Making Heroes of Those Who Slash Jobs ].

But why this decimation? Sales growth. Or rather, the lack thereof. Which Moeller said, would be “1% to 2%.” Below the rate of inflation. Other large companies are in a similar predicament. Microsoft, for example, admitted on Thursday that its revenues rose a paltry 3%. Inflation is just too embarrassingly low for these corporate giants that are dependent on incessant price increases to doll up their top line.

Fed to the rescue! And it has been trying. After years of escalating waves of QE, the Fed has finally managed to print so much money that its balance sheet officially as of Friday, and for the first time in US history, broke through the $3 trillion mark. Here is a screenshot to eternalize the historic event:

On August 1, 2007, when the prior all-time-craziest Fed-inspired credit bubble was showing signs of blowing up, there were “only” $874 billion in assets on that balance sheet. Over the last two months alone, the Fed printed enough dollars to mop up $160.4 billion in securities. The two largest asset groups on the balance sheet : US Treasuries ($1.697 trillion) and mortgage-backed securities ($983 billion). Every month the Fed will add $45 billion in Treasuries and $40 in mortgage-backed securities. Until it comes up with something new.

Other central banks have also run their printing presses until they’re white hot. As all this money went looking for things to buy, it pushed bonds into the stratosphere, and yields into hell. Risk is no longer compensated. Some governments have been borrowing at negative yields. Even 10-year Treasuries yield less than inflation. And junk bonds with a considerable chance of default, if the free money ever dries up, yield as little as a 1-year FDIC-insured CD used to yield before the financial crisis. Commodity prices have been driven up. Food has become unaffordable for many people in poorer parts of the world. And equities have been driven to lofty heights. China just warned that “hot money” fresh off the US and Japanese presses would wash over China and drive asset bubbles to even more insane and dangerous heights.

But the one thing all this money-printing just hasn’t done in the US in 2012 is create the kind of substantive inflation that a lot of corporations need to beautify their revenues. Inflation creates the pretense of growth—just like salaries that have been rising, but less than inflation. It makes things look good on the surface, and analysts can go around and hype the company’s “growth strategy,” and everybody is happy. Reality be damned.

Meanwhile, European talking heads have been reassuring us on an hourly basis that the worst of the debt crisis is over. But the Japanese trade deficit, a measure of reality, not words, tells a different story about the crisis in Europe. And about troubles coming to a boil in China. But neither can be cured by Prime Minister Shinzo Abe’s plan to demolish the yen. Read…. What the Japanese Trade Deficit Says About the Fraying Fabric In China And Europe .

Source: http://www.zerohedge.com/contributed/2013-01-26/failing-pretense-growth/