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China’s Credit Bubble Unprecedented

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Whereas China may have helped to save the world in 2008, its ability to help global GDP has slowly been strangled by its own massive debt levels. Corporate and private sector debt has grown out of all proportions severely limiting China’s ability to grow its way out of its debt problems.  It’s not just Western banks we need worry about.

China’s shadow banking system is out of control and under mounting stress as borrowers struggle to roll over short-term debts, Fitch Ratings has warned. Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

The agency said the scale of credit was so extreme that the country would find it very hard to grow its way out of the excesses as in past episodes, implying tougher times ahead.

“The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem, and potentially into a Japanese-style deflation,” said Charlene Chu, the agency’s senior director in Beijing.

“There is no transparency in the shadow banking system, and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is, and this undermines signalling,” she told The Daily Telegraph.

While the non-performing loan rate of the banks may look benign at just 1pc, this has become irrelevant as trusts, wealth-management funds, offshore vehicles and other forms of irregular lending make up over half of all new credit. “It means nothing if you can off-load any bad asset you want. A lot of the banking exposure to property is not booked as property,” she said.

Concerns are rising after a string of upsets in Quingdao, Ordos, Jilin and elsewhere, in so-called trust products, a $1.4 trillion segment of the shadow banking system.

Bank Everbright defaulted on an interbank loan 10 days ago amid wild spikes in short-term “Shibor” borrowing rates, a sign that liquidity has suddenly dried up. “Typically stress starts in the periphery and moves to the core, and that is what we are already seeing with defaults in trust products,” she said.

Fitch warned that wealth products worth $2 trillion of lending are in reality a “hidden second balance sheet” for banks, allowing them to circumvent loan curbs and dodge efforts by regulators to halt the excesses.

This niche is the epicentre of risk. Half the loans must be rolled over every three months, and another 25pc in less than six months. This has echoes of Northern Rock, Lehman Brothers and others that came to grief in the West on short-term liabilities when the wholesale capital markets froze.

Mrs Chu said the banks had been forced to park over $3 trillion in reserves at the central bank, giving them a “massive savings account that can be drawn down” in a crisis, but this may not be enough to avert trouble given the sheer scale of the lending boom.

Overall credit has jumped from $9 trillion to $23 trillion since the Lehman crisis.

“They have replicated the entire US commercial banking system in five years,” she said.

The ratio of credit to GDP has jumped by 75 percentage points to 200pc of GDP, compared to roughly 40 points in the US over five years leading up to the subprime bubble, or in Japan before the Nikkei bubble burst in 1990. “This is beyond anything we have ever seen before in a large economy. We don’t know how this will play out. The next six months will be crucial,” she said.

The agency downgraded China‘s long-term currency rating to AA- debt in April but still thinks the government can handle any banking crisis, however bad. “The Chinese state has a lot of firepower. It is very able and very willing to support the banking sector. The real question is what this means for growth, and therefore for social and political risk,” said Mrs Chu.

“There is no way they can grow out of their asset problems as they did in the past. We think this will be very different from the banking crisis in the late 1990s. With credit at 200pc of GDP, the numerator is growing twice as fast as the denominator. You can’t grow out of that.”

The authorities have been trying to manage a soft-landing, deploying loan curbs and a high reserve ratio requirement (RRR) for banks to halt property speculation. The home price to income ratio has reached 16 to 18 in many cities, shutting workers out of the market. Shadow banking has plugged the gap for much of the last two years.

However, a new problem has emerged as the economic efficiency of credit collapses. The extra GDP growth generated by each extra yuan of loans has dropped from 0.85 to 0.15 over the last four years, a sign of exhaustion.

Wei Yao from Societe Generale says the debt service ratio of Chinese companies has reached 30pc of GDP – the typical threshold for financial crises — and many will not be able to pay interest or repay principal. She warned that the country could be on the verge of a “Minsky Moment”, when the debt pyramid collapses under its own weight. “The debt snowball is getting bigger and bigger, without contributing to real activity,” she said.

The latest twist is sudden stress in the overnight lending markets. “We believe the series of policy tightening measures in the past three months have reached critical mass, such that deleveraging in the banking sector is happening. Liquidity tightening can be very damaging to a highly leveraged economy,” said Zhiwei Zhang from Nomura.

“There is room to cut interest rates and the reserve ratio in the second half,” wrote a front-page editorial today in China Securities Journal on Friday. The article is the first sign that the authorities are preparing to change tack, shifting to a looser stance after a drizzle of bad data over recent weeks.

The journal said total credit in China’s financial system may be as high as 221pc of GDP, jumping almost eightfold over the last decade, and warned that companies will have to fork out $1 trillion in interest payments alone this year. “Chinese corporate debt burdens are much higher than those of other economies. Much of the liquidity is being used to repay debt and not to finance output,” it said.

It also flagged worries over an exodus of hot money once the US Federal Reserve starts tightening. “China will face large-scale capital outflows if there is an exit from quantitative easing and the dollar strengthens,” it wrote.

The journal said foreign withdrawals from Chinese equity funds were the highest since early 2008 in the week up to June 5, and withdrawals from Hong Kong funds were the most in a decade.

Source: Irish Independent

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Is China Cooking The Books?

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Looks like China has been cooking the books when it comes to its exports according to Bank of America. Things are a lot worse than they are letting on even echoing the pattern in 2008.

Latest research figures carried out by the Bank of America Corp. are set to rock the economies around the world once again. Has China been hiding the real state of its economic data? It would seem that the PRC hasn’t been quite as honest as it might have us all believe! According to the Bank of America Corp., the Chinese trade surplus that was meant to stand at some $61 billion turns out to be a meager mere tenth of that so far this year.

The true figure amounts to only $6 billion and that means it will be the smallest Q1 figure posted since the $10.8-billion deficit in 2004. Research on calculations carried out by the head of BoA’s Greater China Division, Lu Ting, suggests that the supposed tripling of China’s surplus was nothing more than fake, and that China has been cooking the books to appear to be better off than the rest of the world. True figures point to the fact that China’s growth rate is slowing down and that the economy is being restrained rather surging ahead. There’s being growing cause for concern since January this year as it turns out that China has been fibbing about its unemployment figures as well as GDP. Growing skepticism amongst analysts has led to worldwide concern as to the ability to provide real trade data.

Some are saying that the export situation can be likened to 2008 at the very moment when the financial crisis hit the world. China too was plunged into a difficult time as exports decreased back then. Shipments plummeted and out of that panic grew illegal practices in a bid to make money. Irregularities in export data have emerged and allowed for hot-money flows.

True figures seem to highlight that we have had the wool pulled over our eyes as figures show that there is a real growth of just 5% in exports, whereas the PRC has issued figures as high as 17.4%. Similarly, imports have increased by 7.6%, rather than the official government line figure of 10.6%. In a recent Bloomberg poll, investors believe that the Chinese economy is set to deteriorate in the coming year, despite what the official government figures might be stating.

But, it’s no consolation that China’s economy has also taken a downtown like the rest of us. While growth seems to be still partly there, it is definitely slowing down. That could be bad news for the rest of us, in already economic hard times, as we could see a knock-on effect around the world. That’s something we could surely do without right now! This is all in the wake of the Yuan’s all–time high. It currently stands at its highest level for almost twenty years in comparison with the Dollar. The Yen is suffering badly too from the adverse effects of never-before-seen monetary easing policies implemented by the Japanese government. Where do we go from here? Well, questions are now being raised as to how much longer China can withstand a growing Yuan in the face of a failing Dollar and troubled Yen. If it carries on much longer, China can only be on the receiving end of the adverse effects of that.

Source: tothetick

France Is Latest To Sign Currency Swap With China. Who Is Next ?

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France now looks to be the latest country to move away from the dollar as China is busy signing up countries to a currency swap line etc. Further evidence that the dollar will hold a much more minor role in future. Some countries to have signed up in the last few years are :

 

France intends to set up a currency swap line with China to make Paris a major offshore yuan trading hub in Europe, competing against London, the China Daily on Saturday cited Bank of France Governor Christian Noyer as saying.

Yuan deposits in Paris amount to 10 billion yuan ($1.6 billion), making it the second largest pool for the Chinese currency in Europe after London. Almost 10 percent of Sino-French trade is settled in yuan, also called the renminbi or RMB, according to French data cited by the official newspaper.

“The Bank of France has been working on ways to develop a RMB liquidity safety net in the euro area with due consideration of a supporting currency swap agreement with the People’s Bank of China,” Noyer told the English-language newspaper.

The yuan’s internationalization and bilateral financial cooperation could be among the main topics during French President Francois Hollande’s visit to China in late April, the paper said.

French Foreign Minister Laurent Fabius paid a two-day visit to Beijing this week.

The planned swap line would be the latest in a string of bilateral currency agreements that China has signed in the past three years to promote use of the yuan in trade and investment.

It followed a similar step by the Bank of England to set up a reciprocal three-year yuan-sterling swap line with China.

Britain, always anxious to maintain London’s status as Europe’s biggest financial center, launched an offshore yuan currency and bond market to great fanfare last year.

Source: ZeroHedge

Path From USDollar to New Gold Note Global Trade System

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Much has been written of the coming demise of the US dollar and a possible return to the gold standard. Jim Willie explores how he believes this will come about and what to expect along the way. 2013 being the key year.

The crux of the non-US$ trade vehicle devised as a USDollar alternative will be the Gold Trade Note. It will enable peer-to-peer payments to be completed from direct account transfers independent of currency, and most importantly, not done through the narrow pipes and channels controlled by the bankers with their omnipresent SWIFT code system among the world of banks. The Gold Trade Note will act much like a Letter of Credit, serve as a short-term bill, and maybe even push aside the near 0% short-term USTreasury Bills that litter the banking landscape. Any bond or bill earning almost no interest is veritable clutter. The zero bound USTreasurys open the door in a big way for replacement by a better vehicle. The new trade notes will involve posted gold as collateral, whose entire system for trade usage will bear a massive gold core that also will include silver and platinum, maybe other precious metals. The idea is to avoid the FOREX systems, to avoid the USDollar, and to avoid the banks as much as possible in a peer-to-peer system that can be executed between parties holding Blackberry devices or simple PC to complete the payments on transactions. If Gold is ignored by the corrupt bankers, then Gold will be the center of the new trade system and the solution in providing a globally accepted USDollar alternative.

 Do not be surprised to see the Chinese Yuan later as interchangeable with the Gold Trade Note. But first the Yuan must be convertible into the many major currencies actively traded in the world. Numerous reports have come in recent weeks that the Yuan currency will soon have a gold backing, yet unconfirmed. My expectation is for the Chinese Yuan eventually to be interchangeable with the Trade Note. That will signal its implicit gold backing. While many events and steps are not known, and many surprises will be thrust on stage, the guiding pathways are slowly coming to light.

Currency wars ongoing with no sign of abatement.

The list of nations undergoing active currency intervention is growing markedly. Currency manipulation actions are routine, each action inviting a reaction by other nations. It is not just Japan and the United States, the usual suspects. It is Luxembourg, Switzerland, South Korea, Sweden, Norway, and Brazil. Heck, even the venerable England has taken steps to create a Chinese Yuan swap facility. They do not wish to be left out when the Yuan becomes a more global currency, with full convertibility. London is aiding the path to a convertible Yuan. Who’d a thunk it? London wishes to remain a major trading center. Look for someday soon a Chinese Govt Bond auction denominated in Yuan, the offering managed by London banks. Such a development is not welcome news for New York, which must be seething with anger and flush with disgust. This is the more than a currency war, but rather a global currency tumult and transformation, with grand tectonic shifts, on the disruptive path to a return of the Gold Standard.

The Swiss and Japan will make an eventual switch from the current system to an Eastern orientated solution.

Watch for the Swiss and Japan to knock on the door for entrance in the Eastern Alliance, which will produce the USDollar alternative. It requires a critical mass for success. The stress felt in these two nations will motivate their pursuit of the USDollar alternative solution. They are being seriously wounded by the fiat paper currency system with floating rates.

The G20 meeting held in Russia later in the year(Sept) is one to watch out for as Willie suspects the plans will be put in place in the rumoured absence of US/UK.

Rumor is circulating in London that neither the United States nor the United Kingdom will attend the G-20 Meeting in Moscow. Refusal to attend by the Anglos would open a giant gate to coordinate plans by the leading Eastern nations (trade participants) on the new trade settlement system with attendant platforms. Rather than creating a new and better currency, they are more likely to establish a gold-backed trade settlement process that will render the USDollar obsolete. Failure to attend by the US-UK tagteam of financial fascists would ignite the Eastern-led consortium on motivation toward the launch of the new system in a more open public vocal manner with press conferences. The Third World awaits the nations that refuse to become part of a growing critical mass in global trade, which desires a more fair and equitable system of trade settlement. It is coming, but awaits a climax of collapse.

Source: silverdoctors

WGC: Chinese Move Toward Gold Backed Yuan

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Its been discussed by gold bugs over the last few years but Keith Barron in an interview with King World News talks about  the World Gold Council’s commissioned a report which basically says the Chinese are looking to launch a gold backed yuan. Jim Rickards in his book Currency Wars has written about the obvious move for China to back the yuan with gold and its no secret that China with its large dollar reserves are not happy with how its being debased.  With every major Central Bank flat-out printing money combined with gold repatriation stories and hedge fund Pacific Group converting its holdings to physical gold, one cannot help wonder that 2013 could be a very significant year for gold.

The second thing I want to make KWN readers aware of is the report which was commissioned by the World Gold Council.  This is an incredible document, especially coming from the World Gold Council because it’s basically saying that the Chinese are going to back their currency with gold.  This would, in turn, displace the US dollar and make the Chinese yuan the world’s reserve currency.

 The Chinese are sitting on piles of dollars right now, and while the US continues its decline, the reality is that all of the fiat currencies are in a race to the bottom.  We just saw the Bank of Japan yesterday talk about opening up QE and printing vast sums of money.  This will be an attempt to reverse their deflation with inflation.  This move by the Japanese is very, very bullish for gold.

 But between what is happening with the set up for the coming short squeeze in gold, coupled with the Chinese moving to back the yuan with gold, and the shortages we are seeing in the silver market, the outlook for gold and silver going forward are spectacular.  Quite frankly, the gold and silver bulls are going to begin to trample the bears at some point in the near future.”

Last month Stephen Leeb spoke of a chinese diplomat admitting China’s intention only to backtrack shortly afterwards.

There is a ritual we see in overnight trading.  Gold is usually up $4 or $5 at around midnight or 1 AM east coast time.  I’ll be watching gold trade at this time and I can’t count the number of times that in just a minute or two, instead of gold being up $4 or $5, it’s now down $20.  No one is trading at 12 or 1 or 2 in the morning.  Somebody is doing this and it always happens when there is no liquidity.  So you have a game of desperation going on here and the Chinese are aware of this. 

 I was just speaking to a Chinese diplomat and I said to their diplomat, ‘Your two most important commodities are water and gold.’  And this diplomat said to me, ‘Yes, we need gold to back up the yuan.’  Well this diplomat realized very quickly they had made a terrible mistake in admitting that and began to back off and stated, ‘No, it’s not to back the yuan.  It’s because of jewelry.’  But it was too late, the horse had left the barn so-to-speak.

 So the Chinese get this in spades.  The only way for them to become the world’s powerhouse and continue accumulating materials in the resource war is if they have a currency that’s backed up by gold or they have the actual physical gold itself.

The bottom line here is that when I see gold engaged in one of these drops I know it doesn’t make any sense.  The Chinese let the price of gold dip because they are smart buyers and we are playing into their hands with this ridiculous manipulation.

 This game of manipulation we are engaged in with the gold market is going to stop sooner rather than later.  Time is running out on these schemes and when it does stop and when they lose control, you had better be positioned in gold because this will be a bull market to end all bull markets.”

World Gold Council : – Gold Renminbi Mulit Currency Reserve System

Failure On COMEX Silver Likely

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We finished December with a large takedown of both gold and silver by the central banks cartel but already the COMEX is showing signs of strain in coping with demand in silver. Banks with short positions (used to suppress the price) are unlikely to be covered in 2013 and so there is likely to be a failure on the COMEX.

Matterhorn Asset Management’s Lars Schall has released an excellent interview with GoldMoney’s Alasdair Macleod, discussing the latest take-down of the metals post QE4, the outlook for gold and silver, and cartel manipulation of the metals.
Macleod states that massive amounts of physical gold and silver have been flowing to Asia, and that the latest bank participation report indicates massive problems are brewing for the banksters in the COMEX silver market.  With cartel shorts near a record at just under 300 million net ounces, yet with the silver price substantially lower than the 2011 high, Macleod believes that we are quite likely to have a failure on COMEX and in the silver market in particular.

Regarding the latest bank participation report, Macleod states that commercial shorts are at record highs, yet NO SILVER IS AVAILABLE!:

“Bank shorts are at or near record levels. And what is interesting is that with the prices of gold and silver well below the all-time highs there are no profit-takers in the market to sell contracts to close their shorts. And in silver it is very, very alarming. This leads me to think that we are quite likely to have a failure on COMEX and in the silver market in particular.

If you have a failure in silver on COMEX then that is going to affect the gold futures market as well. The West’s central and commercial banks have suppressed the price of both gold and silver by supplying central-bank gold and increased short positions, making prices far too cheap. The result has been a massive transfer of gold and silver to Asia. This is the relevance of the point that you have been raising about Central Banks gold holdings, and it is also going to bring into question the solvency of the bullion banks who are short.

So, I think that while it may not be obvious to many people at the moment, when we look back at the fourth quarter we will see that the conditions were in place for a huge bear squeeze, for silver in particular. I would assume that the short position in gold is more controllable so long as Western Central Banks continue to make bullion available to the bullion banks that are short either on COMEX or with LBMA. But silver is different, nobody has it for sale. There is no silver around.”

Macleod goes on to state that gold will be remonetized, and the process is already well underway:

“I suspect that the Chinese Yuan will play a big role in Asia. What they’re doing with Iran is interesting. They’re settling net balances in gold and gold is being re-monetized in that sense. And I think that China has accumulated a lot more gold than they officially tell us. So they have the potential to use gold as money. I can see gold being re-monetized in the loosest sense for the largest internal market the world has ever seen. Believe me, it’s happening now.”

Macleod also states that the upcoming physical silver crisis at the COMEX will result in a suspension of silver trading at the COMEX, and a reset massively upwards in the price of silver:

“You’ve got the banks’ short position on COMEX which cannot be covered. According to the most recent bank participation reports, the banks are short of nearly 300 million ounces of silver. When you bear in mind this is an industrial metal, the vast bulk of silver consumption from mining and recycling supply goes into biocides, solar panels, electronics, et cetera. You have only 100 million ounces annually left over for investors. The short position for the banks on COMEX is three times that 100 million ounces.

There’s no way this can be covered without a price rise sufficient to kill off significant industrial demand, because there are no strategic reserves to draw on. The only country which might have strategic reserves is China but otherwise there are no reserves. And I think that the only way in which the banks’ shorts could be closed out is after a price hike which would lead to billions of dollars of losses for these banks. There will be a market crisis, and I think that they will have to suspend trading in silver and agree a settlement procedure for long and short contracts. And if that happens, it will be well over $50 an ounce. But remember, other exchanges will continue to price silver if Comex suspends, which will not help Comex resolve the problem if the price continues to rise elsewhere.”

On another question, Macleod was asked about Yuan as the next reserve currency being backed by gold :

“We must also understand that the dollar is for security reasons not something they want to use for their international trade settlements. Remember that every dollar transaction done in the world is reflected in a bank account in New York. So, the Chinese want to get away from the potential control and the intelligence information that it gives America. They want to use a different settlement medium.

Now, they agreed about 10 years ago with the Russians to set up the Shanghai Cooperation Organisation (SCO), and the last unsatisfied objective of the SCO is to have a common trade settlement system between the members of the SCO, which at the moment are Russia, China, and the various “stans” in middle-Asia. But interestingly, the next wave of members who will join are India, Iran, Pakistan, Mongolia and Afghanistan (as soon as NATO has left). So you’ve really got the bulk of Asia’s four billion people and they’re going to be settling cross-border trade not with the dollar but with something else. They need to be gold-rich to give confidence to their currencies. I suspect that the Chinese Yuan will play a big role in Asia. What they’re doing with Iran is interesting. They’re settling net balances in gold and gold is being re-monetized in that sense. And I think that China has accumulated a lot more gold than they officially tell us. So they have the potential to use gold as money. I can see gold being re-monetized in the loosest sense for the largest internal market the world has ever seen. Believe me, it’s happening now.”

Source: SilverDoctors

 

China’s Demand For Gold To Soar

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Although the official figures for China’s Gold reserves are 1054 tonnes its clear that they have been buying up national production while at same time secretly buying physical on the dips. One thing for sure is Chinese gold consumption will continue unabated and soon surpass India.

Considering China’s is the world’s largest gold producer…and their consumption
will be twice their production level what do you think that means for the price
of Gold? Gold 10,000…here we come.

From Shanghai Daily…

CHINA’S gold consumption will more than double the production of bullion by 2015,
the Ministry of Industry and Information Technology said. But China, the second-
biggest consumer in the world after India, will continue to see a wider deficit
in gold supply in the country as consumption is set to surpass 1,000 tons in 2015,
the ministry said in a statement published on its website yesterday.

Although consumption in India remained above China’s in the first three quarters
of the year, the World Gold Council predicts China to become the biggest market
this year, according to its quarterly report unveiled this month.
Since 2007, China has been the world’s biggest gold producer. It aims to produce
between 420 tons and 450 tons of gold in 2015. The country is also the biggest
old jewelry producer, taking up about 60 percent of the global production, according
to the ministry.

According to Jim Willie massive amounts of physical gold has gone East already as faith in allocated accounts have taken a hit due to recent scandals.

Since March 2012, a whopping 6000 metric tons of gold bullion has been shipped from London to the East, primarily China. The circumstances behind the shipments are murky, but they indicate private off-market transactions that are intended to avoid publicity. My suspicion is that old wealthy Chinese families had their Allocated Gold Accounts improperly used in leasing practices by London bankers, associated with posted margin on a gaggle of leveraged contracts spanning from sovereign debt to currencies. The trades went sour. Margin calls were enforced with lost gold in a grand forfeit, the London bankers feet put to the fire reportedly. Publicity was avoided, but in the process a tremendous amount of gold was forfeited. With the gold went a transfer of power, to the East. They will dictate terms of the new trade settlement system. They will become the world’s more prominent lenders. They will control the next geopolitical chapter.

On thing is for sure, the Chinese are well aware of the impending Global financial collapse and are preparing themselves and so should we.

 

Source: The China Money ReportSilverDoctors

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