Yes Virginia...It's a Bubble...

[EJ]

Re: Yes Virginia...It's a Bubble...

This two ideas might be connected, but they might not.

It's just as easy to postulate that the fleeing Chinese rich are the most honest and rational among the Chinese rich.
They might have been operating inside a dangerous and corrupt system to gain their fortune, but now things are getting so unstable they are running for the exits before the murder starts.
The most corrupt and violent sorts might prefer to stay and rule over the bloodshed.

Pure speculation on my part, but equally plausible.

I just had a long conversation with a Chinese ex-pat friend in NYC who runs a hedge fund. He made his fortune in China then moved his family to the states. Most of his friends and neighbors are also wealthy ex-pats from China.

Why are they here? Better quality of life for themselves and their families. Here you can breath the air and eat the food without the worry you are being poisoned. Your kids will be better educated. You don't have to deal with petty corruption at the local level.

Bottom line you can make a fortune in China because it's more entrepreneurial than the U.S., if you are good at navigating the corruption. For all of the corruption the business environment is brutally competitive and this tends to reward the best, even in the government.

But once you've made your fortune the U.S. is a better place to live.

[GRG55]

Re: Yes Virginia...It's a Bubble...

This two ideas might be connected, but they might not.

It's just as easy to postulate that the fleeing Chinese rich are the most honest and rational among the Chinese rich.
They might have been operating inside a dangerous and corrupt system to gain their fortune, but now things are getting so unstable they are running for the exits before the murder starts.
The most corrupt and violent sorts might prefer to stay and rule over the bloodshed.

Pure speculation on my part, but equally plausible.

I doubt this is as binary as we might imagine.

First, there may be explicit approval and some relaxation of funds transfer capability out of China for the well connected wealthy, as part of an effort to find ways to vent the excess private savings into something other than internal property speculation and shadow banking system investment products, both of which are causing concern with the authorities. Buying gold and various luxury goods inside China can only absorb so much...foreign real estate and perhaps other private investment abroad might be carefully encouraged.

But monitoring and controlling the outflows, once started, might also be problematic in a nation as large, populous, complex and corrupt as China. So it is entirely likely that some, shall we say, "unscrupulous and ill gotten gains" are also finding their way out of China, along with their representative owners, through the same conduits?

It's just another cycle repeating...well perhaps rhyming in a new variation might be a better description?

The lesson of Bo Xilai is probably not lost on anyone with some wealth in China:

Bo Xilai found guilty on all charges, sentenced to life in prison

updated 7:11 AM EDT, Mon September 23, 2013

Beijing (CNN) -- A court in eastern China sentenced Bo Xilai -- the former rising star of the ruling Communist Party who fell from power amid a scandal involving murder, betrayal and financial skullduggery -- to life in prison Sunday.

Bo received the life sentence for bribe-taking, as well as 15 years for embezzlement and seven years for abuse of power.

The sentences, which came shortly after the guilty verdicts, surprised some analysts...

...Days before the court announced the date for delivering the verdict, Bo reiterated his innocence but said he anticipated a lengthy imprisonment in a letter written to his family...

..."Meanwhile I will be waiting quietly in prison," Bo continued. "Dad was thrown into prison multiple times in his lifetime and I will look up to him as my role model."

Bo's late father, Bo Yibo, was a revolutionary contemporary of Chairman Mao Zedong and late paramount leader Deng Xiaoping. During the tumultuous Cultural Revolution that Mao launched in 1966, however, the senior Bo was persecuted, tortured and imprisoned for over a decade. He was "rehabilitated" in 1979 and became one of the most influential senior politicians under Deng...

[thriftyandboringinohio]

Re: Yes Virginia...It's a Bubble...

...This line is telling, what it tells me is the Chinese "rich" who are fleeing are the ones who are corrupt and have reason to suspect that the new administration is going to kill them or make them disappear...

This two ideas might be connected, but they might not.

It's just as easy to postulate that the fleeing Chinese rich are the most honest and rational among the Chinese rich.
They might have been operating inside a dangerous and corrupt system to gain their fortune, but now things are getting so unstable they are running for the exits before the murder starts.
The most corrupt and violent sorts might prefer to stay and rule over the bloodshed.

Pure speculation on my part, but equally plausible.

[ProdigyofZen]

Re: Yes Virginia...It's a Bubble...

Rich Chinese continue to flee China

Published: Friday, 17 Jan 2014 | 11:28 AM ET

Do the wealthy Chinese know something we don't?

A new report shows that 64 percent of Chinese millionaires have either emigrated or plan to emigrate—taking their spending and fortunes with them. The United States is their favorite destination.

The report from Hurun, a wealth research firm that focuses on China, said that one-third of China's super rich—or those worth $16 million or more—have already emigrated.

The data offer the latest snapshot of China's worrying wealth flight, with massive numbers of rich Chinese taking their families and fortunes overseas. Previous studies show the main reasons rich Chinese are leaving is to pursue better educations for their kids, and to escape the pollution and overcrowding in urban China.

But analysts say there is another reason the Chinese rich are fleeing: to protect their fortunes. With the Chinese government cracking down on corruption, many of the Chinese rich—who made their money through some connection or favors from government—want to stash their money in assets or countries that are hard for the Chinese government to reach.

According to WealthInsight, the Chinese wealthy now have about $658 billion stashed in offshore assets. Boston Consulting Group puts the number lower, at around $450 billion, but says offshore investments are expected to double in the next three years.

A study from Bain Consulting found that half of China's ultrawealthy—those with $16 million or more in wealth—now have investments overseas.

The mass millionaire migration out of China is also hitting luxury companies hard. Hurun said China's luxury sales last year fell 15 percent—the biggest drop in over a half a decade. Spending on gifts, which made up a sizable portion of luxury sales, fell 25 percent.

Bentley Motors last week said that its sales in China slowed last year in part because of "the migration of high net worth individuals from China."

In other words, it isn't that wealthy buyers in China are spending less—they're just disappearing.

Most are looking for permanent residences, Hurun said. The United States was their top destination, which any real estate agent in San Francisco, Seattle or New York can confirm. Europe is their second favorite destination, followed by Canada, Australia, Singapore and Hong Kong.

The question is, how does a crash affect Chinese imports when most imports are mandated from the PRC?

"But analysts say there is another reason the Chinese rich are fleeing: to protect their fortunes. With the Chinese government cracking down on corruption, many of the Chinese rich—who made their money through some connection or favors from government—want to stash their money in assets or countries that are hard for the Chinese government to reach."

This line is telling, what it tells me is the Chinese "rich" who are fleeing are the ones who are corrupt and have reason to suspect that the new administration is going to kill them or make them disappear like they have done others who have embarassed or fallen out of line with the ruling party.

It does not tell me that the current Chinese exit is for the same reasons as previously, (education, citizenship, pollution).

[GRG55]

Re: Yes Virginia...It's a Bubble...

Rich Chinese continue to flee China

Published: Friday, 17 Jan 2014 | 11:28 AM ET

Do the wealthy Chinese know something we don't?

A new report shows that 64 percent of Chinese millionaires have either emigrated or plan to emigrate—taking their spending and fortunes with them. The United States is their favorite destination.

The report from Hurun, a wealth research firm that focuses on China, said that one-third of China's super rich—or those worth $16 million or more—have already emigrated.

The data offer the latest snapshot of China's worrying wealth flight, with massive numbers of rich Chinese taking their families and fortunes overseas. Previous studies show the main reasons rich Chinese are leaving is to pursue better educations for their kids, and to escape the pollution and overcrowding in urban China.

But analysts say there is another reason the Chinese rich are fleeing: to protect their fortunes. With the Chinese government cracking down on corruption, many of the Chinese rich—who made their money through some connection or favors from government—want to stash their money in assets or countries that are hard for the Chinese government to reach.

According to WealthInsight, the Chinese wealthy now have about $658 billion stashed in offshore assets. Boston Consulting Group puts the number lower, at around $450 billion, but says offshore investments are expected to double in the next three years.

A study from Bain Consulting found that half of China's ultrawealthy—those with $16 million or more in wealth—now have investments overseas.

The mass millionaire migration out of China is also hitting luxury companies hard. Hurun said China's luxury sales last year fell 15 percent—the biggest drop in over a half a decade. Spending on gifts, which made up a sizable portion of luxury sales, fell 25 percent.

Bentley Motors last week said that its sales in China slowed last year in part because of "the migration of high net worth individuals from China."

In other words, it isn't that wealthy buyers in China are spending less—they're just disappearing.

Most are looking for permanent residences, Hurun said. The United States was their top destination, which any real estate agent in San Francisco, Seattle or New York can confirm. Europe is their second favorite destination, followed by Canada, Australia, Singapore and Hong Kong.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Repeat after me:

China property is a "cash market";

The Chinese government "won't let" the property market crash;

China has 1.1 Billion people that need homes so all the empty apartments will get filled;

It's different in China because a centrally planned economy and a totalitarian government can make and implement good economic decisions so much more quickly and effectively than the USA or any other democracy...

(feel free to add your own China myth to the list)

Misallocation of capital? In China? Perish the thought...

Last updated: April 16, 2013 5:32 pm

China local authority debt ‘out of control’

By Simon Rabinovitch in Beijing

A senior Chinese auditor has warned that local government debt is “out of control” and could spark a bigger financial crisis than the US housing market crash.

Zhang Ke said his accounting firm, ShineWing, had all but stopped signing off on bond sales by local governments as a result of his concerns.

“We audited some local government bond issues and found them very dangerous, so we pulled out,” said Mr Zhang, who is also vice-chairman of China’s accounting association. “Most don’t have strong debt servicing abilities. Things could become very serious.”

The International Monetary Fund, rating agencies and investment banks have all raised concerns about Chinese government debt. But it is rare for a figure as established in the Chinese financial industry as Mr Zhang to issue such a stark warning.

“It is already out of control,” Mr Zhang said. “A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”...

...Last week, Fitch cut China’s sovereign credit rating, in the first such move by an international agency since 1999. On Tuesday, Moody’s cut its outlook for China’s rating from positive to stable.

Local governments are prohibited from directly raising debt, so they have used special purpose vehicles to circumvent these rules, issuing bonds under the vehicles’ names to fund infrastructure projects.

Investment companies owned by local governments sold Rmb283bn of bonds in the first quarter of 2013, more than double the total for the same period last year. Such an increase would normally be expected to boost the economy, but China’s growth unexpectedly slowed to 7.7 per cent in the first quarter of 2013...

...Mr Zhang said many local governments had invested in projects from public squares to road repairs that were generating lacklustre returns, and so were relying on financing rollovers to pay back their creditors. “The only thing you can do is issue new debt to repay the old,” he said. “But there will be some day down the line when this can’t go on.”

Mr Zhang added that he grew alarmed when smaller towns and counties discovered that investment vehicle bonds were an easy way to raise financing. “This evolution was quite frightening,” he said. “China has more than 2,800 counties. If every county issued debt, it could lead to a crisis. It could be even bigger than the US housing crisis.”...

The one advantage that China has if it ever does find itself in a credit induced banking squeeze is that it does not have to nationalize the banks...it already owns them.

January 16, 2014


China crisis may be unavoidable

JUNHENG LI

Mainland policymakers and analysts commonly argue that China's public debt burden in itself is not a problem. They say that as long as gross domestic product growth outpaces credit growth, and that credit-driven growth generates a positive return on investments, all will be fine.

The accuracy of the numbers reported last month by the National Audit Office is of course questionable. We see that, though, as less relevant than the government's intended message to the market: that overall debt is still manageable.

I, however, question the idea China can grow its way out of this problem. That's because, first of all, the debt issuers are not the primary beneficiaries of gross domestic product growth. The primary beneficiary of GDP growth is the central government, which gains in the form of tax revenues. Debt issuers, on the other hand, are mostly local and their primary revenue source is land sales.

There is no direct, mechanical or automatic link between economic growth and local authorities' debt service capacities, as we have witnessed since 2008 as total social financing, a broad measure of credit, has exploded.

The argument that China can grow out of its credit bubble is valid if and only if GDP growth increases the debt service capacity of the debtors. As GDP is only a measure of economic activity, not efficiency or profitability, GDP growth alone does not guarantee a proportional increase in the revenue of local authorities that could be used to pay down the debt issued via financing vehicles....

...Investments in city construction, land reserves, transportation facilities and social housing in mid-2013 made up 35%, 11%, 24% and 7%, respectively, of total spending by local authorities, according to Citigroup analysts.

Bulls would argue that these hard assets could be drawn on to repay the debt. But common sense dictates that financial returns from the physical assets funded by local government are largely unknown and most likely negative. If these projects were financially viable, why didn't local authorities invest in them prior to 2008 rather than waiting till the onset of the global financial crisis?...

...It is clear that policymakers in China are focused on engineering a transition to slower but more sustainable growth without causing a sharp cyclical slowdown. From an empirical perspective, however, the number of economies that have historically succeeded in letting the air out of a credit balloon in a gradual fashion, without creating a credit crunch and a short-lived recession, cannot be counted even on one finger.

Whether China will be different, given its unique policy tools and central planning instruments such as quantitative credit controls, is yet to be seen. Nevertheless, policy intervention comes with costs, mostly higher and more convoluted than anticipated.

One thing is certain: The consequences will be profound and long lasting for global economies and investors.

[GRG55]

Re: Yes Virginia...It's a Bubble...

Well I don't know why the Chinese government is encouraging it's cityzens to buy gold. Maybe it's just to give the people a sound ways to invest their savings without overloading the RE market...

That's what I think.

I've lived and worked in quite a few places where the economy is dominated by state owned enterprises. In most of these cases there are also usually restrictions on citizens sending or taking money abroad. This severely limits the options for private savings to be invested internally...small service and retail businesses, followed closely by property and stock market speculation are the most common alternatives. This was the situation I observed in the Persian Gulf in 2000. And of course they went through a lovely stock market and property bubble (and bust) led by the regional poster child, Dubai. This seems a common pattern when an authoritarian government starts to mildly loosen its grip on its economy and larger numbers of citizens start to become wealthier...and therefore earn more than they spend.

I suspect the recent official (and "look the other way" unofficial) relaxation on taking money out of China to invest abroad, the creation of the Shanghai gold exchange and the official urgings for citizens to buy gold are all part of finding alternate ways to vent the excess savings and direct them away from another stock market mania, or compounding an already difficult property bubble situation. The "reforms" that are being discussed in China, including promoting more consumption, will take a lot of time. The government and the PBOC know this.

So far the "China is buying gold and will take over the world, crush the USA and the US Dollar" crowd don't make any logical sense for this observer.

[Southernguy]

Re: Yes Virginia...It's a Bubble...

Well I don't know why the Chinese government is encouraging it's cityzens to buy gold. Maybe it's just to give the people a sound ways to invest their savings without overloading the RE market.
What I stress is that China is climbing the ladder of economic development as per following work. And of course as history tells about any emerging major power they are becoming big capital exporters as well. Unlike Latin America, still mired in raw materials for most of it's exports while depending on capital imports for significant part of investment all this paired to huge capital flight from it's elites, China exports industrial output with ever growing tecnological contents.
HONG KONG — Cheng Chunmeng, the general manager of a manufacturer of colorful children’s chairs in east-central China, gave his workers a 30 percent raise last year to keep them from leaving. His labor costs are rising even faster in dollar terms, as the Chinese currency slowly climbs against the United States dollar.
Yet Mr. Cheng, like many Chinese exporters, enjoys growing sales to the United States. “I saw a remarkable increase in orders from the United States starting in March, and getting better and better since then,” Mr. Cheng said. “I feel 2014 will be an even better year.”
Export gains like Mr. Cheng’s suggest that despite years of predictions of trouble for China’s export juggernaut, it has not yet been derailed by fast-rising costs for blue-collar labor, by an appreciating Chinese currency or by foreign investment shifts toward other, lower-wage Asian countries.
China announced on Friday morning its largest annual trade surplus in dollar terms since 2008, as the surplus widened another 12.8 percent compared with 2012, reaching $259.75 billion.

Launch media viewer

Cheng Chunmeng of Hangzhou Luyi Arts & Crafts. Timothy O'Rourke for The New York Times

China has kept its export machine running even while wages rise. Blue-collar pay has soared between fivefold and ninefold in dollar terms in the last decade, wrecking China’s reputation as a low-wage place for export-oriented manufacturing. Rocketing wages and benefits reflect an acute shortage of manufacturing labor, as a younger generation goes to college instead of heading for factories and as rural China has mostly run out of young adults to send to the cities.
China’s exports, while growing more slowly than a few years ago, are still far from stalling despite the disappearance of its advantage in labor costs. Chinese exporters say they have been able to keep prices low and retain overseas customers because factories are becoming more productive. Much of the manufacturing has stayed in China because the highly developed supply chains leading to and from the factories remain among the best in the world.
“We haven’t started thinking of moving to another country,” said Xiang Wenwei, the sales director of the China Mybaby Group, a 3,000-employee manufacturer of baby strollers in Ningbo that makes and assembles all of its major components. It relies on a dense web of suppliers near the factory for everything from raw materials to factory equipment maintenance.
The trade gains for China are magnified because over the last several years many companies have shifted the production of components from high-wage Asian countries like Japan and South Korea to China itself. So China is producing more of the value in each product, and not just doing the final assembly of products produced elsewhere.
China has begun to account for more than half the American trade deficit in some months, including last November, partly because of rising production of shale gas and shale oil that has reduced America’s need to import energy. China was only a quarter to a third of the American deficit before the global financial crisis began in 2008. As the American economy continues to improve, economists predict that Americans will import even more from China.
“The pickup in China’s trade surpluses could lead to rising trade tensions if they are perceived as holding back job growth in the U.S. and dampening the economic recovery,” said Eswar Prasad, a Brookings Institution economist specializing in China.
The gradual recovery in demand in the United States and Europe is being partly absorbed by Chinese exporters instead of stimulating longer hours and further investment at factories closer to home. The unexpected strength in China’s export sector has weakened the West’s economic recovery and retarded job creation in the United States and Europe.
Asked this week for their view on China’s trade surpluses, United States Treasury officials reiterated their opinion that the renminbi, China’s currency, remains significantly undervalued, which China denies, and said that rebalancing the Chinese economy remained incomplete.
The composition of the American trade deficit with China is also shifting in ways that could affect employment in the United States, according to the latest American data, released on Tuesday. The American deficit is increasingly in goods classified by the United States Commerce Department as advanced technology products, notably consumer electronics, while starting to shrink in categories of lower value like shoes.
Chinese leaders and some economists have contended for years that a decline in China’s export competitiveness is imminent, but their country has continued to post trade surpluses. They have used their predictions of slowing exports to justify resistance to pressure from Washington for faster appreciation of the renminbi against the dollar. The renminbi rose only 3.1 percent against the dollar last year, and weakened 1.2 percent against the euro.

A Bigger Share

The United States trade deficit in oil and gas has begun to narrow, but the deficit with China has remained stubbornly high.

U.S. trade
balance in goods


With China

–$20

Overall


– 40

– 60

Billions
of dollars

– 80

’00

’04

’08

’12




Source: U.S. Census Bureau via CEIC Data

The question is how much longer China can remain the dominant exporter. Many economists still predict trouble ahead for Chinese exporters. “Even if there is an increase in the trade surplus, this is temporary,” said Diana Choyleva, a China specialist who is the head of macroeconomic research at Lombard Street Research in London.
She noted that when calculated in renminbi and adjusted for inflation, China’s exports actually fell in some months last summer, although they have strengthened considerably since last October. China’s trade surplus is also less than half as large as a share of national economic output compared with five years ago when the surplus was slightly larger in dollar terms. The Chinese economy has grown nearly 80 percent in nominal renminbi terms since then and doubled in dollar terms.
Export figures for China were exaggerated by a few percentage points early last year as exporters overstated their shipments to circumvent Chinese controls on moving money into the country to speculate on further appreciation of the renminbi. But while some overstating of shipments may still take place, the strength in exports in recent months appears more genuine, particularly compared to an artificially high base of exports a year ago, said Louis Kuijs, a China economist in the Hong Kong office of the Royal Bank of Scotland.
“I have much more faith in the veracity of the numbers now,” he said.
In separate interviews this week with nearly a dozen Chinese exporters, at Hong Kong trade fairs or by telephone, all said that their biggest problem lay in labor: finding enough blue-collar workers and paying for their soaring wages.
Mr. Cheng said that a decade ago he paid about $75 a month for entry-level industrial workers and provided virtually no benefits. Now, he said, his 200-worker business, the Hangzhou Luyi Arts & Crafts Company, pays $570 a month plus $100 a month in government-mandated benefits.
That works out to compensation roughly three times as high as in Indonesia, four times as high as in Vietnam, five times as high as in Cambodia, and as much as 10 times as high as in Bangladesh. But all of those countries have other problems, such as overburdened, unreliable electricity grids, which force companies to install costly generators and buy expensive diesel instead.
Like many companies in China, Hangzhou Luyi has responded to surging wages with increased investments in automation. “This machine takes the place of five workers,” Mr. Cheng said, sitting in a booth at a Hong Kong trade fair this week and pointing at a poster on his wall of a computer-controlled, die-cutting machine for producing chair components.
Similar investments at factories across China mean that fewer hours of labor typically go into each product. So labor costs per unit do not rise nearly as quickly as wages.
Extremely heavy investment in new factories and new equipment, as the state-owned banking system continues to pump out credit at a remarkable pace, has also created considerable overcapacity. Exporters are unable to raise prices without losing overseas markets to nearby rivals. This prompts managers like Chen Yaping, executive director of the Zhejiang Daseng Stationery Company, a toymaker in Yiwu City, to focus increasingly on research and developing their own brands.Foreign investment in China has stagnated while surging in Southeast Asian rivals like Cambodia, Indonesia and Vietnam, setting off hand-wringing in Chinese media. But China still invests heavily in China. Domestic investment dwarfs foreign investment elsewhere in the region, leaving Chinese entrepreneurs and state-owned enterprises with more than enough cash to keep buying machinery.
A result of rising productivity and manufacturing overcapacity is that average prices for American imports from China have actually dropped 0.9 percent in the last year even as the renminbi has risen and Chinese wages have soared, according to data from the Bureau of Labor Statistics in Washington. That decline in prices has kept the pressure on Western competitors — and kept Chinese exports buoyant.

Hilda Wang contributed reporting.

A version of this article appears in print on January 10, 2014, on page B1 of the New York edition with the headline: Even as Wages Rise, China Exports Grow.

[Milton Kuo]

Re: Yes Virginia...It's a Bubble...

China knows the Golden Rule: "He who has the gold, makes the rules."

I can think of two reasons why:

1. to give the Chinese people a buffer (thereby preventing civil unrest) in case of big devaluation of their currency.

2. encourage their citizens to buy it now in massive quantities, with plans to either confiscate or buy it from them later at a price they can't refuse. China would then be even better positioned to end the reign of the petrodollar/be the world's reserve currency.

I tend to believe that it's #1: to prevent social unrest when the RMB is depreciated to arrest a mass defaulting of loans. The Chinese have not in their living memory had a good currency. There was a pretty substantial depreciation in the early-to-mid 1990s in the wake of the Tiananmen incident, a wipeout when the Communists took over China in the late 1940s - early 1950s, and I believe the currency was shaky around the time the Japanese invaded China.

If there were a wipeout of the people's cash savings (assuming they have not loaded up on gold or real estate), I'm not sure the Poliburo is going to be able to shift the blame and the people's anger to the Japanese and the Americans.

[coolhand]

Re: Yes Virginia...It's a Bubble...

Do you actually understand why they are encouraging their citizens to buy gold?

In the interest of showing my hand for benefit of the group, here's what I know:

1. In the past 2 years, China has bought more $ in gold than in UST's.

2. In the past 2-3 years, China has signed yuan-swap lines with most major trading nations in the world.

3. In the past 2-3 weeks, China has indicated they are evaluating allowing offshore yuan balances to buy physical gold in Shanghai, which would amount to China implementing a gold trade standard (despite countless western economists that have said for nearly 100 yrs that it could never work.)

4. In the past 3 months, China has become both the biggest trader in the world & the biggest importer of oil in the world.

5. Many senior members of the Chinese Communist Party have read the book "Road to Serfdom", while the "Currency Wars" book published in 2007 in China was also reportedly widely read by senior party members but never translated back to English.

6. China has advocated for a "neutral" reserve currency/asset rather than any one nation's currency/debt b/c they understand the latter will cause the hollowing out of the reserve nation's manufacturing base & ultimately lead to Triffin's Dilemma (like the US & like now).

7. In any debt crisis, there are two options: Write down the debt or write up an asset to offset the debt.

8. In a debt-backed fiat currency system, the debt of the public are the assets of the elite. Therefore writing down the debt will crush the assets of the elite & the backing of the currency, spurring hyperinflation. (Leading to the following conclusion which is strictly my opinion - there is no way this debt overhang will be fixed by the debt being written down.)

9. There is only one asset on global central bank balance sheets all over the world that can be written up - not bonds, not stocks, not commodities, not silver, not oil - gold. That's it & that's all.

I keep coming back to the same conclusion...gold is flowing b/c where it's flowing b/c TPTB (this isn't conspiracy theory, the front page of the WSJ noted 18 months ago that global central bankers meet every 2 months in Basel, Switzerland at the BIS to discuss policy in secret) need it in the right places to reset the currency system.

China understands this & is looking out for its people. The US is encouraging its people into stocks, which won't do as well as gold but will still do really, really well b/c when gold is written up massively to balance the systemic debt, it will mark the de facto end of the USD's reserve status, making the US among the cheapest places in the world to make stuff. When that happens, the US stock market will move much, much higher. IMO, stocks with highest % of P P & E in the US are the best plays for the next 5 yrs...

[Polish_Silver]

Why Gold in China?

Do you actually understand why they are encouraging their citizens to buy gold?

I very much would like to know.


Here's my thinking:

1) The party knows something huge is going down and they want some citizens to survive.

1b) The party wants a country liveable for its members after "IT" happens and Gold will help do that.

2) The more total gold the country has, the more influence they wield when the US blows up.

4) China still has a trade surplus, and putting the liquidity into gold causes less problems than more real estate and stock speculation.


I think it's (4) actually. As money, gold has a low velocity, doesn't contribute to bank reserves (excess lending), and
functions more independently than most other assets. That is, a bubble in gold doesn't directly feed into other types of bubbles.

[shiny!]

Re: Yes Virginia...It's a Bubble...

Do you actually understand why they are encouraging their citizens to buy gold?

China knows the Golden Rule: "He who has the gold, makes the rules."

I can think of two reasons why:

1. to give the Chinese people a buffer (thereby preventing civil unrest) in case of big devaluation of their currency.

2. encourage their citizens to buy it now in massive quantities, with plans to either confiscate or buy it from them later at a price they can't refuse. China would then be even better positioned to end the reign of the petrodollar/be the world's reserve currency.

[coolhand]

Re: Yes Virginia...It's a Bubble...

Do you actually understand why they are encouraging their citizens to buy gold?

I think I do, but am totally open to the possibility that I am wrong (God knows it happens plenty! ). Why are they encouraging their citizens to buy gold?

[GRG55]

Re: Yes Virginia...It's a Bubble...

All of these may be true, but it is interesting that allowing the market rate of interest to fluctuate is seen as a bigger warning sign than what we have in the US, where the Fed has capped interest rate movements with printed money, & where a 100bp move in interest rates has notably slowed housing demand from all but wealthy cash borrowers.

I also note that China has recently begun evaluating allowing offshore yuan balances to buy physical gold in Shanghai...that would be a de facto gold exchange standard. Furthermore, go on the website for ICBC, the biggest bank in China & the world & notice that among their "investment products" on offer is physical gold. Contrast that with the website at Wells Fargo or Bank of America.

China is not appreciably more or less indebted than the US...but unlike the US, they appear to be more than willing to allow the price of gold to rise to offset that indebtedness...they are encouraging their people to own it and their banks do too b/c it would fix China's debt problem...

Contrast that with the US gov't & financial system, which discourages the US of gold at all turns b/c while a massive rise in gold prices would also fix the US' debt situation, it would also mark the end of the Petrodollar arrangement that has allowed the US to print dollars to pay for oil, military spending & entitlement spending...

Do you actually understand why they are encouraging their citizens to buy gold?

[coolhand]

Re: Yes Virginia...It's a Bubble...

http://nationalinterest.org/commenta...reat-debt-9677

The Real China Threat: Credit Chaos

Minxin Pei

| January 8, 2014

The spectacle of a game of financial chicken in the world’s second-largest economy is both entertaining and terrifying. Twice in 2013, the People’s Bank of China (PBOC), the country’s central bank, tried to demonstrate its resolve to rein in runaway credit growth. In June, it engineered a sudden credit squeeze that sent the interbank lending rates to more than 20 percent and caused a short-lived panic in the Chinese financial markets. Apparently, the financial turmoil was too much for the Chinese government, which quickly ordered the Chinese central bank to reverse course. As a result, the PBOC lost both face and credibility.
However, as credit growth continued unabated and activities in the most risky segment of China’s financial sector – the so-called shadow banking system – displayed alarming recklessness, the PBOC was left with no choice but try one more time to send a strong message that it could not be counted on to provide unlimited liquidity to the banking system...

...Thus, in the first two rounds of a stand-off between the PBOC and China’s shadow banking system, the latter is widely seen as the winner. The PBOC blinked first each time...

...Of these dynamics, two deserve special attention. The first one is the rapid rise in indebtedness (or financial leverage) in the Chinese economy since 2008. In five years, the country’s total debt-to-GDP ratio (including both public and private debt) rose from 130 percent to 210 percent, an unprecedented increase for a major economy...

...Staggering under an unsustainable debt burden of roughly 160 percent of GDP (equivalent to $14 trillion), these borrowers are expected to default on a significant portion of their bank debt in the coming years...

...Specifically, Chinese banks peddle new “wealth management products” – short-term securities promising high interest rates – to their depositors. The issuers of such securities, which are not protected or insured by the government – are typically high-risk borrowers, such as local governments (and their financing vehicles) and real estate developers.

In the meantime, these borrowers are facing rising pressures for loan repayments in an environment of overcapacity and unprofitable investments. Unable to generate cash to service their loans, they have to turn to the shadow-banking sector for credit and avoid default. The result is an explosive growth of the size of the shadow-banking sector (now conservatively estimated to account for 20-30 percent of GDP)...

All of these may be true, but it is interesting that allowing the market rate of interest to fluctuate is seen as a bigger warning sign than what we have in the US, where the Fed has capped interest rate movements with printed money, & where a 100bp move in interest rates has notably slowed housing demand from all but wealthy cash borrowers.

I also note that China has recently begun evaluating allowing offshore yuan balances to buy physical gold in Shanghai...that would be a de facto gold exchange standard. Furthermore, go on the website for ICBC, the biggest bank in China & the world & notice that among their "investment products" on offer is physical gold. Contrast that with the website at Wells Fargo or Bank of America.

China is not appreciably more or less indebted than the US...but unlike the US, they appear to be more than willing to allow the price of gold to rise to offset that indebtedness...they are encouraging their people to own it and their banks do too b/c it would fix China's debt problem...

Contrast that with the US gov't & financial system, which discourages the US of gold at all turns b/c while a massive rise in gold prices would also fix the US' debt situation, it would also mark the end of the Petrodollar arrangement that has allowed the US to print dollars to pay for oil, military spending & entitlement spending...