Chinese president invites Ahmadinejad for SCO summit []

Chinese President Hu Jintao has invited Iran’s President Mahmoud Ahmadinejad to attend the 12th summit of Shanghai Cooperation Organization (SCO) in China due in early June.


The leaders of Tajikistan, Kyrgyzstan, Kazakhstan, Uzbekistan, Pakistan and Afghanistan have also been invited to the event, scheduled for June 6-7 in Beijing, China’s Foreign Ministry Spokesman Liu Weimin said in a Thursday news conference.

The participants in the SCO summit would discuss current regional and international developments during the meeting.

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As Draghi Fiddles And Madrid Burns, China Buys [Zerohedge]


The move marks State Grid’s latest effort to expand into more lucrative areas than its tightly- regulated home market. State Grid oversees China’s power network over all but some southern portions of the country, giving it nearly nine tenths of the country.

Beijing also tightly controls the power market, limiting State Grid’s ability to seek terms from power suppliers or pass on costs to customers.

Beijing’s leaders over the past few years have pushed State Grid as well as other state-run behemoths to invest overseas as part of a broader effort to use China’s financial firepower to strike deals.

The pressure has been especially strong on China’s energy companies, which are seen as potential national champions in an increasingly competitive global market.


Perhaps this is why Greece is failing? Because China has realized it could buy Spain (and soon Portugal and Italy) for the same price, or even cheaper: remember – these are asset, not stock, purchases: one assumes liabilities as well. So $1 of equity value should be sufficient. And once China is done with the PIIGS, it can proceed to control the rest of the Europe… Which incidentally will still have to rely on Russia for its energy.

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China’s SHFE silver futures contracts expected to have impact on global market []

The Shanghai Futures Exchange’s silver futures contracts, the first of their type to be offered in China, give Chinese investors a new way to bet on the precious metal.


In a move that will make the silver market more liquid, the Shanghai Futures (SHFE) has begun trading in silver contracts. The contracts are expected to be bullish for silver prices, with traders stating that it could make market manipulation more difficult.

Although the country is a main producer and consumer of silver, it has remained on the sidelines in silver trading. By initiating silver futures, traders say China clearly wants more control over the precious metal’s pricing policy.

Chinese investors have been showing an increasing interest in the white metal amidst surging inflation and the sluggish performance of the stock and property markets. In March, about 134 billion yuan ($21 billion) in silver contracts were traded, more than 15 times the amount traded two years ago. More than gold, many retail investors prefer silver because the minimum requirement for investing in it is much lower in China.

The white metal is imbedded in the Chinese psyche. For long, it has been the basis of China’s currency. In 1935, the Shanghai-based biweekly Finance and Commerce reported personal hoards of the precious metal at 1.27 billion ounces.

With the Shanghai Futures Exchange gaining approval to begin trading silver futures, traders insist a significant shift appears to be in the making.

Wang Ruilei, an official with precious metals trader CGS Company told newswire agencies that the market would be bigger and more liquid with the advent of the futures contracts. Traders added the futures exchange would provide direct access to silver for Chinese investors.

It would also be beneficial to silver enterprises and industries as the metal would now be available for trading, hedging and buying at their local exchange and in the local currency.

Huo Ruirong, vice manager of the Exchange was quoted by newswires as saying that the new trading option would provide China with a pricing mechanism on silver and help readjust the silver industry structure.

This is at a time when China is believed to have exceeded Peru and Mexico to become the world’s leading producer of silver. The country is also the second-largest consumer of the precious metal after the United States.  It is also, of course, now the world’s leading producer of gold too.

Regulators in China are hoping to see more than just investors benefit from this new trading vehicle. At the inauguration ceremony, Liu Xinhua, Vice Chairman of the China Securities Regulatory Commission, pointed out that this year, they were keen to implement the spirit of Premier Wen Jiabao’s 2012 missive to “secure introduction of …commodity futures and financial derivatives, in order to enhance our overall competitiveness and meet the real economy needs to provide more tools and instruments”.

He said the silver futures market would be conducive to optimising the silver price formation mechanism and provide low-cost, efficient means of risk management.

Liu Xinhua stressed that the silver futures play, from the listing to mature and play features, would require a gradually cultivated stance, and was no overnight decision. He added the move would help the Shanghai Futures Exchange strengthen market surveillance and effectively guard against market manipulation and other illegal activities.


Investment in silver has been booming in China. An early indication was the trading volume of silver forwards on the Shanghai Gold Exchange, China’s only exchange for the precious metal, which surged 751% in 2010 as compared to a year earlier. Also, the volume in September last was more than six times that of the same period in 2010.

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Gold Bar Demand in China Surged 51% to 213.9 Tons In 2011 [goldcore]

Gold’s London AM fix this morning was USD 1,579.00, EUR 1,255.67, and GBP 1,006.63 per ounce. Friday’s AM fix was USD 1,560.50, EUR 1,240.66, and GBP 996.04 per ounce.

Silver is trading at $28.65/oz, €22.86/oz and £18.33/oz. Platinum is trading at $1,442.50/oz, palladium at $592.60/oz and rhodium at $1,275/oz.

Gold rose $13.30 or 0.85% in New York on Friday and closed at $1,572.80/oz. The higher close Friday was not enough to prevent a lower week for gold which was down 1.2% for the week.

Asian trading started out flat and then gold climbed to about $1,583/oz and pulled back a bit and is now trading in Europe near $1,580/oz.  US markets are closed for Memorial Day today which means that volumes may be low and illiquidity could result in sharp price movements.

Cross Currency Table – (Bloomberg)

Gold is higher in all currencies today as some buyers view the recent price falls as overdone and are buying the dip. There is some relief that Greek opinion polls showed pro bailout conservatives in the lead for elections. This has alleviated fears of a disastrous Greek exit from the euro, but uncertainty still remains and ‘Grexit’ remains likely.

The risk of contagion in the Eurozone appears to increase by the day as the news from Spain shows that it is following fast in the footsteps of Greece and this will support gold. Bank runs in Greece and the risk of bank runs in Spain and elsewhere are a scenario which could lead to contagion.

As long as the short term panacea of using quantitative easing, the modern euphemism for the creation of trillion of units of currency (dollars, euros, pounds etc) is embraced by global policy makers – gold’s bull market is assured.

The day or reckoning has been postponed for now but economic recovery is not coming and indeed there is now the real risk of a global recession and even a  global Depression – especially if there are widespread global electronic bank runs.

While gold and silver fell marginally last week, the very large weekly returns in the gold mining sector may signal we are close to a bottom. The XAU and HUI gold mining indices rose 6.8% and 7.9% respectively. Strong gains in the XAU and HUI have often preceded market bottoms for gold and silver.

This week investors will look to China’s PMI and US non-farm payrolls to gauge the health of the world’s two largest economies.

XAU/USD Currency Chart – (Bloomberg)

A reminder of the sharp increase in demand for gold and silver, particularly store of wealth demand, in recent years was seen in the figures released by the China Nonferrous Metals Industry Association in Shanghai today.

China’s gold consumption rose 33% to 761 tons in 2011 and China’s silver consumption rose 6.8% to 6,088 tons last year.

China’s gold consumption rose 190 metric tons last year to 761 tons, Wang Shengbin, China Gold Association Vice Chairman, said in a speech in Shanghai as reported by Bloomberg.

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China responds to economic weakness by letting RMB depreciate [SoberLook]

by Walter Kurtz

Further signs of economic slowdown in China have shown up in the HSBC China PMI index.

WSJ: – The preliminary May reading marks the seventh straight month the index has been in contractionary territory. A reading below 50 indicates contraction from the previous month, while anything above that indicates growth.

“China’s real economy is getting weaker,” Citi Investment economist Ding Shuang said following the release of the PMI.

“The likelihood that May industrial production and fixed-assets investment, two major gauges of economic activity, will improve is slight. The data are likely to stay weak,” he added.

Ding expects growth in China’s gross domestic product to slow to 7.5% in the second quarter from a year earlier, slowing from the first quarter’s 8.1% expansion, which was the weakest in more than three years.

: – … the government had asked for project proposals by the end of June, even for those initially earmarked for the end of the year, said the China Securities Journal, one of the country’s top financial papers.To address this slowdown, we’ve already seen China accelerating infrastructure projects approvals.

Citing government sources, the article said Beijing did not rule out bringing forward next year’s projects, if it thought more investments would be needed to stimulate the economy.

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Is China Really Liquidating Treasuries? [Azizonomics]


The news that China has become the first sovereign to establish a direct sales relationship with the U.S. Treasury (therefore cutting out the middleman and bypassing Wall Street ) raises a few interesting questions.

From Reuters:

China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government, according to documents viewed by Reuters.

The relationship means the People’s Bank of China buys U.S. debt using a different method than any other central bank in the world.

The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions.

China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn’t been necessary.

The documents viewed by Reuters show the U.S. Treasury Department has given the People’s Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.

The biggest Chinese outflows in U.S. Treasuries occurred in the months following the establishment of this relationship:

Which begs the question for some analysts — was China really selling? Or was China stealthily buying direct from the U.S. Treasury (unrecorded) and selling back into Wall Street (recorded)?

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U.S. lets China bypass Wall Street for Treasury orders [Reuters]

By Emily Flitter

(Reuters) – China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury’s first-ever direct relationship with a foreign government, according to documents viewed by Reuters.

The relationship means the People’s Bank of China buys U.S. debt using a different method than any other central bank in the world.

The other central banks, including the Bank of Japan, which has a large appetite for Treasuries, place orders for U.S. debt with major Wall Street banks designated by the government as primary dealers. Those dealers then bid on their behalf at Treasury auctions.

China, which holds $1.17 trillion in U.S. Treasuries, still buys some Treasuries through primary dealers, but since June 2011, that route hasn’t been necessary.

The documents viewed by Reuters show the U.S. Treasury Department has given the People’s Bank of China a direct computer link to its auction system, which the Chinese first used to buy two-year notes in late June 2011.

China can now participate in auctions without placing bids through primary dealers. If it wants to sell, however, it still has to go through the market.

The change was not announced publicly or in any message to primary dealers.

“Direct bidding is open to a wide range of investors, but as a matter of general policy we do not comment on individual bidders,” said Matt Anderson, a Treasury Department spokesman.

While there is been no prohibition on foreign government entities bidding directly, the Treasury’s accommodation of China is unique.

The Treasury’s sales of U.S. debt to China have become part of a politically charged public debate about China’s role as the largest exporter to the United States and also the country’s largest creditor.

The privilege may help China obtain U.S. debt for a better price by keeping Wall Street’s knowledge of its orders to a minimum.

Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn’t saving money by cutting out commission fees.

Instead, China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price.

It is one of several courtesies provided to a buyer in a class by itself in terms of purchasing power. Although the Japanese, for example, own about $1.1 trillion of Treasuries, their purchasing has been less centralized. Buying by Japan is scattered among institutions, including pension funds, large Japanese banks and the Bank of Japan, without a single entity dominating.

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Rare-Earth Mining Rises Again in United States [wired]

The fight over the minerals that run the electronic world entered a new phase in March when the United States, the European Union and Japan collectively filed a case against China, accusing the rare-earth powerhouse of violating world trade rules to manipulate mineral prices.

At the heart of the argument are 17 little-known elements with whimsical names like europium and praseodymium, that are found in everything from mobile phones and computers to smart bombs and large wind turbines. Traces of the metals can be found around the world, but rarely in high enough concentrations for mining to be convenient or profitable.

China now controls 95 percent of total rare-earth supply. A figurative sneeze on its export policy is all that’s needed to shake global markets, and in 2010 China began restricting rare-earth exports. International prices spiked, reaching near-dizzying levels last summer before crashing in the fall. In the wake of the World Trade Organization case, they’ve perked up again.

Foreign companies buying rare earths from China must now pay more than twice the rate paid by companies inside China. The tiered pricing encourages companies to move factories and jobs to China, where they can be sure of supply and lower prices. Beyond the extra economic boost for China, this has made it easier for Chinese companies to steal foreign intellectual property. Businessmen and politicians worry that China’s dominance over these 17 elements is a strategic vulnerability, discouraging innovation and threatening national defense.

A bread-roll-sized chunk of neodymium sells for about $300. Photo: Jim Merithew/Wired

That may soon change. Encouraged by rising prices and political support, new mines are starting up around the world, most notably in Malaysia and in California, where a company called Molycorp has reopened what until the 1980s was the world’s flagship rare-earth mine.

“In five years there will be rare earths produced all over the world and China will lose its edge,” said mining analyst John Kaiser, editor of Kaiser Research Online. “Molycorp is part of that equation. They’re putting back into production what was once the largest rare-earth mine in the world. And this is a good thing because it takes away power concentrated in China.”

Located in Mountain Pass, California, about an hour west of Las Vegas, the mine sits atop mineral deposits discovered in the late 1940s by geologists looking for commercial-grade uranium. They found some of the world’s richest reserves of bastnasite, a mineral containing higher-than-usual concentrations of rare-earth elements like cerium, lanthanum and yttrium.

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“Uncivilized” China Quietly Building Gold Reserves As Gold Imports From HK Soar By 587% In First Quarter [Zerohedge]

Submitted by Tyler Durden on 05/08/2012 10:00 -0400

A month ago we ended up with the hilarious situation where the US was actively considering releasing petroleum from the Strategic Petroleum Reserve even as China was demonstratively and concurrently adding to its strategic inventory. Now, as the developed world is seeing day after day of gold hammering on amusing flights of fancy that central banks won’t be forced to engage in more and ever bigger rounds of monetary dilution, and where the seller apparently has no regard for getting a “good” price, but merely seeks to crash the bid stack slams various PM prices, we see the same inversion with gold. Because as Bloomberg reports, “Mainland China’s gold imports from Hong Kong surged more than sixfold in the first quarter, to 156 metric tons, adding to signs that the country may displace India as the world’s largest consumer of the precious metal on an annual basis.” And the punchline: “The purchases through Hong Kong may signal that the mainland is accumulating reserves, London-based brokerage Sharps Pixley Ltd. said in February. The nation last made its reserves known more than two years ago, stating them at 1,054 tons.” Yep ladies and gents: the PBOC is very grateful that it can add hundreds of tons of gold to its reserve holdings in a stealthy operation which it will announce only after its conclusion, at which point, like true 13F chasing lemmings, retail will send gold soaring. But in the meantime, dear hedge funds worried about your margin calls and 1 month performance reports, please proceed calmly along with the lemming herd, and keep pushing gold lower and cheaper for our new Chinese overlords, and for everyone else who, without P&L timing constraints, takes delight in such brief arbitrage opportunities.

From Bloomberg:

Imports from Hong Kong were 135,529 kilograms (135.53 metric tons) between January and March, from 19,729 kilograms in the year-earlier period, according to data from the Census and Statistics Department of the Hong Kong government. Shipments in March rose 59 percent from February, yesterday’s data showed.

Demand has climbed in the world’s second-largest economy as rising incomes and curbs on property speculation boosted purchases. China may become the biggest user annually this year, according to a forecast from the producer-funded World Gold Council. Last year, total Indian demand including for jewelry and investment was 933.4 tons to China’s 769.8 tons.

“We’re looking at another solid year for Chinese demand based on these early numbers,” said Nick Trevethan, senior commodities strategist at Australia & New Zealand Banking Group Ltd. “While it’s largely related to price, negative real interest rates should keep demand strong.”

Gold has lost 15 percent from its record $1,921.15 an ounce in September as the European debt crisis, combined with reduced expectations for further monetary easing by the Federal Reserve, boosted the dollar. Spot gold traded at $1,637.32 an ounce at 9:41 a.m. in Singapore, 4.7 percent higher this year

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China’s domestic rate liberalization may create unintended consequences [SoberLook]

A World Bank report entitled “China 2030″ (attached below) has pointed to China’s liberalization of domestic interest rates as one of the critical reforms needed to transform China into a market-based economy. But the World Bank report also warns that this policy change would need to be gradually phased in.

World Bank: – … after the above institutional and governance structures are in place, the Chinese authorities can also prepare and implement a plan that phases out the ceiling on deposit rates and the floor supporting lending rates; this step will facilitate the commercialization of banks and ensure stability in the financial sector. And as is actually well recognized and understood in China, this final stage of interest rate liberalization will have to be properly sequenced—long-term market instruments first, and short-term deposit rates last. Careful monitoring of the progress of liberalization will be crucial to ensure that banks do not indulge in destabilizing competition that erodes margins or in reckless lending that harms the quality of the loan portfolio, and that any emerging risk of distress is dealt with swiftly.

Until recently such reforms have been difficult to achieve. While rates have officially been liberalized, lenders made little differentiation in the spread they were charging various borrowers or other banks. But according to a recent report from Deutsche Bank (DB), this is starting to change. As inflation increased, the PBOC controlled rate on deposits became negative in real terms (sounds familiar?). To service some of the wealthier depositors who demanded better returns, banks started offering “wealth management” products that pay more of a “market” rate (materially above the PBOC benchmark rate). To fund these more expensive deposits China’s banks were forced to raise rates on loans.

Percentage of loans at, below, or above the PBOC benchmark rate (source: DB)

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Iran fights oil sanctions with supervessels [RT]

Chinese shipyards are to deliver 12 supertankers to Iran, with the final vessel ready by the end of 2013. These could help alleviate logistical difficulties caused by US and European sanctions against Iranian oil exports.

AFP Photo / Henghameh Fahimi


The first of the very large crude carriers (VLCCs) built for Iranian oil shipping operator NITC is expected to arrive in May, reports Reuters, citing industry executives. Seven more are to be delivered over the year, with the remaining four to be commissioned by the end of 2013. Two shipyards are building the supertankers under contracts worth $1.2 billion.

The supertankers will significantly expand NITC’s shipping capabilities, cushioning the impact of sanctions.

Starting from July, the EU will prohibit European insurers and reinsurers from indemnifying tankers carrying Iranian crude oil anywhere in the world, which will discourage maritime firms from dealing with Iran.

Buyers of Iranian oil in China, India, Japan and South Korea hope their governments will step in and provide sovereign guarantees to allow Asian insurers to replace lost European coverage. Another option would be for Iran itself to provide maritime insurance for foreign shipping companies.

But the addition of 12 VLCCs capable of carrying 24 million barrels of crude to NITC’s current fleet of 39 ships with a total capacity of 61.5 million barrels of crude will at least partially dampen the expected cut.

The tankers however will not allow Iran to rely solely on its own fleet to cover its entire export of 2.6 million barrels per day. Roughly 17 such ships would be needed for this, Reuters estimates.

The 12 supertankers were commissioned at Waigaoqiao Shipbuilding and Dalian Shipbuilding Industry, with each shipbuilder taking an order for six ships. NITC, the National Iranian Tanker Company, was privatized in 2000 and is now owned by three Iranian pension funds.

The US and EU are trying to cut the Islamic Republic’s oil export through a ban on the import of its crude and financial sanctions against Iran’s trade partners. Their stated goal is to force Tehran to freeze its controversial nuclear program.

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Why China Wants to Break Up Its State Bank Monopoly [Forbes]

By Gordon G. Chang

A man walks past the Bank of China headquarter...

On Tuesday, China’s premier suggested that momentous changes were coming to the country’s financial sector.  “Frankly, our banks make profits far too easily,” Wen Jiabao said on state-run China National Radio.  “Why?  Because a small number of major banks occupy a monopoly position, meaning one can only go to them for loans and capital.”  China’s top economic official then made a startling suggestion:  “That’s why right now, as we’re dealing with the issue of getting private capital into the finance sector, essentially, that means we have to break up their monopoly.”

Investors reacted sharply, dumping stocks of major Chinese banks.  Analysts, however, began to hope that Beijing would undertake major restructuring of the economy, especially because Wen’s words followed the State Council’s March 28 decision to declare Wenzhou a “general financial reform zone.”  In the city, known as China’s “cradle of private enterprise,” private parties will be able to invest in local banks and to establish financial institutions such as loan companies and rural community banks.

The State Council, China’s cabinet, also said recently that it will relax various restrictions on the transfer of funds in and out of the country.  The series of announcements upends the generally accepted notion that reform must wait for the handover of power to a new set of leaders and, at a minimum, shows that economic reform has become a matter of public debate.  Some are even more optimistic, arguing that the premier is pushing economic reform as a means of achieving political reform.

So will we see a new era of change in China?  The prospects are tantalizing, but Premier Wen’s proposal to break up the state bank monopoly is by no means a good signal.

Remember that he attributed the fat banking profits to the fact that “a small number of major banks occupy a monopoly position.”  It is true that China’s banking sector is dominated by the Big Four, which control a little less than half the market, and a handful of other state-owned institutions.  But the near state monopoly has little to do with bank profitability.  The problem is caused by the People’s Bank of China, the central bank, fixing lending and deposit rates across the country.

Premier Wen, with one single decision, could allow rate competition that would narrow bank profits immediately.

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The Decline And Fall Of The USD


The SWIFT Settlement System

In our previous article we looked at whether the U.S. Dollar was headed for a major fall or not. We demonstrated how the dominance of the U.S. dollar was almost entirely dependent on the grip it had over oil producers and this allowed the oil price to be designmnated in the U.S. dollar. The U.S. has gone to war in Kuwait and Iraq over this issue under the guise of destroying “weapons of Mass Destruction” as it appears on the verge of doing in Iran. It is no coincidence that Iran has long since ceased using the dollar to price its oil. It has also eliminated the U.S. dollar from its reserves. But of greater importance to the emerging world has been the use of the Belgian-based SWIFT system of international settlements. Not only has the move stopped the sale of Iranian oil, but it has also interfered with an important source of oil to the emerging world.

Right now there are ongoing discussions between the BRICS (Brazil, Russia, India, China and South Africa) countries over ther use of the SWIFT system of international settlements as a ‘weapon’ against Iran. The full extent of the impact of this appears to have been ignored. With China and India as two of Iran’s clients, they found that the U.S. could hurt them considerably with this action. If they can hurt them in this way, then they can hurt them the same way on other issues. So the question that the BRIC nations are now asking is, “Must we be subject to the financial will of the U.S.?”

The question has long-term implications that could affect these nation’s freedom of financial activity. The question demands to see just how powerful the U.S. really is. It is very clear to these emerging nations that if they are to keep on growing, unfettered by the U.S. will, they must set up a system that is not vulnerable to U.S. influence and to reduce the influence of the dollar itself.

What is being realized slowly is that the actions that come out of this conference may well mark a watershed in the shift of power from West to East and the significant reduction in the power of the U.S. as the globe’s main financial influence. Consequently, these nation’s will have to lower the influence of the U.S. dollar on their affairs if they are to achieve real financial independence. This has to be a future and extremely negative influence on the international value of the U.S. dollar.

While the SWIFT settlement system is a Belgian-based international banking settlement agency, the U.S. influence over it was sufficient to halt all Iranian interbank transfers. It is not the system that is faulty but the influence of the U.S. over it that is the danger to the BRIC nations.

China, the Rising Dragon

China, for the last two years has been moving to expand the influence of her currency around the globe, initially with her main trading partners. She has been developing her banking system, using the Yuan in a limited way in her trade with outside nations, from whom she imports a great deal and is developing her monetary systems so that the Yuan will become a global reserve currency one day.

That day is still expected to take up to a decade to achieve, but as history has shown so far, China is moving far faster than all expectations have thought. Nation by nation, strategic item by strategic item, China has been introducing the Yuan as the payment currency in a series of ‘swap’ arrangements. The latest is Australia with South Africa coming on stream by 2015. This will take the Yuan deep into the heart of Africa. By then we fully expect to see the Yuan an internationally acceptable currency in which to deal.

Her progress to date has targeted growth-markets, mainly other rapidly developing economies, as well as the whole Asian continent, and no longer just the U.S. and Europe. One of her key strategies through the Shanghai Cooperation Organization is to build a pan-Asian security and trade bloc in partnership with Russia. The last element of this 10-year old plan is to settle cross-border trade without using the West’s financial system. China expects to play a major part with her currency, which explains why she is adding to her gold reserves. The relevance of gold is that China will have to show to the people of Asia that her currency has better long-term prospects than the dollar, which goes some way to explaining why so many of the countries associated with the S.C.O. are now also accumulating gold.

To date, China has had to be extremely careful in moving away from the dollar, for the value of over $3.18 trillion in her reserves needs to be maintained. A sudden withdrawal would badly damage this, which China cannot afford right now. At worst, a global systemic collapse of the monetary system could happen if the evolution away from the dollar were handled badly.

The latest moves by the U.S. are deeply disturbing to China, as they have the power to directly hurt the spread of the Yuan on a global basis, if the U.S. so decides. Consequently, China is threatened right now! China has been working on alternatives so far, but the moves on the SWIFT system by the U.S. have made the issue urgent as she now faces a security threat. As China continues to develop, she will face a massive demand to be able to provide financing for expensive capital goods. China can no longer afford to depend on the U.S. dollar as the financing currency for its goods, as it is technically possible, although unlikely, at the moment, to face threats from the U.S. even on this subject.

It is clear to the BRICS nations that they need to set up institutions at the heart of the present world financial systems to act as an alternative to the World Bank and the International Monetary Fund and perhaps a replacement to the SWIFT system for transactions with the emerging world. It will not be sufficient to just have an important role in the developed world institutions. It will also be inappropriate to rely on the U.S. dollar as the currency of the emerging world as it is now.

Gold is Critical to any Change in Currencies on the Global Monetary Scene

Perhaps the largest flaw in the current global monetary system is its reliance on foreign acceptance of national currencies. When the U.S. was unquestionable and unchallengeable, there was no doubt that it ruled the global monetary system completely.

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BRICS summit videos

The BRICS summit has wrapped up in India. Creating an alternative global lender and stepping away from the dollar as a reserve currency were among their main objectives.





BRICS summit to explore creation of bank [aljazeera]

Group of five rising powers to discuss creation of “South-South” development bank in mould of World Bank.

The five-member BRICS countries account for roughly 18 per cent of the world’s GDP [AFP]

The proposal of a development bank is high on the agenda at the summit of the five BRICS bloc nations – Brazil, Russia, India, China and South Africa – starting on Thursday in New Delhi.

The proposal for a “South-South” development bank in the mould of the World Bank is one of the main points to be discussed by the group of five rising powers at the fourth BRICS summit.

The initiative would allow the countries to pool resources for infrastructure improvements, and could also be used in the longer term as a vehicle for lending during global financial crises such as the one in Europe, officials said.

“What will be discussed (in New Delhi) is the possibility of setting up a BRICS development bank for infrastructure projects, development, not only in member countries but also in developing countries,” Maria Edileuza Fonteneles Reis, a senior Brazilian foreign ministry official, said.

Fernando Pimentel, the Brazilian industry and trade minister, told reporters in Brasilia last week, “the proposal to set up a BRICS bank, an international, investment bank of these five countries,” is the main item on the agenda.

He said that the countries would sign a deal at the summit to study the creation of the bank.

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Chinese Business Media Cautions Japanese Bond Bubble Is Ready To Burst, Anticipates 40% Yen Devaluation [Zerohedge]

Tyler Durden's picture

Submitted by Tyler Durden on 03/26/2012 14:50 -0400

It is a fact that when it comes to the oddly resilient Japanese hyperlevered economic model, the bodies of those screaming for the end of the JGB bubble litter the sides of central planning’s tungsten brick road. Yet in the aftermath of last month’s stunning surge in the country’s trade deficit, this, and much more may soon be finally ending. Because as Caixin’s Andy Xie writes “The day of reckoning for the yen is not distant. Japanese companies are struggling with profitability. It only gets worse from here. When a major company goes bankrupt, this may change the prevailing psychology. A weak yen consensus will emerge then.” As for the bubble pop, it will be a sudden pop, not the 30 year deflationary whimper Mrs. Watanabe has gotten so used to: “Yen devaluation is likely to unfold quickly. A financial bubble doesn’t burst slowly. When it occurs, it just pops. The odds are that yen devaluation will occur over days. Only a large and sudden devaluation can keep the JGB yield low.Otherwise, the devaluation expectation will trigger a sharp rise in the JGB yield. The resulting worries over the government’s solvency could lead to a collapse of the JGB market.” It gets worse: “Of course, the government will collapse with the JGB market.” And once Japan falls, the rest of the world follows, says Xie, which is why he is now actively encouraging China, and all other Japanese trade partners of the world’s rapidly declining 3rd largest economy to take precautions for when this day comes… soon. Oh, and this: ” If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue of 42.3 trillion yen.”

Why has Japan been able to sustain its deflationary collapse for over 3 decades? Simply – an ever rising currency.

A strong yen, deflation and rising government debt form a short-term equilibrium that lasts as long as the market believes it is sustainable. The yen has seen a relentless upward trend since it depegged from the dollar in 1971, up to 83.4 from 360 again to the dollar. When wages and asset prices rise, a strong currency can be justified. When wages and asset prices fall, a strong currency is suicide. Japan’s nominal GDP peaked in 1997 and its nominal wages did too. Its property prices have declined every year since. The Nikkei rose in only four out of the last fifteen years and is still close to a three-decade low.


Japanese policymakers, businesses, academics, currency traders and the average Mrs. Watanabe all believe in a strong yen. This belief is wrong but self-fulfilling. It has lasted so long because the Japanese government adopts policies to offset the destabilizing effects of deflation due to a strong yen. Hence, Japan’s national debt has marched upwards along with the value of yen. It is expected to top yen 1,000 trillion in 2012, 215 percent of GDP, 7.8 million yen (or roughly US$ 94,000) per person, and about half of net household wealth per capita.


The sustainability of Japan’s deflationary path depends on the market’s confidence in Japan’s debt market. As Japanese institutions and households hold almost all of the government’s debts, their faith in the government’s creditworthiness is the mojo for Japan’s seemingly harmless deflationary spiral.

There’s that. And also that it is nothing but a ponzi. In Xie’s words.

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Antal Fekete Responds To Ben Bernanke On The Gold Standard

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Submitted by Tyler Durden on 03/21/2012 12:04 -0400

Yesterday, Ben Bernanke dedicated his entire first propaganda lecture to college student to the bashing of the gold standard. Of course, he has his prerogatives: he has to validate a crumbling monetary system and the legitimacy of the Fed, first to schoolchildrden and then to soon to be college grads encumbered in massive amounts of non-dischargeable student loans. While it is decidedly arguable that the gold standard may or may not have led to the first Great Depression, there is no debate at all that it was sheer modern monetary insanity and bubble blowing (by the very same professor!) that brought us to the verge of collapse in the Second Great Depression in 2008, which had nothing to do with the gold standard. And as usual there is always an other side to the story. Presenting that here today, is Antal Fekete with “The Gold Problem Revisited.”


Antal E. Fekete

The article The Gold Problem of Ludwig von Mises, published 47 years ago in 1965, just six years before he died (the gold standard died with him in the same year) has some breath-taking thoughts, for example, “the gold standard alone can make the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups”, or: “the gold standard did not fail: governments deliberately sabotaged it, and still go on sabotaging it.” But for all our admiration we would be amiss if we did not point out certain errors in his article. These are all errors of omission, and correcting them would hopefully make the Mises article even more helpful to the discriminating reader.

Mises fails to answer his own question why gold is the best choice to serve as money. Indeed, why not another commodity, or a basket of commodities? The reason is that the marginal utility of gold is unique in that it declines at a rate slower than that of any other substance on Earth. Various assets have various marginal utilities which determine their value. All of them decline, albeit at various rates. In other words, economic actors accumulate assets increasingly reluctantly, up to their satiation point that will be reached sooner or later. For gold, this point is removed farther, so far indeed that for all practical purposes it is beyond reach.

Therefore if you substituted another commodity, or basket of commodities for gold, then you would end up with a unit of value the marginal utility of which was inferior. It would decline at a rate faster than that of gold. It would be akin to substituting a yardstick made of rubber for one made of metal.

1. The futility of inflationary policies

Mises ignores the fact that newly created money can be spent not only on goods and services, but also on financial assets. This is the proverbial fly in the ointment of the inflationary argument. It is also a subtle one, so much so that the government as the would-be perpetrator of inflation often falls victim to it. It may think that it is promoting inflation while, in fact, it acts as quartermaster for deflation.

By restricting the circulation of gold money or by other means, the government can make financial speculation more attractive. In doing so it wants to reduce the amount of money available for buying goods and services. This strategy of the government and its pseudo-economists consists precisely in channeling enough of the newly created money into speculative ventures so that the untoward consequences of price and wage rises will not occur, or they will occur later, so that the causality relation is obscured.

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Currency war update

Faber Exposes Unprecedented Perils of Our Currency Crisis

Posted by Brittany Stepniak – Tuesday, March 20th, 2012

According to Dr. Faber, there are some rather dire unintended consequences associated with the U.S. currency crisis.

Moreover, Marc Faber asserts that downward spiraling inflationary trends all across the globe maintain a direct correlation with the Federal Reserve’s money printing policies.

While we’re all aware of the danger of printing too much fiat money, Faber stresses that the world’s fiat currencies are in greater danger than any of us realize…

Here’s how Faber views inflation:

If you start to print, it has the biggest impact. Then you print more — it has a lesser impact, unless you increase the rate of money printing very significantly. And, the third money-printing has even less impact. And the problem is like the Fed: They printed money because they wanted to lift the housing market, but the housing market is the only asset that didn’t go up substantially.

In general, I think that the purchasing power of money has diminished very significantly over the last ten, twenty, thirty years, and will continue to do so. So being in cash and government bonds is not a protection against this depreciation in the value of money.

Additionally, Faber explains how the Fed can’t possibly forecast the economy with accuracy because they are “academics,” and have “never worked a single day in their lives.”

Essentially, they lack the experience to understand the big picture.

They aren’t businessmen balancing books; they don’t go shopping and spend time at the local pub; they don’t need to sell products or services to make a living for themselves… The are paid by the government and lack an insider’s understanding of the way the U.S. economy truly functions.

Perhaps this is why they print money and their naive idealism lets them believe it will bring wealth back into our nation.

Unfortunately, that’s simply not true. If it were, every country in the world would thrive in prosperity and live happily ever after.

There are no Utopian societies. Printing endless amounts of paper money won’t change that fact.

And the unintended consequences of firing up the printing presses time and again will lead to unprecedented hardships in America — and across the globe.

Again, Marc Faber tackles this issue stating:

We know one unintended consequence, and this is that the middle class and the lower classes of society, say 50% of the US, has rather been hurt by the increase in the quantity of money in the sense that commodity prices in particular food and energy have gone up very substantially. And, since below 50% of income recipients in the US spend a lot, a much larger portion of their income on food and energy than, say, the 10% richest people in America and highest income earners, they have been hurt by monetary policy. In addition, the lower income groups, if they have savings, traditionally they keep them in safe deposits and in cash because they don’t have much money to invest in the first place. So the increase in the value of the S&P hasn’t helped them, but it helped the 5% or 10% or 1% of the population that owns equities. So it’s created a wider wealth inequality, and that is a negative from a society point of view.

Amidst extreme currency devaluation, this crisis has the potential to lead to malinvestment which will, in turn, create asset bubbles that’ll explode in chaos when the bubbles burst.

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China yuan could be reserve currency with reform: IMF

BEIJING (Reuters) – China’s yuan could become a reserve currency in future if the country undertakes further economic reform, International Monetary Fund managing director, Christine Lagarde, said in a speech on Sunday.

The IMF chief, speaking to a gathering of leading Chinese policymakers and global business leaders, added that China needed a roadmap for a stronger, more flexible exchange rate system.

China operates a closed capital account system and its yuan currency is tightly controlled, although Beijing has said it wants to increase the international use of the yuan to settle cross border trade and has undertaken a series of reforms in recent years to that end.

(Reporting by Koh Gui Qing; Writing by Nick Edwards; Editing by Jonathan Thatcher)

Analysis: Turning point in the currency war

By Mike Dolan

LONDON | Wed Mar 21, 2012 3:01am EDT

(Reuters) – A counteroffensive of sorts may be underway this year in what has seemed like a one-sided “global currency war” as developing economies slow, western money-printing pauses and the heat comes out of pumped-up emerging marketcurrencies.

The three-year-old “war”, as Brazil dubs the devaluationist policies of developed nations seeking relief from home-grown credit crunches, may well just come full circle and burn itself out as a result.

But the reverse course of emerging currency depreciation carries its own significant risks, from skewing investment decisions to aggravating trade diplomacy.

What’s more, it’s Japan’s success this year in finally weakening its supercharged yen, by fresh rounds of money-printing from its central bank, which may prove pivotal by disturbing the delicate balance in Asia.

Some economists warn the yen’s more than 10 percent retreat since January is already forcing China’s hand on its own controversial policy of yuan capping in a way that could cause consternation in Washington in an election year.

Far from seeing a sharply rising yuan emerge from China’s policy of greater exchange rate flexibility – core U.S. and multilateral demands – the yuan has actually weakened this year as China’s economy and inflation rates slow, its trade account worsens and fears of a “hard landing” there persist.

Even though the tightly-controlled yuan has gained more than 10 percent against world currencies over the past five years, it’s one of the few major emerging market currencies to remain lower against the U.S. dollar so far in 2012. Bouncing back smartly from a dire 2011, Russia’s rouble, India’s rupee, Mexico’s peso and South Africa’s rand are all up 5-10 percent.


BRIC currencies since 2007:

Currency performance in 2012:

Chinese yuan vs Japan yen:

China trade in deficit:

Japan exports to China vs US:


China recorded its biggest trade deficit in more than a decade in February and signs of slowing economic activity are mounting in everything from real estate prices to ore demand to foreign direct investment. But if it allowed or engineered a lower yuan, then it’s unlikely the other emerging giants – never mind the west – could ignore that.

Long-term global markets bear and Societe Generale strategist Albert Edwards says it’s vitally important global investors put the possibility of a weaker Chinese yuan on their radars because consensus thinking is disregarding the risk.

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