CHINA TAKES OFF THE RESERVE CURRENCY TRAINING WHEELS

GREETINGS,

IT APPEARS THAT THE CHINESE GOVERNMENT AND ITS CENTRAL BANK ARE NO LONGER GOING IT WITH AMERICA.LEARY OF AMERICA’S DEFICIT SPENDING,HER FIRCAL POLICIES,AND HER FEDERAL RESERVE MONETIZIED SPENDING AND MONETIZING OF HER DEBT,CHINA HAS DECIDED TO STEP OUT OF THE E.U. AND AMERICA’S DEBT RIDDEN SHADOWS AND BECOME THE CAPTAIN OF ITS OWN FINANCIAL SHIP;”Thursday, September 10, 2009
China Hoarding Gold and Plans to Issue Yuan-Denominated Bonds in Hong Kong
by Eric deCarbonnel

The New York Times reports that china will issue yuan-denominated bonds in Hong Kong.

(emphasis mine) [my comment]

China to Issue Yuan-Denominated Bonds in Hong Kong
By CHRIS V. NICHOLSON
Published: September 8, 2009

The Chinese Ministry of Finance said Tuesday that it would issue 6 billion yuan worth of government bonds in Hong Kong, a major step to internationalize its currency at a time of concern about the dollar.

Kin Cheung/Associated Press
This is the first time that government bonds, comparable to U.S. Treasury securities, are to be issued. Above, a Bank of China in Hong Kong.

The yuan bond issue, the equivalent of $879 million, will “promote the yuan in neighboring countries and improve the yuan’s international status,” the ministry said on its Web site.

“The first step toward internationalization is regionalization,” Shi Lei, a currency analyst at Bank of China in Beijing, said during an interview. “China wants to develop the offshore market in Hong Kong.”

While domestic banks like Bank of China and the Export-Import Bank of China have issued yuan-denominated bonds in Hong Kong for a couple of years at the encouragement of Beijing, this is the first time that government bonds, comparable to U.S. Treasury securities, are to be issued. The sale is set for Sept. 28.

In July, the People’s Bank of China, the country’s central bank, started a program for local companies to settle trade in yuan, but it has so far spurred little trade. Zhi Ming Zhang, an analyst at HSBC in Hong Kong, said the government bond issue might show foreign investors they could rely on the yuan.

“If I’m doing trade with China, where am I going to park this money?” Mr. Zhi asked, referring to the yuan. The yuan-bond market needs security and liquidity to make such settlements attractive, he said, and government bonds will provide security and a pricing benchmark. The next step, he added, would be to increase the number of Chinese issuers and investors in the yuan.

Experts estimate that China holds about 75 percent of its $2 trillion in foreign reserves in dollar-denominated assets, but since the global financial crisis began, that position has made Beijing uneasy. Since the beginning of 2007, the dollar has slipped more than 20 percent against the yen, and more than 12 percent against the yuan, and investors are concerned as the United States continues to pile up debt to finance its huge stimulus package.

In March, China’s prime minister, Wen Jiabao, expressed concern about the dollar’s slide and encouraged the United States to ensure its stability.

While the bond issue announced Tuesday is a step toward making the yuan a global currency, the size of the sale is small compared with those of U.S. Treasury securities, and the time it will take to establish the yuan internationally remains uncertain. [less than a year]

“There is no timetable,” said Mr. Shi, the Bank of China analyst, adding that developing the market would take “at least three to five years.” [it happen much faster, driven by panic about the collapsing dollar.]

In another move to make the yuan accessible to investors, BOC Suisse Fund Management, Bank of China’s asset-management arm based in Geneva, said Friday that it had received approval from the Swiss financial regulator to create a new set of funds, nearly half of them denominated in the Chinese currency. [This looks interesting]

The Telegraph reports that China is alarmed by US money printing.

China alarmed by US money printing
The US Federal Reserve’s policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

By Ambrose Evans-Pritchard, in Cernobbio, Italy
Published: 9:06PM BST 06 Sep 2009

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”.

“We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

China’s reserves are more than – $2 trillion, the world’s largest.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added.

The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

Mr Cheng said the Fed’s loose monetary policy was stoking an unstable asset boom in China. “If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.

“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”

Mr Cheng said China had learned from the West that it is a mistake for central banks to target retail price inflation and take their eye off assets.

“This is where Greenspan went wrong from 2000 to 2004,” he said. “He thought everything was alright because inflation was low, but assets absorbed the liquidity.”

Mr Cheng said China had lost 20m jobs as a result of the crisis and advised the West not to over-estimate the role that his country can play in global recovery.

China’s task is to switch from export dependency to internal consumption, but that requires a “change in the ideology of the Chinese people” to discourage excess saving. “This is very difficult”.

Mr Cheng said the root cause of global imbalances is spending patterns in US (and UK) and China.

“The US spends tomorrow’s money today,” he said. “We Chinese spend today’s money tomorrow. That’s why we have this financial crisis.”

Yet the consequences are not symmetric.

“He who goes borrowing, goes sorrowing,” said Mr Cheng.

It was a quote from US founding father Benjamin Franklin.

The Telegraph reports about China, Bernanke, and the price of gold.

China, Bernanke, and the price of gold
By Ambrose Evans-Pritchard Economics Last updated: September 7th, 2009

China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose.

I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d’Este last night at which he listened very attentively as a number of American guests tore President Obama’s economic and health policy to shreds.

Mr Cheng was until recently Vice-Chairman of the Communist Party’s Standing Committee, and is now a sort of economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply “a survivior”.

What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.

Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week – outperforming US equities fourfold, even with reinvested dividends – has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today’s paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke’s monetary experiments at the Federal Reserve.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed’s QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now ten times incomes.

“If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.”

“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”

Of course, China cold end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus [but China will let the yuan rise anyway when food crisis really begins]. China’s exports were down 23pc in July from a year before even at the current exchange rate, and exports make up 40pc of GDP. “We have lost 20m jobs in this crisis,” he said.

China’s mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.

Where is the gold going to come from?

Chinese buying drove gold over $1000

My reaction: The news developments above are screaming warning sirens telling the world to get out of the dollar before it is too late.

China continues to internationalize the yuan

1) On September 28, China will issue 6 billion yuan worth of government bonds in Hong Kong.

2) This is the first time that China issues bonds comparable to U.S. Treasury securities.

3) This represents a MAJOR step to internationalize the yuan at a time of rising concern about the dollar.

China issued “Beijing Put” on gold

1) Comments by Mr Cheng (until recently Vice-Chairman of the Communist Party’s Standing Committee) validate the long-held belief of gold bugs that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

2) Comments by Mr Cheng (on record) also validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

3) China is buying the dips in gold prices, and will continue to do so as a systematic policy. Mr Cheng’s comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force (Chinese buying) steps in from the unknown.

Conclusion: Gold is never going back down. Don’t expect to ever see gold beneath $900 again. Prices that low would result in too much Chinese buying, so those short gold can’t allow it to happen.

Meanwhile the yuan continues to strengthen as an alternative to the dollar. By the time a dollar panic begins at the end of 2009, the currency will be ready to serve as a makeshift replacement for the dollar in international trade.”

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