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Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters
Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters.
BY MARWA RASHAD
RIYADH, March 16 Sun Mar 16, 2014 7:58am EDT
Asked whether it made sense to consider diversifying the central bank’s reserves to include the yuan, also known as the renminbi, or explore a currency swap agreement, Mubarak said: “We think it is a stronger currency, but it is far from being a reserve currency at this stage.”
“But indeed it represents a good option and a good diversifier and we have seen that some of the central banks have some reserves in the renminbi,” he said at an annual news conference in the Saudi capital.
Mubarak, who does not comment on policy outside of annual press briefings, did not say, however, whether the central bank had considered adding the yuan to its portfolio of net foreign assets. Its reserves, the vast majority of which are believed to be in U.S. dollars, grew to a record $718 billion in January.
A gradual easing of restrictions on the yuan and increasing trade with China have led some of Beijing’s partner countries include the renminbi in their official reserves and open currency swap agreements.
Last year, Taiwan’s central bank said it was holding the yuan in its foreign exchange reserves portfolio in recognition of the yuan’s growing globalisation and importance of trade, while Australia’s central bank unveiled a plan to invest some of its reserves in Chinese government bonds for the first time.
Among the Gulf Arab oil exporters, who mostly peg their currencies to the U.S. dollar, the United Arab Emirates signed a three-year currency swap agreement worth $5.5 billion with China in 2012 to boost two-way trade and investment.
Oil giant Saudi Arabia is the top crude supplier for China, the world’s second biggest economy. Last year, the Gulf monarchy supplied Beijing with around 1.17 million barrels per day of oil and is expected to deliver the same amount this year, according to traders.
Beijing has laid out plans to make the yuan convertible on the capital account, but its market interventions to hold back the pace of appreciation have shown a wariness of currency liberalisation.
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Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters
Saudi c.bank: China yuan good diversifier, but far from reserve currency | Reuters.
BY MARWA RASHAD
RIYADH, March 16 Sun Mar 16, 2014 7:58am EDT
Asked whether it made sense to consider diversifying the central bank’s reserves to include the yuan, also known as the renminbi, or explore a currency swap agreement, Mubarak said: “We think it is a stronger currency, but it is far from being a reserve currency at this stage.”
“But indeed it represents a good option and a good diversifier and we have seen that some of the central banks have some reserves in the renminbi,” he said at an annual news conference in the Saudi capital.
Mubarak, who does not comment on policy outside of annual press briefings, did not say, however, whether the central bank had considered adding the yuan to its portfolio of net foreign assets. Its reserves, the vast majority of which are believed to be in U.S. dollars, grew to a record $718 billion in January.
A gradual easing of restrictions on the yuan and increasing trade with China have led some of Beijing’s partner countries include the renminbi in their official reserves and open currency swap agreements.
Last year, Taiwan’s central bank said it was holding the yuan in its foreign exchange reserves portfolio in recognition of the yuan’s growing globalisation and importance of trade, while Australia’s central bank unveiled a plan to invest some of its reserves in Chinese government bonds for the first time.
Among the Gulf Arab oil exporters, who mostly peg their currencies to the U.S. dollar, the United Arab Emirates signed a three-year currency swap agreement worth $5.5 billion with China in 2012 to boost two-way trade and investment.
Oil giant Saudi Arabia is the top crude supplier for China, the world’s second biggest economy. Last year, the Gulf monarchy supplied Beijing with around 1.17 million barrels per day of oil and is expected to deliver the same amount this year, according to traders.
Beijing has laid out plans to make the yuan convertible on the capital account, but its market interventions to hold back the pace of appreciation have shown a wariness of currency liberalisation.
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China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge
China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge.
In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.
The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:
Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.
People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.
Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.
Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”
The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:
the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.
The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.
A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.
The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.
For some even the doubling in the rate band is not enough:
Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.
But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.
Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.
That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.
As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.
“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.
One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.
* * *
Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.
UBS
- The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
- Action doesn’t have direct implications for direction of CNY against USD
- UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
- Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang
Morgan Stanley
- “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
- Wider yuan band will help deter “carry trade speculators” as volatility increases
- Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
- Recent CNY depreciation created precondition for band widening
Commonwealth Bank of Australia
- With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
- Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
- Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years
BEA
- PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
- Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
- Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization
Bank of America
- Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
- PBOC wants to widen band when market view is more balanced
- Not very surprising in terms of band-widening timing
- Another band widening this year is unlikely
- Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
- Long-dated NDFs could weaken further, though not necessarily the daily official fixings
- Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation
ANZ
- With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
- Yuan band widening didn’t come as a surprise
- Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
- Another widening won’t come so soon given the last move was 2 yrs ago in 2012
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China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge
China Widens Dollar Trading Band From 1% To 2%, Yuan Volatility Set To Spike | Zero Hedge.
In the aftermath in the recent surge in China’s renminbi volatility which saw it plunge at the fastest pace in years, many, us included, suggested that the immediate next step in China’s “fight with speculators” (not to mention the second biggest trade deficit in history), was for the PBOC to promptly widen the Yuan trading band, something it hasn’t done since April 2012, with the stated objective of further liberalizing its monetary system and bringing the currency that much closer to being freely traded and market-set. Overnight it did just that, when it announced it would widen the Yuan’s trading band against the dollar from 1% to 2%.
The healthy development of China’s current foreign exchange market, trading body independent pricing and risk management capabilities continue to increase. To meet the requirements of market development, increase the intensity of market-determined exchange rate, and establish a market-based, managed floating exchange rate system, the People’s Bank of China decided to expand the foreign exchange market, the floating range of the RMB against the U.S. dollar, is now on the relevant matters are announced as follows:
Since March 17, 2014, inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar floating rate of expansion from 1% to 2%, or a daily inter-bank spot foreign exchange market trading price of the RMB against the U.S. dollar foreign exchange transactions in China can be Center announced the same day the central parity of RMB against the U.S. dollar and down 2% in the amplitude fluctuations. Designated foreign exchange banks to provide customers with the highest cash offer price of $ day of the minimum cash purchase price difference does not exceed the magnitude of the day the central parity rate expanded from 2% to 3%, other provisions remain in compliance, “the People’s Bank of China on the interbank foreign exchange market Trading foreign exchange designated banks listed on the exchange rate and the exchange rate management issues related to notice “(Yin Fa [2010] No. 325) execution.
People’s Bank of China will continue to improve the RMB exchange rate formation mechanism of the market, further develop the role of the market in the RMB exchange rate formation mechanism, strengthen two-way floating RMB exchange rate flexibility, to maintain the RMB exchange rate basically stable at an adaptive and equilibrium level.
Amusingly, we may have the first attempt at forward guidance by yet another central bank: that of China. As the WSJ explains: “There is no basis for big appreciation of the renminbi,” the PBOC said, noting that China’s trade surplus now represents only 2.1% of its gross domestic product. At the same time, “there is no basis for big depreciation of renminbi,” the central bank added, saying that risks in China’s financial system are “under control” and the country’s big foreign-exchange reserves can serve as a big buffer against any external shocks.
Alas, in China merely soothing words hardly ever do the job which is why “while pledging to give the market a bigger role in setting the yuan’s exchange rate, the PBOC said it would still implement “necessary adjustments” to prevent big, abnormal fluctuations in the yuan’s exchange rate.”
The macro thinking behind China’s move was foretold well in advance, but for those who missed it, the WSJ does a good recap:
the change, which followed Beijing’s landmark move in 2012 to double the yuan’s trading bandwidth, is seen as an important step toward establishing a market-based exchange-rate system, whereby the yuan would move up and down just like any other major currency.
The exchange-rate reform is part of China’s plan to overhaul its creaky financial sector, elevate the country’s status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.
A freer yuan can also help China deflect foreign complaints about its currency policies. The U.S. and other advanced economies have pressed Beijing for years to relax its hold on the yuan and allow it to appreciate at a faster pace. The hope is to boost consumer demand in China as consumers in Western countries such as the U.S. and Europe pull back amid still-fragile economies.
The move to widen the yuan’s trading range comes as China’s juggernaut economic machine is slowing down, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies.
For some even the doubling in the rate band is not enough:
Widening the band would give a greater indication of how the market values the yuan. A prominent Chinese economist, Yu Yongding, for instance, advocates that the daily band be widened to 7.5% in either direction, which would essentially let the market fully determine the rate.
But perhaps the biggest message from today’s announcement is that China is preparing to focus far more on its internal affairs rather than dealing with daily FX manipulation, as well as the micromanagement of China’s reserves, which recently may or may not have been sod off in the form of US Treasurys.
Meanwhile, loosening its hold on the yuan can also help the PBOC focus more on domestic monetary policy while reducing the need for currency intervention by the central bank.
That is because when the yuan’s floating range gets bigger, the yuan won’t touch the upper or lower limit of the band as frequently as it did in the past, thereby making it less necessary for the PBOC to meddle in the currency market in a bid to rein in or prop up the yuan’s value.
As a result, with the expanded trading band, the PBOC is expected to issue fewer yuan for the purpose of exchange-rate intervention, and that could leave the central bank with more room to manage the domestic monetary policy.
“The PBOC will still resort to intervention, but a wider trading band means that it may not need to intervene as readily as it did in the past,” said Christy Tan, a currency specialist at Bank of America Merrill Lynch.
One thing is certain: as the world digests the latest out of the country that creates credit at a pace that is five times greater than the US, the volatility in the CNY will soar, at jthe worst possible time. Because as we explained before, all global specs, especially those out of Hong Kong need, is for the USDCNY to surge above 6.20 for the margin calls to start coming in fast and furious.
* * *
Finally, here are some kneejerk reactions by Wall Street analysts, via Bloomberg.
UBS
- The action, coupled with more two- way volatility, could help discourage “hot money” inflows and encourage companies and banks to be more vigilant about exchange-rate risks, Wang Tao, chief China economist at UBS AG in Hong Kong, says in an e-mail.
- Action doesn’t have direct implications for direction of CNY against USD
- UBS still sees exchange rate “broadly unchanged, with increased two-way volatility”
- Action isn’t surprising because central bank has said for a qhile that it would widen band soon: Wang
Morgan Stanley
- “We do not think the PBOC took this move to accelerate the CNY depreciation for mercantile interests to stabilize growth,” Morgan Stanley economist Helen Qiao says in e-mailed comment.
- Wider yuan band will help deter “carry trade speculators” as volatility increases
- Action is “largely in line with our expectation, as a major step in China’s FX reform” and is part of government’s “continued reform efforts”
- Recent CNY depreciation created precondition for band widening
Commonwealth Bank of Australia
- With PBOC dollar purchases being key driver in recent yuan weakness, it will be challenging for yuan to trade at both sides of the doubled trading band in a symmetric fashion, Andy Ji, FX strategist at Commonwealth Bank of Australia, says in email interview.
- Yuan is unlikely to depreciate substantially without PBOC intervention, given the status of current account surplus and without broad dollar strength
- Yuan may weaken in 1H then strengthen in 2H, similar to the patterns in past two years
BEA
- PBOC is likely to guide a weaker yuan through its daily reference rate to ensure there won’t be renewed one-way appreciation bets after doubling the trading band, Bank of East Asia FX analyst Kenix Lai says in phone interview today.
- Yuan band widening announcement shouldn’t be too surprising to market given the PBOC has already signaled such a move in Feb.
- Yuan should still be able to deliver mild appreciation in 2014 as China continues to push for yuan internationalization
Bank of America
- Weaker yuan fixings in past month or so has changed one-way appreciation bias, Albert Leung, BofAML local market strategist for Asia, says in email interview.
- PBOC wants to widen band when market view is more balanced
- Not very surprising in terms of band-widening timing
- Another band widening this year is unlikely
- Knee-jerk market reaction should be higher volatility, with higher NDF, DF implied rates
- Long-dated NDFs could weaken further, though not necessarily the daily official fixings
- Any follow-through after the knee-jerk and whether yuan will weaken further will highly depend on PBOC daily fixing and how macro data and corporate credit situation
ANZ
- With the band widening and, more importantly, recent spate of weak China data, the bias is for near-term yuan weakness and potentially higher volatility, ANZ FX strategist Irene Cheung says in email interview today.
- Yuan band widening didn’t come as a surprise
- Band widening doesn’t necessarily relate to recent PBOC Governor Zhou Xiaochuan’s statement on interest rate liberalization
- Another widening won’t come so soon given the last move was 2 yrs ago in 2012
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From PetroDollar to PetroYuan – The Coming Proxy Wars » Golem XIV – Thoughts
From PetroDollar to PetroYuan – The Coming Proxy Wars » Golem XIV – Thoughts.
Why would the central bank of Nigeria decide to sell dollars and buy Yuan?
At first glance it might not seem the most interesting or pressing question for you to consider. But I think it is one of those little loose threads that if pulled upon carefully begins to unravel the hints and traces of a much larger story. But please be warned this is speculative.
Two days ago the Nigerian Central Bank announced it was going to increase the share of its foreign currency reserves held in Yuan from 2% at present, to up to 7%. To do this it was going to sell US Dollars. Now a 5% swing in anything financial is big. In our debt drunk times it’s difficult somethimes to remember that 2.15 billion dollars (which is what 5% comes to) is actually a great deal of money, even if it is less than a drop in America’s multi trillion dollar debt ocean. On the other hand even a 5% increase in Yuan would still leave 80% of Nigeria’s $43 billion worth of reserves in dollars.
BUT while it is small in raw financial terms I think it is significant in geopolitical terms.
Nigeria is Africa’s second largest oil and gas exporter. It holds as many dollars as it does because oil is sold in dollars. Nigeria gets paid in dollars which it then needs to recycle. This is the famous petrodollar in action. It is also a major reason the dollar is still the world’s major reserve currency and that in turn is why America can have such a monumental pile of debt and still (for now) be the risk-off haven that institutional investors run to when other currencies and markets become too risky and unstable.
What interest me is that prior to this announcement from Nigeria’s central bank, China has, for some years now, been working hard and succesully to buy exploitation rights in Nigeria’s oil fields. In 2009 The Wall Street Journal reported,
Chinese companies have proposed investing $50 billion to buy 6 billion barrels of oil reserves in Nigeria, the African nation’s presidential adviser on energy said Tuesday.
A year later in 2010 the WSJ reported,
Nigeria and China have signed a tentative deal to build three oil refineries in the West African state at a cost of $23 billion, in a move to boost badly needed gasoline supply in Nigeria and to position China for more access to the country’s coveted high-quality oil reserves.
And just last year China extended a $1.1 billion loan in return for a reported agreement that oil exports to China would increase from around 20 000 barrels a day to 200 000 per day by 2015. This loan was on top of a range of development agreements betwen the two countries for various infrasctructure projects such a telecoms and railways.
Nigeria had, as of 2011, over 37 billion barrels of proven oil reserves. China is now one of its major trading partners. China wants Nigerian oil and my guess is that if it isn’t doing so already it is going to trade it entirely in Yuan. Such a move would mean Nigeria would need fewer dollars and more Yuan and the PetroYuan would begin to rise at the expense of the Petrodollar.
For some years now China has been making the Yuan a settlement currency. I have written about this a lot over the years. In 2012 I wrote a piece called “A new reserve currency to challenge the dollar – What’s really going on in the Straits of Hormuz.” China has created a series of bilateral settlement agreements with, among others, the EU, South Korea, Iran, India and Russia. All of these agreements by-pass the US dollar. If China now trades its oil in Yuan where will that leave the dollar? Of course Saudi would never agree to such a thing, would it?
Now Its a long way from Nigeria’s 200 000 barerels a day to overthrowing the dollar as the premiere oil currency. But let’s face it the US has gone to war on more than one occasion recently in part because the country involved had been going to sell its oil in Euros. And the US is Europe’s friend, isn’t it?
The US hawks have always been afflicted with dominophobia – fear of falling dominoes. Somewhere in a room in the Pentagon or Langley, there is a huddle of spooks, military types, oil men and State department advisors all wondering how to prevent this new creeping menace. Because you cannot afford to be complacent you know. It starts in one country and if you don’t do something other’s will follow and before you know it the rich Western Africa oil bonanza is flowing into Yuan, to be followed by all those North African and Middle Eastern Arab Spring countries where the clean-cut boys are already having to ‘advise’ on the need to take a firm line with potentially anti-American Muslim Brotherhood types by locking them up, shooting them and generally branding them as terrorists.
What would happen, someone will mention almost in a whisper, if Qatar were to triumph over Saudi and then cut a multi-lateral deal to sell its gas in Euros to Europe and in Yuan to China?
But to return from the overheated imaginations of the Virginia Hawks to some sort of reality, Nigeria is increasing its Yuan reserve at the expense of the dollar and is developing far closer ties to China than to the US. Which is why I think you will soon find the US dramatically increasing its involvement, both financial and military, in Angola.
Angola is going to be America’s answer to China’s Nigeria. And I think the signs are already there.
While in Nigeria Chinese companies are expanding, in Angola the big players are the Western Oil majors: Chevron/Texaco(US), Exxonmobil (US), BP (UK), ENI (Italy), Total (FR), Maersk (DK) and Statoil (NOR). There are others but these are the big players. Of these Total is probably the largest presence producing about a third of all Angola’s oil output. And Total has recently increased its presence. Of the others Chevron is one of the largest and is expanding aggressively.
Angola itself is busy selling off new concessions. 10 new blocks containing an estimated 7 billion barrels of oil, which is over half of all Angola’s proven reserves are to be auctioned this year. Angola has recently edged ahead of Nigeria to be Africa’s largest oil exporter. If I’m correct I expect the Western nations/companies, led by the US and new best war-buddy, France to make sure the Chinese do not get a large share of the spoils. One to watch.
As part of this new Western push, I expect to see China also restricted in any new oil fields around Sao Tome and Principe. The big players to date are Chervon, Exxonmobil and Nigeria. The latter suggesting a way in for the Chinese that I think the Westerners will want to push shut. To which end what I found interesting about recent events in Soa Tome and Principe is the visit there of Isabel dos Santos, the daughter of Angola’s President for life. I have written about her and her banking empire in The Eurofiscal Corruption Contest – The Portuguese entry. Isobel is most often refered to as Africa’s or Angola’s most famous business woman or Africa’s richest woman (She’s a billionaire). Rarely does anyone from the press raise the question of how she became so vastly wealthy.
She made a visit to the islands and both she and Angola’s state companies have begun to invest heavily. Angolan companies now have a very commanding position in the island’s economy and Angola, even though its own people live in poverty, found the money to loan Sao Tome and Principe $180 million which is half of the island’s GDP. Top that Beijing! The Islands are Portuguese speaking, the largest bank is Portuguese, and the islands also house a broadcast station for Voice of America.
I think taken together the signs are that the West, led by America, has in mind to try to contain or perhaps even confront Chinese expansion particularly as it concerns access to oil and gas in West and North Africa, and to rare earth minerals – but that’s another story. I don’t think there can be any doubt that America and Europe are looking at Chinese expansion and its hunger for resources and see a threat. The question is what will they do? America is accustomed to being the hegemonic power and its hawks have proved over and over that they are are quite prepared for military confrontation. The question for them would be how? Invading countries who have – in reality – very little military or economic might is one thing, but directly confronting another superpower is another. I think all sides would see direct and open military confrontation to be out of the question. Not just for military reasons but for global economic ones as well. They need to find ways of fighting that do not sink the world economy – neither its flows of goods and trade , nor its flows of captail and debt. Which is why I wonder about the possibility of seeing an era of new proxy wars being faught out in tit-for-tat destabilization escalating up to protracted gorilla/civil wars.
In West Africa the front line seems to run between Angola and Nigeria. So who would like to play a game of destabilize your neighbour? There is already unrest about Chinese goods flooding Nigeria. How tempting might it be to think about fanning flames of unrest in already unstable Nigeria espeicially in the delta?
In return what would you have to do to re-ignite the lines of mistrust and division which blighted Angola through decades of civil war? Dos Santos and the MPLA may have been the Soviet proxy but he’s a capitalist now. So, how about a nice cold-war style proxy war? I cannot bring myself to believe that no one at the Pentagon has dusted off the old plans for such conflict and set some analysts to working up some new ones with China scribbled in, in place of Russia.
Something is, I suspect, already afoot. One last pull on that little thread, one last detail that makes me wonder. Just last April (2013) the Israeli billionaire, Dan Gertler sold back to the government of the Democratic Republic of Congo, one of the oil companies/exploration blocks he had bought from it, but for 300% more than he paid. Anti-corruption campaigners have been up in arms.
Two facts interest me . One, that the purchase was actually financed by Sanangol, the Angolan state oil company (the company from which $32 billion had gone missing. Missing billions: billionaire dos Santos… No connection obviously). The DRC is to pay Sanangol back from oil revenue. Until that time, of course, Sanangol calls the tune. Two, that this oil block lies between the DRC and Angola in what was contested territory but has since been decreed a zone of cooperation.
Now this sale by Gertler could just be a bog standard pillage-Africa deal. And I might well be seeing things that just aren’t there, but why now? This sort of big money, that is connected to the top of the DRC government (how do you think Gertler was able to buy the concession at the price he did? And who do you think might be the, so far, hidden second beneficiary of Gertler’s oil company? The government minister who sold the concession to him in the first place, maybe?) moves when its contacts suggest this is a better time to lock in profit than times to come.
All in all, if I were a religious man, I would be saying a prayer for the children of Nigeria and Angola.
A note on all this speculation and non-financial stuff. I don’t usually write this much speculation but recently I have become more convinced that we are in a watershed in which everything around us, all the rules we are used to, all the lines on the map, are up for grabs and are changing around us. For me, finance is not separate from politics so we have to understand how they rub against one another. I hope you will bear with me.
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Presenting the latest country to lose confidence in the dollar….
Presenting the latest country to lose confidence in the dollar…..
January 30, 2014
Sovereign Valley Farm, Chile
Zimbabwe. You remember those guys, right?
The country’s plight with its currency became world famous, the butt of untold jokes in economic circles. At its height, hyperinflation in Zimbabwe reached nearly 90 sextillion in 2008.
That’s a 9 with 22 zeros.
To put it in context, if you had 90 sextillion grains of sand, you could cover the entire surface of the earth all the way to the outmost layers of the atmosphere.
Then, in April 2009, the government effectively abandoned the Zimbabwe dollar. The US dollar became the official currency for all government transactions, and US dollars, British pounds sterling, euros, and South African rand became the most widely used tender in circulation.
I’ve traveled to Zimbabwe frequently; they have some of the best stories you could ever hear about standing in line at the banks with wheelbarrows, and using stacks of paper currency at home for toilet paper or furniture.
Given that Zimbabwe is literally THE poster child for hyperinflation over the last half-century, one cannot understate the irony of their latest announcement.
Just yesterday, the government there announced that the Chinese renminbi (among other currencies) will become legal tender in Zimbabwe.
This is big news. As we have discussed so many times in the past, the current fiscal and monetary antics in the United States are absolutely no different than what Zimbabwe employed several years ago.
Zimbabwe printed its currency in nearly infinite quantities. So has the United States. The only difference is that the US dollar is readily accepted around the world thanks to good ole’ American credibility that was built by previous generations.
But that credibility is rapidly deteriorating. And everywhere you look, there are obvious signs that the rest of the world is quickly moving on from the dollar.
Central banks around the world are stocking up on gold. Major powers like China and Russia are calling for a new reserve currency. And a number of nations (Zimbabwe is the latest) have already begun to use other currencies like the renminbi for international trade and central bank reserves.
It’s happening. And it’s one of those things that will play out like what Hemingway wrote about going bankrupt: gradually, then suddenly.
The dollar’s share of global reserves has slowly fallen from roughly 75% in 2001, to just over 60% today.
But the world will eventually reach a bifurcation point where investors, foreign governments, central banks, etc. panic and start rushing for the exits.
It’s something that could happen tomorrow. Or five years from now. No one knows. But rational, intelligent people shouldn’t be waiting around for it to happen.
I very strongly recommend that you take a portion of your savings and move them into real assets– precious metals and productive land are the most obvious. But even things like collectibles or nonperishable goods (like ammunition) would be preferable to US dollars.
Then there’s other currencies that you can hold. Right now, the Norwegian krone has the strongest fundamentals in the world as it is backed by the most solvent central bank on the planet.
The Hong Kong dollar is also an interesting option because it minimizes your downside currency risk while providing protection against the US dollar’s deterioration.
(Premium members: please refer to your SMC welcome guide for actionable information about holding Hong Kong dollars and Norwegian krone.)
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China’s Peer-To-Peer Lending Bubble Bursts As Up To 90% Of Companies Expected To Default | Zero Hedge
When it comes to the topic of China’s epic credit bubble (which continues to get worse as bad debt accumulates ever higher), we have beaten that particular dead horse again and again and again and, most notably, again. However, since in China the concept of independent bank is non-existent, and as all major financial institutions are implicitly government backed, by the time the “big” bubble bursts, it will be time to hunker down in bunkers and pray (why? Because while the Fed creates $1 trillion in reserves each year, and dropping post taper, China is responsible for $3.6 trillion in loan creation annually – yank that and it’s game over for a world in which “growth” is not more than debt creation). But just because the big banks can continue to ignore reality with the backing of the fastest marginally growing economy in the world (inasmuch as building empty cities can be considered growth), the same luxury is not afforded to China’s smaller lender, such as its peer-to-peer industry.
Granted, in the grand scheme of things P2P in China is small, although in recent years, as a key part of shadow banking, it has been growing at an unprecedented pace: according to research published last year by Celent consultancy, the country’s P2P lending market grew from $30m in 2009 to $940m in 2012 and is on track to reach $7.8bn by 2015. Here’s the problem: it won’t. In fact, China’s P2P lending boom just went bust because as the FT reports, “dozens of the P2P lending websites that sprang up in recent years have shut as borrowers default on loans. The biggest companies are unscathed so far, but the rapid collapse of smaller rivals highlights the mounting difficulties in the Chinese micro-lending industry as economic growth slows and monetary conditions tighten… Of the nearly 1,000 P2P companies operating in China, 58 went bankrupt in the final quarter of last year, according to Online Lending House, a web portal that tracks the industry. Several more had already run into trouble this year, it added.”
And it’s only going to get worse:
“The main reasons are the intense competition in the P2P industry, the liquidity squeeze at the end of the year and a loss of faith by investors,” said Xu Hongwei, chief executive of Online Lending House. He estimated that 80 or 90 per cent of the country’s P2P companies might go bust.
Oops. None of this is unexpected: after the Chinese banking system nearly collapsed in June, following an explosion in overnight lending rates on just the mere threat of tapering of liquidity by the PBOC (since repeated several times with comparable results), it was inevitable that there would be unexpected consequences somewhere.
That somewhere is manifesting itself in the one industry that was supposed to gradually alleviate the lending burden for the SOEs.
People in the industry had hoped that P2P lenders would fill a hole in China’s financial system by helping small businesses obtain funding and by giving investors higher returns than they can obtain from banks.
While proponents believe that will still eventually prove to be the case, many believe the industry has expanded too quickly and with insufficient oversight.
“A lot of P2Ps have blindly copied each other and they don’t have a business plan that is robust enough to react to market changes. They’ve just focused on sales, scale and bragging to each other,” said Roger Ying, founder of Pandai, one of the websites that is still active.
Wangying Tianxia, a Shenzhen-based lender, was one of the biggest P2Ps to fail, according to the Shanghai Securities News, an official newspaper. Between its founding in March last year to its failure in October, Rmb780m ($129m) of loans were disbursed via its platform.
A second China-wide cash crunch at the end of December heaped more pressure on P2P lenders. Fuhao Venture and Guangrong Loans posted notices on their websites in the first week of the new year warning investors that loan repayment might be delayed.
So, condolences to China’s P2P business model: if it is any consolation, you are merely the first of many debt-related dominoes to tumble in China.
But while the Chinese government has already thrown in the flag on P2P – after all at just over a $1 billion in notional how big can the damage be – it is desperately scrambling to give the impression that all is well in the other, much more prominent areas of its credit bubble. Which is why the WSJ reports that “China’s government is gearing up for a spike in nonperforming loans, endorsing a range of options to clean up the banks and experimenting with ways for lenders to squeeze value from debts gone bad.
Write-offs have multiplied in recent months. Over-the-counter asset exchanges have sprung up as a way for banks to find buyers for collateral seized from defaulting borrowers and for bad loans they want to spin off. Provinces have started setting up their own “bad banks,” state-owned institutions that can take over nonperforming loans that threaten banks’ ability to continue lending.
“In recent years, Chinese banks have been exploring new avenues to resolve their bad loans,” said Bank of Tianjin, which is based in northeastern China. The lender recently listed more than 150 loans for sale on a local exchange. “We will continue to recover, write off, spin off and use other avenues in order to resolve bad loans,” it said.
China’s banks reported 563.6 billion yuan ($93.15 billion) of nonperforming loans at the end of September. That is up 38% from 407.8 billion yuan, the low point in recent years, two years earlier.
Amusingly, just like in the US, where nobody dares to fight the Fed, in China the sentiment is that nothing can possibly go wrong at a level that impairs the entire nation: “Analysts think it is unlikely that Beijing would let major banks go bust. Still, investors suspect the cost of a cleanup could be a sizable economic burden and could become even greater if growth continues to slow.”
Good luck with that, here’s why:
“The last time Beijing confronted bad-loan problems, in 1999 and 2000, the sums involved had crippled the banking system. Banks became far less able to make new loans, forcing the government to take action. Some 1.3 trillion yuan of bad debt was spun off the books of the biggest state banks and swept into four purpose-built bad banks.
This time, to avoid a costly bailout in the future, the government is pushing the banks to clean up their mess early. It is giving them new tools to do so: the exchanges to sell bad assets, provincial-level bad banks and permission to raise fresh capital using hybrid securities, complex products that combine aspects of debt and equity.”
One small problem: sell them to who? After all China is a closed system, and the US hedge funds have their hands full will pretending Spain and Greece are recovering and sending their stock markets to the moon because of the endless stream of lies emanating from the government data aparatus, all of it made up.
A potential constraint on the bad-debt cleanup is the inexperience of buyers at pricing and dealing with distressed debt, never a significant asset class in China. Finding buyers for a failed factory or commercial property seized as collateral can be difficult, particularly in cities with weaker economies.
“There’s an immature market for collateral. So the banks’ capacity to resolve loans is more determined by the market than their own abilities,” said Simon Gleave, regional head of finance services at KPMG China.
Analysts see the bad-loan problem as a growing issue. Although figures as of the end of September indicate bad debt represents only about 1% of total loans in
China’s banking system, a range of major industries are plagued with overcapacity and local governments are struggling to repay money borrowed to fund a construction binge. Investors broadly believe the actual bad-loan figure is much higher. The share prices of Chinese banks listed in Hong Kong have fallen, to trade below their book value.
And while all of the above is accurate, here is the biggest constraint: it is shown as the blue line in the chart below:
Applying a realistic, not made up bad debt percentage, somewhere in the 10% ballpark, and one gets a total bad debt number for China of… $2.5 trillion, and rising at a pace of $400 billion per year.
No, really. Good luck.
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Dead Currency Walking | project chesapeake
Dead Currency Walking | project chesapeake.
By: Tom Chatham
The Chinese have made no secret of their discontent with the massive money printing by the U.S. that is threatening to diminish their massive holdings. They are currently on a massive buying spree to get every ounce of gold they can as fast as they can. The U.S. interests are holding down the price of PMs in an effort to fool the average person into believing that everything is just fine. This manipulation is playing right into the hands of China as they continue to buy.
The amount of gold moving from London to the east is creating a drain on vaults in the west and it is only a matter of time before they go empty. When that happens, the price of physical will skyrocket and no amount of paper will be able to stop it. The end of the line for paper gold and silver is getting close. With China buying over 1,000 tons of gold every year for the past few years plus what they mine themselves, their vaults are filling up fast. Once they have a sufficient amount, they will complete the destruction of the Dollar with massive dumping of their U.S. bonds.
China has already signaled the end of the dollar when it recently announced it would start invoicing all of its oil imports in Renminbi. It has also announced it will no longer be adding any more foreign reserves to its holdings. This is an indication that China will begin to build up its own middle class to absorb much of its production just as the U.S. did in the last century. This is a clear signal that the loss of reserve currency status for the U.S. is not far off.
As if to make an even bolder statement, China is working on an agreement with Nicaragua to build a canal that rivals the Panama Canal. China is also talking about operating their own oil futures market that will be priced in Yuan. At least half of the OPEC nations have expressed interest in the endeavor.
As if life were not difficult enough in the U.S. right now, the loss of reserve currency status will hit like a financial tsunami that will push Americans over the edge before they know what hit them. This will cause all of our imports to increase in price until we can no longer afford them. This is a fact that few Americans know or understand. Most like to pretend everything will be fine and keep their head in the sand to stop any negative information from getting through but this crisis is going to run up and bite them in the ass whether they want to know or not. This is why so many will lose everything they have in the coming months. They can ignore reality but they will not be able to ignore the consequences of ignoring reality.
There are going to be rough times ahead and most Americans refuse to admit it and prepare for the worst. There has usually been someone or some thing to step in in the past and cushion the fall for most but this time there will be no one there to stop the pain. The death of the dollar will be one of those times in life that everyone will remember for many years to come.
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Yet another massive nail in the dollar’s coffin
Yet another massive nail in the dollar’s coffin.
On the other side of the world today, a couple of gentlemen that few people have ever heard of signed an agreement that has massive consequences for the global financial system.
It was a Memorandum of Understanding signed by representatives of the Singapore Exchange and Hong Kong Exchange. Their aim– to combine their forces in rolling out more financial products denominated in Chinese renminbi.
This is huge.
Hong Kong and Singapore are THE two dominant financial centers in Asia. For years they’ve been locked in competition with one another, much like New York and London. So their public partnership is a very big deal… indicative of the clear objective they have in front of them.
Bottom line– finance executives in Asia see the writing on the wall. They can see that the dollar is in a period of terminal decline, and it’s clear that the Chinese renminbi is going to take tremendous market share away from the dollar. They want a big piece of the action.
The renminbi has already surpassed the euro to become the #2 most-used currency in the world when it comes to trade settlement, according to a report released yesterday by the Society of Worldwide Interbank Financial Telecommunication (SWIFT).
Right now the renminbi has about an 8.6% share of the global market for trade settlement. Granted, the dollar has the lion’s share of trade settlement at more than 80%.
But just look at how quickly the renminbi has grown; in January 2012, its share of the global market was just 1.9%. So it’s grown by nearly a factor of 5x in less than two years.
With today’s agreement between Hong Kong’s and Singapore’s financial exchanges, that growth will likely accelerate.
As we’ve discussed before, the dollar is in a unique position simply because it is the world’s dominant reserve currency.
This means that when a rice distributor in Vietnam does business with a Brazilian merchant, they’ll close the deal by trading US dollars with each other… even though neither nation actually uses the dollar.
It’s been this way since World War II, simply because there has been such a long tradition of trust in the United States, and a steady supply of dollars throughout the world.
But this confidence is fading rapidly as merchants and banks around the world have been seeking alternatives, primarily the Chinese renminbi.
As the dollar’s market share in international trade decreases, it will mean the end of US financial privilege. No longer will the US be able to print money without repercussions.
And as so many other nations have learned the hard way, when you print money with wanton abandon and indebt your nation to the hilt, there are severe consequences to pay.
Today’s move between Hong Kong and Singapore gives us a glimpse into this future.
We’ll soon see more financial products– oil, gold, Fortune 500 corporate bonds, etc. denominated in renminbi and traded in Asia.
And as trade in these renminbi products grows, the dollar will be closer and closer to its reckoning day.
Years from now when this has played out, it’s going to seem so obvious.
Just like the post-Lehman crash in 2008, people will scratch their heads and wonder– ‘why didn’t I see that coming? Why didn’t I recognize that it was a bad idea to loan millions of dollars to unemployed / dead people?’
Duh. Same thing. People will look back in the future and wonder why they didn’t see the dollar collapse coming… why they didn’t recognize that it was a bad idea for the greatest debtor nation in the history of the world to simultaneously control the global reserve currency…
The warning signs are all in front of us. And today’s agreement between Hong Kong and Singapore is one of the strongest signs yet.
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Chinese Yuan Surpasses Euro, Becomes Second Most Used Currency In Trade Finance | Zero Hedge
Chinese Yuan Surpasses Euro, Becomes Second Most Used Currency In Trade Finance | Zero Hedge.
Slowly but surely the Chinese currency is catching up to the world’s reserve and moments ago, according to SWIFT, the Yuan just surpassed the Euro in trade (remember trade: that’s how countries once upon a time would generate capital flows in a time when central banks weren’t there to literally print domestic funding needs) finance usage leaving just the USD in front.
- YUAN OVERTAKES EURO IN TRADE FINANCE USAGE: SWIFT
- YUAN IS SECOND MOST-USED CURRENCY IN TRADE FINANCE: SWIFT
More from Bloomberg:
- Chinese currency had 8.66% share in letters of credit and collections, or trade finance, in Oct., Society for Worldwide Interbank Financial Telecommunications says in statement today.
- Euro’s shr in trade finance was 6.64% in Oct.
- Top 5 countries using yuan for trade finance in Oct. were China, Hong Kong, Singapore, Germany and Australia
- Yuan mkt shr in global payments was 0.84% in Oct. vs. 0.86% in Sept.
- Yuan payments value rose 1.5% in Oct. vs. 4.6% growth for all currencies: Swift
And so while the “developed” world is busy crushing its fiat through trillions in annual currency dilution and debasement in an attempt to make its exports cheaper and outtrade its peers through beggar thy neighbor policies (not to mention inflate away its debt), the leader of the “emerging” world, China, is doing just that.
Olduvaiblog: Musings on the coming collapse 