More Concerns Out Of China?

The bad news continues to flow out of China. The Telegraph reports that: Tumbling Chinese yuan sets off 'carry trade' rout, triggers derivatives contract

China’s yuan has suffered its biggest one-week fall in 20 years, nearing key trigger levels that threaten a wave of forced selling and mounting stress for those with dollar debts.

The jitters come amid reports of fire-sales of Hong Kong property by Chinese investors desperate to raise cash, some slashing their prices by 20pc for a quick sale. A liquidity squeeze in mainland China has already led to the collapse of Zhejiang Xingrun real estate this week with $570m of debts, the biggest property failure so far.

Meanwhile Hong Kong's The Standard, in an article titled Bankruptcy Looms, reports that in addition to the solar, coal and real-estate developer companies that are on everyone's radar as potential future bankruptcy candidates, one can also add steel makers to the list, with its report that Highsee Group, the largest private steel makers in Shanxi province has defaulted on CNY3 billion of debt, unable to repay its bonds on time.

Finally, a South China Futures Brokerage shuts down on "significant business risks"

Will the ripples be felt here?

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Mon Post #1: China's bubble is starting to break

Patrick Wolff, founder and chief executive officer of Grandmaster Capital Management LLC, was on Bloomberg Television's "Money Moves" talking about China.

In his words, China's bubble is starting to break.

The thing that is really striking about China is that there is an extraordinary double standard in the world today. You know, what you have in China is a state dominated, really state controlled, economy. It's, you know, it's not really capitalism by any stretch; it's something different. And it's very striking to me that the same people who would probably be apoplectic at the idea of the US government tightening regulations even a little bit in some area--that I know you were talking about the Volker Rule earlier where obviously there is a lot of debate on that as their should be--but the same people who would be really really upset about that, somehow come to believe that the fact that China's government controls everything in China is a good thing. I don't think it's a good thing; I think it's a bad thing.

I think there have been years and years of debt-fueled mal-investment. And it's come to a head. And when it breaks, as it seems to be breaking now, it's a long way down.

Another reason we shouldn't expect HAM (Hot Asian Money) to flood in and support the Vancouver Housing Market.

(hat tip World Housing Bubble)

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Mon Post #2: The shifting sands in China spells bad news for those in real estate relying on HAM

One of the arguments you hear from locals who dismiss concerns that our real estate prices have surpassed what local incomes can support is that Vancouver is in high demand and endless streams of wealthy Asian investors will buy what locals cannot afford to purchase.

As we have noted here before, China's history is replete with boom and bust cycles. In addition, the policies of the US Federal Reserve have been exporting inflation to the far east.  At some point China is going to react and begin focusing their economy inward.

Few people believe this is going to happen. Fewer still fully understand the repercussions this will have on the world economy.

Evidence that this trend is starting in earnest comes today from Reuters who report that Chinese Premier Wen Jiabao has cut his nation's 2012 growth target to an eight-year low of 7.5%. Wen Jiabo has made boosting consumer demand the year's first priority as Beijing looks to wean the economy off its reliance on external demand and foreign capital.

"We will improve policies that encourage consumption," Wen told nearly 3,000 delegates of the Communist Party-controlled legislature.

China has vowed to wean the economy off dependence on exports, smoke-stack industries and government-backed infrastructure, and promote balanced growth that will elevate the incomes and spending of farmers and workers.

The lower growth numbers just reflect the reality that growth is going to be slower because the rest of the world is going to be weaker. China is in for some rough times ahead. And rough times means less money for entrepreneurs to spend overseas.

China could be headed for its slowest full-year of growth in the last ten years. The economy ended 2011 with its slackest quarter of growth in 2-1/2-years at 8.9% as it felt the chill of the euro area debt crisis and a sluggish U.S. economy.

The outlook for the real economy remains cloudy, according to the latest surveys of China's vast factory sector and the burgeoning services industries that are key to rebalancing growth and generating more stable domestic-driven demand.

The Premier also pledged to curb speculative demand in the property market. The government will continue to defuse rising local government debt, regarded by many investors as the key risk to fiscal sustainability (and the source of the liquidity for the exploding Chinese real estate market). Government figures show about 10.7 trillion yuan ($1.7 trillion) was owed by local governments at the end of 2010.

Chinese investors (who have been spending money like drunken sailors on Vancouver Real Estate) are about to experience huge cash flow issues. Somehow I suspect what money is available for investments, that money isn't going to be spent in a real estate market that EVERYONE can clearly see is overvalued and ripe for a major correction.

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'Some Things You Should Know About China' - Charles Hugh Smith

I read an excellent post about China by American blogger Charles Hugh Smith on his blog Two Minds.

It is reprinted here and is worth your time to check out.

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Some Things You Should Know About China

If all you know about China comes from PBoC and Central Government reports and analysts' financial statements, then you know very little about China or how it actually works.

I know it's tough to think about anything but the fast-melting ice cream cone that is Europe, but there are some things you should know about China. All the reassurances you've been reading about China's "soft landing" and its "they know what they're doing" central government are probably false. Here's why: very little in China is as it seems on the surface, or as it's presented to the Big Noses (Westerners). There are three reasons for this.

Before I explain, let me stipulate that I am not passing judgment on what's "good" or "bad" about China, or any other nation. Each country functions in its own peculiar way, and there are always productive and counterproductive elements to each nation's way of doing things. But it is important not to gloss over reality and accept illusion as truth.

1. Old cultures are far more opaque than young cultures. All sorts of traditions and foibles get embedded into the culture as time progresses, and these features manifest themselves in the economy, finance and the machinery of governance.

What this means is that it takes a lot of time to truly understand the inner workings of old cultures and their economies. Sure, you can get a report from the central bank, or buy a villa there, and make some superficial acquaintances. All these things will foster your hubris that you "really know" how the country works.

You don't, and you won't, until you've married into a family there, lived there for years, if not decades, and actually done business there, on the ground, with your own capital and contacts. If all you know about China comes from PBoC and Central Government reports and analysts' financial statements, then you know very little about China or how it actually works.

Quite frankly, you'd be better off going to the zoo with the proverbial dartboard and having the chimpanzees toss some darts at it; those prognostications will be equally valid, and you'll be outside in the fresh air (unless you're actually in China) instead of some glitzy dining room gorging yourself on yet another wasteful banquet.

The same is true of Italy, France, Greece, and many other old countries. The attitudes, governance and actual mechanics of the economy are not transparent in any of these old cultures. Take the television tax in France. If you don't know about it, and how it's evaded and grudgingly paid, then what do you know about how things actually work in France?

I once received an email from British reader who was outraged by my comments on black-market labor in France. He had a house in Brittany, and he knew the people, and there was no black market labor there. It took me a while to stop laughing, for this is the typical "visitor who thinks he's a real resident" syndrome which you find everywhere.

We all want to be insiders, of course, and we all want to be accepted by the locals. And so we construct a thin veneer of working knowledge and delude ourselves that we've "gone native" by defending our adopted land vigorously, lauding its ancient culture, and so on.

The new arrival falls in love, and their romance lasts from a few months to a few years. Eventually the way things actually work becomes evident, and start grinding away at the love affair. After a long time, the outsider-resident become cynical, or even bitter; what a bloody unholy mess this place is, beneath the phony surface sold to tourists. The 20-year resident listens with a wry smile to the newcomer gush over the ancient ways and glorious food, etc., but keeps his mouth shut. Why spoil romance? Reality will do so soon enough.

This is how you can live in, say, Japan, for twenty years, and be accepted--as a gaijin. Until you die or leave. In other words, you will never be accepted in the way you might hope. You will be accepted as part of the landscape, but you will never become Japanese. Being accepted is the sort of thing we expect as Americans, because America is a young country and being here and liking American sports, or reviling certain teams even if you are disinterested in the sport, is enough: hey, you're an American now.

Which brings us to point 2:

2. Immigrant nations require a certain level of functional transparency; if they lack this requisite level of transparency in how things actually work, then they quickly become two-tier societies and economies filled with the resentment of second-class citizens.

This is why old cultures have so much trouble with immigration, and why America is one of the more transparent places to live and work in the world. In the dynamic parts of the American landscape and economy, say Silicon Valley and similar hotbeds, then we've got places to go, things to do, people to see and wealth to create, and we don't have time or interest in explaining arcane cultural rules to a huge spectrum of people with a non-native grasp of English. So we keep things fairly transparent. Having a lot of tangled cultural anacronysms that have to be hidden lest "people get the wrong idea" (i.e. discover the truth) just gums things up and wastes time and money.

So we don't have much of that. Nobody cares where you're from, or what caste you are, or anything like that. As long as you do your work without being a real pain in the rear-end, are pleasant to your neighbors and workmates, keep your pitbull chained, etc., then you are good to go. Many if not most of the people you interact with also know English as a second language, and since that's burden enough for all of us, we dispense with all the insider stuff. America is on most levels a WYSIWYG culture: what you see is what you get.

Places like China and Japan are on the opposite end of the spectrum: they are not immigrant cultures. Very few nations have a culture that is adapted not to tradition and an opaque mindset but to getting on with immigrants from everywhere. This is one reason people want to come to America; they lose their baggage here and can be themselves, because nobody cares, we're busy with other things, and it doesn't take 15 years to figure out how things actually work here. If it did, the whole thing would grind to a halt and that would be really annoying.

In other words: I've got another meeting, so let's cut to the chase and get this done, OK? Talk to legal, talk to accounting, get it signed and do what you agreed to do. If you can't or don't, you're out and we're not interested in complicated nuances and back-door sub rosa stuff. Those are time-sinks and we're in a hurry here.

3. China, and other Asian cultures, are built around "face". This requires a public facade, to maintain face and cloak the private, back-door reality. In general, Asian people do not like criticizing their country, as this is experienced as a loss of face.

I cover this in my longish essay from 2005, China: An Interim Report: Its Economy, Ecology and Future.

Here's how "face" works. If you marry a "local" in China, Japan, Thailand, etc., then they will eventually, obliquely and with reluctance, tell you some of the unsavory details of how life actually works. Maybe. If they do, they will not like it if you repeat these "we lose face" realities to other Big Noses. You will have to do so in private, in a hushed voice.

As a result, there are always two doors in Asia: the front door, carefully arranged to present a face-enhancing image to the outside world, and the back door, where everything important actually takes place.

A typical front door in China is the banquet with the glad-handing mayor. The back door is for his mistress, the cash "commissions" from various deals and the cover-up of the face-damaging deaths in the local factory. Bad business, that; we lost face. Go take care of it with cash, threats, promises or whatever is required to bury it and restore face.

This is how you get top-ranked American officials who travel the world constantly, flitting from meeting to meeting, "getting down to business in heart-to-heart talks" (cynical guffaw), staying a night or two in a fancy resort or hotel, and then being whisked away to another country. (That's the burden of Empire; you have to fly a lot. On the plus side, you soon accumulate a list of amusing cocktail-party stories of quaint locals, strange foods and night-time visits to embassies in quasi-dangerous places.) If you live in D.C., you know lots of people like this. If you can brag about your multiple visits to Afghanistan, you might even be one.

But this sort of tourist-slash-water-carrier-for-the-Empire doesn't really know anything about the countries he or she lands in for "power lunches." They don't know the lingo, the geography, the history, the culture or what passes through the back door.

This is also how we get superficial opinions passed off as analysis. There is an amazing amount of claptrap written about China in the Western media, seemingly most of it by people who have never been there or visitors who have no contacts others than PR flacks, denizens of Shanghai bars or official handlers.

Take, for example, the constantly repeated idea that "China can easily keep its workforce busy on big infrastructure projects." That is repeated as if it was an undeniable truth.

Have any of the people repeating this as fact ever actually watched a building project under construction in China? Things are pretty efficient there, despite all those photos you've seen of thousands of peasants planting trees in the desert, etc. The number of people required to toss up a highrise is remarkably small. Given the workforce of hundreds of millions, even a thousand-kilometer rail line doesn't take that many workers.

Then there's the reality that all the low-hanging fruit of useful infrastructure has already been built. Now it's the really marginal stuff, classic malinvestment.

Then there's the reality that nothing gets maintained in China. A lot of new stuff gets built but nothing that's already built gets maintained. So all sorts of things start falling apart and stop working. The basic idea is that when it starts looking bad then we'll tear it down and build something new. That is a mindset built on limitless resources and money, neither of which is actually limitless.

The other opinion presented as fact is that China is transitioning from a "capital investment" economy to a consumer economy. The fact is that only 35% of the official economy is consumer-driven. But the other fact is that everybody who can afford anything in China already has it.

When I was there in 2000, there was already a glut of TVs. Our friend's amah already owns a car, and she isn't paid much even by Chinese standards. It sits in a garage, rarely taken out, because she doesn't really need a car; it's simply a status symbol. Everyone with enough money to do so has already bought a car.

As for real estate: Our friends' friends already owned three rental flats each five years ago. No-nothing Westerners mindlessly talk about the 700 million peasants who need housing, but this just reveals their bottomless ignorance. Chinese families were offered their own flats for a dirt-cheap price decades ago by the central government. Most families have owned their own flat (not the land, that's 100% government-owned) for years before the bubble.

The 700 million low-wage people in China might like a $200,000 flat, but they can't afford one. They're living on $13 a month in rural villages, or making a few hundred dollars a month in a factory or other low-wage position. Claiming that there is an endless demand for costly housing in China is like saying the demand for more McMansions is endless in the U.S. because 20 million poor people south of the border want a luxury home.

The reality is that everyone who could afford a flat in China already owns one, or two or three. Those who don't own one cannot buy one, not this year or next year or in ten years. Their income is 1/40th the cost of the flat, and the price of the flat dropping in half doesn't meaningfully change the equation.

Chinese consumers with money have already bought everything they could possibly want, and purchased Coach bags for their boss's wife (you can forget the promotion if you don't pony up a legitimate Coach bag for the Missus, or perhaps Number One mistress; be sure to include the receipt and official Coach bag to show it's legit).

Those without this kind of income have seen their purchasing power decimated by high inflation in essentials like food. To save face, the government issues statistics that "prove" inflation is dropping. This is as reliable as the bogus unemployment number in the U.S., you know, the one that keeps dropping because the government stops counting millions of people in the workforce, not because the number of people with real jobs is rising.

The only sources who actually know what's going on in China are in local government. Another fantasy Westerners lap up is that the central government actually knows what's going on, and even more laughable, knows how to "fix" everything. If you don't even know what's happening, how can you fix the problem?

Westerners also don't understand "corruption." They think in terms of bribes that could be suppressed by some new rules. That is beyond laughable, for corruption isn't bribes, it's the warp and woof of how things work in China. They don't understand that pirated goods are crushed by bulldozers for a show of face; nothing changes behind the facade presented for show.

There is a lot of anger and resentment in China, especially among young people. This will not go away because some new railway is built, or a new mall opens.

Occasionally a glimpse of the back door makes it into the mainstream media. Here are some recent examples worth reading

Swimming Naked in China With the Chinese government tightening credit, the massive leakage from the formal banking sector into the ‘shadow system’ ultimately risks sinking the country’s financial system.

Why We Should All Be Very Skeptical on China

And most importantly: Top of Chinese wealthy's wish list? To leave China

"Among the 20,000 Chinese with at least 100 million yuan ($15 million) in individual investment assets, 27 percent have already emigrated and 47 percent are considering it, according to a report by China Merchants Bank and U.S. consultants Bain & Co. published in April."

The Western resident of Beijing (married to a Chinese woman, with two children) who posted this on his blog added, "Everyone with money has a escape plan."

Here's a simple question for China bulls and all those writing about how infrastructure projects, an omniscient central government and rampant consumerism are going to keep China's growth engine humming for years to come: if the future's so bright, then why does everyone with money have a bug-out plan, two passports and a house in Vancouver, New York or Los Angeles?

If you can't answer that, then you need better sources.

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"Residential property prices are in freefall in China" - Forbes

On Saturday we talked about how the Real Estate in China appears to be starting the process of bursting.

Coverage of this issue has been growing since early summertime.

In mid June the UK newspaper the Daily Mail ran a story titled 'China's ghost towns: New satellite pictures show massive skyscraper cities which are STILL completely empty'.

Recently we had this TV news story reporting the fact that property values in Shanghai are crashing:

And, as Forbes reported yesterday, the problem is not just limited to Shanghai but is spreading throughout China:

"Residential property prices are in freefall in China as developers race to meet revenue targets for the year in a quickly deteriorating market."

Forbes is reporting that China's largest builders began discounting homes in Shanghai, Beijing, and Shenzhen in recent weeks, and the trend has now spread to second- and third-tier cities such as Hangzhou, Hefei, and Chongqing.

In Chongqing, for instance, Hong Kong-based Hutchison Whampoa cut asking prices 32% at its Cape Coral project. 

Property Consultant Alan ChiangSheung-lai told the South China Morning Post that:

“The price war has begun.”

What started slowly at the end of summer has now turned into a rout. The middle of October is normally a good time for sales, but Shanghai developers started to slash asking prices instead.

Analysts expected falling property values to move China's Premier, Wen Jiabao, to relax tightening measures intended to cool the market. China has increased mortgage rates and put prohibitions on second-home purchases.

So far Wen Jiabao is unmoved.

After a State Council meeting on October 29, 2011 Mr. Wen affirmed the policy, stating that local authorities should continue to:

“strictly implement the central government’s real estate policies in the coming months to let citizens see the results of the curbs.”

The announcement turned an escalating drop in prices in mid-October into an earnest spree of panic selling over the past 15 days as desperate developers begin competing among themselves to unload inventory.

Over the past week and a half stunning price cuts are turning up everywhere. One builder — Excellence Group — even said it would sell flats in Huizhou at its development cost.

Citi’s Oscar Choi believes prices will decline another 10% next year, but that’s a conservative estimate. State-funded experts are far more pessimistic. For example, Cao Jianhai of the prestigious Chinese Academy of Social Sciences sees price cuts of 50% on homes if the government continues its cooling measures.

If China's 'approved' analysts are saying prices could halve in a few months; you can be rest assured they believe the eventual sell-off will be worse.

Legendary investor Jim Chanos has long been bearish on the China Real Estate market and has said that China will be “Dubai times 1,000—or worse”. He has said that what will play out is the unwinding of “the biggest housing bubble ever created”.

Anyone who thinks this will not be felt in North America is simply deluding themselves. As Time has noted:

"if the bubble pops, it will have serious consequences in the U.S. America sold $92 billion in goods and services to China last year. If China succeeds in moving away from its model of cheap land and cheap capital and makes a smooth transition to an economy based more on domestic demand, hallelujah. But if Chinese land prices plummet, there will be less demand for raw materials and a steep decline in world commodity markets and global trade in general."

And as this blog wrote on Saturday - when China's Real Estate values collapse, many of China's investors will have serious credit problems. As those credit problems mount, assets will have to be liquidated to pay debts. Given the choice between liquidating assets at home and liquidating assets abroad... assets abroad will most often be liquidated first.

Does anyone seriously believe that Vancouver won't be significantly affected by a rash of Asian owned property liquidations in our city?

Anyone, besides Ozzie Jurock, that is.

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Meanwhile... on the topic of Real Estate in China

We continue to monitor the chatter on the move by the CME to increase margins to 100% for all commodities; a move many believe that will lead to widespread margin calls for small and medium investors on Monday and widespread liquidations after that. We will update when we have more to contribute.

Meanwhile the blog World Housing Bubble has brought our attention to another excellent article on Real Estate in Beijing, China.

Titled "Home price-cuts get steeper, more extensive in China", China's news agencies are telling us that there is now a stunning 22 months of inventory available for sale in Beijing.

• "According to the Centaline Property Agency, a supply of 9,152 new homes in October has added Beijing's total house supply to 118,000 units, a new high since June 2009. It would take 22 months to consume the inventory even if there were no new supply, said the agency."

Zhang Yue, chief analyst with Home Link China, a leading real estate agency, said with large trading volume and strict government curbs, Beijing is seen as bellwether for the market. He says price-cuts will get stronger in the fourth quarter and that in Beijing, 53 of this year's 90 new residential projects have already started to offer discounts.

As if that wasn't enough, Zhang Dawei, an analyst from the Centaline Property Agency, said the first-tier cities have come very close to the house price turning point.

• "If the government continues to maintain firm curbs on the real estate market, house prices will reach a turning point in March next year."

Chang Zhi, chief analyst of Century 21 China Real Estate, said he expects more real estate companies in the second- and third- tier cities to follow large firms' steps to cut house prices under the current policy.

• "A new round of home-price declines may come in one or two months."

China is no different from anywhere else.

As Real Estate values collapse people run into credit problems.  As credit problems mount, assets have to be liquidated to pay bank loans.

Given the choice between liquidating assets at home and liquidating assets abroad... assets abroad will most often be liquidated first.

The question is: how will Vancouver be affected by a rash of Asian owned property liquidations in our city?

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The Surging Demand for Silver in China

It has been an incredible week in Euroland and we haven't written much lately about Gold and Silver.

Obviously if you follow this blog, you know we remain highly bullish on the prospects for both metals. There may be some short term issues as positions are liquidated in the MF Global bankruptcy, but one only have to look at how the Chinese are desperately acquiring the metals to understand what lies on the horizon.

Dan Collins, over at the blog Financial Sense, recently took a look at Silver and China.

Collins notes that Chinese investment in silver has exploded since last year, with the trading volume going exponential.

The China Daily reported yesterday that the trading volume of silver forwards on the Shanghai Gold Exchange (SGE) surged 751% year-on-year in 2010. Meanwhile, the volume in September of this year was more than six times that of the same period in 2010.

That is a stunning demand for Silver.

Chinese commercial banks are now selling silver to investors in the hundreds of tons. One example is the Industrial and Commercial Bank of China Ltd (ICBC), China's biggest lender which launched paper silver trading for individual investors in August of last year.

The other large Chinese Banks have also introduced silver trading. The trading volume of ICBC's paper silver products alone reached 300 tons in the first half of 2011, almost four times the figure for the whole of 2010.

That's right, one Chinese bank alone sold 300 tons or over 10.5 million ounces of silver in only 6 months.

In only their first year of trading, ICBC bank alone will sell over 20 million ounces of silver which alone would represent over 2% of the total amount of silver mined on earth for the entire year.

The key factor to pay attention to is that most of these silver purchases are forward contracts and not the actual physical silver. What happens when Chinese investors demand physical silver instead of paper silver?

Demand for precious metals in China is skyrocketing. High inflation and a lack of investment options are feeding the demand.

With new housing regulations bringing housing investment to a standstill, investors are looking for new ways to invest cash. The housing market looks to go down and the stock market is widely viewed as corrupt and risky.

Gold and silver are becoming increasingly popular.

It's yet another reason why we remain bullish on the prospects for Silver.

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If China goes bust, will Vancouver go Ka-Boom?

If China goes bust, will Vancouver go Ka-Boom? This is the $64,000 question.

Or, given that we're talking about Vancouver Real Estate, the $64,000,000 question.

HAM, or Hot Asian Money, has been one of the factors attributed to driving our irrational real estate market.  And many have openly wondered, if China falters will Vancouver whither?

We may soon find out.

Simon Black, who writes the blog Sovereign Man, recently reported that the stresses of the housing bubble in China are starting to become evident.

As faithful readers know, we have talked about the fact that China has poured more stimulus per capita into their economy than have the Americans.

And Black reports of the effects of Chinese backpedalling.

After dumping trillions of dollars into the economy to ward off the effects of the global financial crisis, Black notes the Chinese government is now pressuring banks to reduce loans. A move which is bringing much of China's credit-intensive economy to a screeching halt.

Recent reports from China's National Bureau of Statistics show that home prices have fallen up to 50% in many parts of the country in the period from July to September.

And the reality of those statistics are evident to Black who notes the reaction of Chinese citizens:

• Stunned. That probably best describes the mood of China's vast pool of property owners. For the last few years, anyone with as much as a taxi driver's salary has been speculating in the real estate market, scooping up off-plan properties at terms that would make a Countrywide mortgage broker blush.
  
  And why not? Chinese culture has almost universally adopted the attitude that property prices never go down. Minor fluctuations and corrections over the last several months have been written off as statistical error. Well, reality has now uncomfortably set in.

In Shanghai that uncomfortableness manifested itself in rage as nearly 300 angry customers stormed a sales office of Longfor Properties Co Ltd after finding out that the developer had slashed prices on one of its projects by nearly 25%... practically overnight.

Another angry mob in Shanghai assembled outside the sales office of China Overseas Property Group Co after that company made similar price concessions for new buyers. These were obviously the poor suckers who bought in months (or years) ago at a much higher price... and they're not especially happy about a property crash.

Black notes the troubles are not just in real estate. Auto dealers are having the same issues, with many luxury brands ranging from BMW to Mercedes offering steep discounts up to 20% to lure buyers onto the showroom floor.

Growth has definitely slowed dramatically, and the tightening of credit is having widespread effect across the economy.

This article notes that a Chinese banking collapse is brewing and that in Hong Kong September sales to the United States and Mainland China fell 8.9% and 7.3% respectively. Shipments of electronics are off 16%, while outflow of T-shirts, undies, and the like fell 8%.

The HK government has described the situation as "bleak."

Will it be long before the effects are felt in Vancouver?

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Thur Post #2: Is China nearing the tipping point? And whither Vancouver?

We have covered the flip floping of local Real Estate industry representatives who now claim 'hot asian money' is not the factor in the Vancouver Real Estate market that it has been made out to be.

Whether or not it is true, there is no denying a definite Asian influence that has transformed Vancouver since the early 1990s.

Asian money is most certainly present in Vancouver and it plays a role in our resilient housing bubble.

Some observers of our Real Estate scene believe the real tipping point for the implosion of our massive bubble will begin in earnest when the China juggernaut begins to slip.

China is renown for its boom/bust cycles and many critics content the latest 'China miracle' is simply an extension of that trend.

China, on a per capita basis, has pumped more stimulus into their economy than America has during this financial crisis. Their housing bubble is believed to be larger than the one the that built up in the United States.

Mike Shedlock, author of the blog Mish's Global Economic Trend Analysis has done a number of posts about the China situation.  You can see them by following the links at the bottom of this post in which he looks at news that China's shadow loan market is crashing and that scores of business owners, unable to pay back their loans, have disappeared or have committed suicide.

The collapse of the shadow loan market (and the rash of suicides) is the latest in a series of troublesome news out of China.

Back on April 17, 2011 we noted how the fourth ncrease in China's banking reserve requirements this year had triggered a plunge in Chinese real estate:

• “Prices of new homes in China’s capital plunged 26.7% month-on-month in March, the Beijing News reported Tuesday, citing data from the city’s Housing and Urban-Rural Development Commission... Home purchases fell 50.9% year over year and 41.5% month over month the newspaper said… For all intents and purposes a drop of this magnitude levered even 2 times (assuming 50% or so equity down) means that China is on the verge of a complete bubble implosion.”

The China situation deserves close scrutiny. 

If the China Real Estate bubble is indeed starting to unwind, at some point wealthy Asian property owners will be forced to liquidate assets they own in other parts of the world in order to cover debt payments.

And given the current situation in the Vancouver market, an emergency selloff in the high end of our market could be the trigger that starts a cascade of selling.

As we have said, it's a situation that continue to watch with interest.

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Ratings agency from China says what everyone already knows

Dagong, the infamous Chinese rating agency, came out today and said what  everyone already knows but is afraid to say out loud:

• "In our opinion, the United States has already been defaulting....Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies - eroding the wealth of creditors including China, Mr Guan said."

The Dagong announcement follows on the heels of various reports from earlier this week which are urging China to not only pull its US holdings, but to minimize its USD exposure in total.

You can read the full story about Dagong's downgrade here.

This comes just after the German credit rating agency Feri lowered its rating on US debt by a full notch, from AAA to AA.  Feri becomes the first Western agency to downgrade US government bonds!

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Shanghai Daily: It's only a matter of time before China's housing bubble bursts

Excellent post today regarding China on the Australian blog, The Unconventional Economist. It articulates the issue succinctly.

China has, on a per captia basis, pumped more money into their economy than the Americans.

While most are viewing the results as the growth of an emerging economic superpower, the reality is that China's economy has become over-dependent on fixed asset investment - i.e. the building of infrastructure, real estate and manufacturing plants.

This over-investment in fixed assets, which now comprises a whopping 60% of China's annual GDP, has caused China to build far too many things (apartments, factories, etc) that are not needed, resulting in significant over-capacity.

We have seen this time and time again in bubbles everywhere.

One only has to view footage of China's empty cities on youtube to understand the extent of this malinvestment.

Jim Chanos, founder and president of New York investment company Kynikos Associates, famously described China's fixed asset malinvestment and manufactured growth earlier this year as "a treadmill to hell".

China has a massive over dependence on real estate construction. They have built entire cities that are now sitting empty. Yet, despite this over building, construction is continuing, with 12 million to 15 million residential units this year.

These units, which are priced similar to those for US residents, are intended for Chinese workers who earn about $3,500 annually and are in the bottom 20% of wage earners. To make matters worse, many of the Chinese who have moved to cities from the country are construction workers. So when the construction slows, many will likely move back to the country-side, leaving a construction ghost town and one massive financial black hole.

• “Construction is 60-plus percent of GDP, compared to exports of 5 percent... The problem is that consumption as a percentage of Chinese economy has declined in the last 10 years, from 40 to 35 percent. It’s all real estate...When construction is 60 percent of your economy, and you are building lots of things that people don’t need, the state may let this get out of control... It’s hard to manage this type of bubble".

Now Business Insider has provided proof of China's over-building and malinvestment with alarming satellite photos of entire cities laying vacant. From their article:

• "The hottest market in the hottest economy in the world is Chinese real estate. The big question is how vulnerable is this market to a crash.
  
  One red flag is the vast number of vacant homes spread through China, by some estimates up to 64 million vacant homes.
  
  We've tracked down satellite photos of these unnerving places, based on a report from Forensic Asia Limited. They call it a clear sign of a bubble: 'There’s city after city full of empty streets and vast government buildings, some in the most inhospitable locations. It is the modern equivalent of building pyramids. With 20 new cities being built every year, we hope to be able to expand our list going forward.'"

Last week Yu Yongding - a prominent economist from within the Chinese establishment - published a scathing attack on China's economic model in the state-run China Daily. This article supported the concerns voiced by external commentators over the Chinese economy.

Now the Shanghai Daily has published an explosive article entitled: It's only a matter of time before China's housing bubble bursts.

The Unconventional Economist notes that China's housing bubble is approaching Japanese proportions. Back in the 1980s, Japan's residential housing values reached a stratospheric 3.8 times GDP at the peak of its bubble. As of February 2010, China's housing values were 3.5 times GDP.

In the heyday of Japanese prosperity, the land value of Tokyo alone exceeded that of the entire United State. This 'wealth effect' had Japanese tycoons considering buying up America.

What happened to Japan is well known history.

Will China follow a similar pattern?

The Unconventional Economist speculates on how a collapse in China could devastate Australia.

The ramifications are no different for the Village on the Edge of the Rainforest.

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To infinity and beyond... Vancouver Style

So yesterday Re/Max came out with another one of those upbeat assessments that real estate would go up in every market across the country.

Garth Turner had a succinct analysis, saying:

• "Yes the fabricators at Re/Max struck again, issuing a 2011 forecast based on, well, nothing, and predicting still-higher housing prices. In every single city. As outrageous as this seems, at a time when the economy is so fragile that we still have emergency interest rates, exports are plunging, unemployment is going structural and families have never owed as much, the media reaction was even more cookie-hurling. After reading 18 versions of the story in as many markets, I could not find a single one that expressed a contrarian sentiment. So Canadians were once again deprived of a balanced view of the world."
  

In Vancouver the Re/Max spokesperson gushed about the presence of Hot Asian Money and how, like it or not, it will send the Vancouver westside market higher by 10%. This based on "someone" from CMHC telling him that upwards of 40,000 Asians 'may' immigrate to Vancouver next year. Guess we better buy now or be priced out forever...

Meanwhile Westside Realtor Larry Yatkowsky also had an Asian themed post yesterday, 'Chineseness’ = Gold in Your Pocket.

As I have written before, China - on a per capita basis - has pumped more stimulus money into their economy than have the Americans. A vast amount of that money is working it's way into the Asian stock markets and into foreign property purchases.

I personally believe the China Economic Miracle is, in reality, a paper tiger waiting to be shredded.

With that in mind, I took particular interest in a MarketWatch article by Paul Farrell. Farrell is predicting another major stock market crash and notes that the preceding condition that triggers that crash is collapse in China.

Citing an interview that Fortune’s Bill Powell did with hedge-fund kingpin Jim Chanos of Kynikos Associates, Farrell notes that Chanos is “betting that China’s economy is about to implode in a spectacular real estate bust.”

From the article:

• China is “an economy on steroids.” In a Charlie Rose interview, Chanos said “China’s on an economic treadmill to hell.” If so, then all of Wall Street’s highly promoted emerging markets are also sucker bets.
  
  Another hedge-fund player warned: Chanos “is shorting the entire country,” including a company “Goldman Sachs recommended as a buy … the listing for the Hong Kong Stock Exchange … China’s Merchants Bank, one of Beijing’s largest.”
  
  Back in the 1980s, Japan “grew largely on the back of capital investment” and then turned into “a capital-destruction machine, and that’s what China is now. You have an economy that’s 60% fixed-asset investment, and not even in the developing world is that sustainable.”
  
  Chanos won’t pinpoint the timing or the trigger: “He just believes it’s coming,” and he is betting on it. Reminds us of Henry Paulson shorting Goldman Sachs’ crooked deals before the 2008 crash.

As everyone gushes about how the stagnating North American economy and wages are irrelevant to our increasingly unsupportable real estate market because of the Asian factor, one thing is for certain.

If China suffers a 1990s style economic collapse, not only will our real estate implosion be spectacular... it will be on a scale that surpasses even my predictions.

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A butterfly flaps it's wings in China... what happens in Vancouver?

According to the mailbag, some people believe I don't think there is any Asian money in Vancouver real estate.

Au contraire mon frere!

'Hot Asian Money' does exist. My point is that it isn't the massive band aid that will sufficiently sustain the world's most bubbly real estate market as it faces severe pressures from increased listings and decreasing sales.

That's why the most recent set of statistics from the Real Estate Board of Greater Vancouver show that the 'months of inventory' available has now risen to just about 6, prices have fallen for 2 months straight and a weak market looks set to fall even further.

But make no mistake... there is a lot of 'HAM' here notwithstanding.

In fact 'HAM' may represent an even greater achilles heel to Vancouver R/E than interest rates.

As faithful readers know, I have long viewed the China economic dragon as a paper tiger. China has, on a per capita basis, pumped as much - if not more - stimulus into their economy as America.

And that massive stimulus... source of the infamous 'HAM' we keep hearing about - has created a huge real estate bubble in China.

In recent months the Chinese central government has taken significant steps to cool the market. This has prompted Kenneth Rogoff, the ex-IMF economist, to observe the the Chinese property market is beginning a collapse that will hit the banking system hard.

The Harvard University economics professor told Bloomberg Television today that property transactions have dropped and prices are stagnating in the wake of those central government moves.

"You're starting to see that collapse in property and it's going to hit the banking system," said Rogoff.

Even Xu Shaoshi, China's minister of land and resources, said this past weekend that he expected prices to start falling within a few months.

If accurate it would validate the likes of Jim Chanos and all those who have long been warning about the inevitable Chinese bubble pop. And the impact of such a pop on Vancouver would be profound.

In 2008, when North American stock markets collapsed, Americans who were pressed for cash on margin calls and debt issues at home make the logical choice... they liquidated foreign property holdings for cash first.

In Vancouver, high end properties - particularly those in West Vancouver - saw signficant declines in value as foreign owners sold for whatever the market would give them immediately for their properties.

That's what happens in these types of circumstances.

If Rogoff is correct, the effect in Vancouver will be significant.

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China/Vancouver Real Estate: A Symbiotic Relationship?

Above is part of a Charlie Rose interview with James Chanos, hedge fund manager and founder of Kynikos Associates Ltd.

Chanos talks with Charlie Rose about China's economy, currency policy and the risk that investment will "dry up." He says China'a property bubble will burst as early as this year.

What grabs the attention of those in the Village on the Edge of the Rainforest is his comments at about the 1:30 mark of the interview.

He talks about all the 'hot money' that is going INTO China on this real estate speculation is from Chinese nationals outside the country; in London, Singapore, Vancouver and San Francisco.

It's a take on things that makes one sit up and take note. Pervasive has always held here that the situation was in reverse... that it has been 'hot money' from China inflating our Real Estate bubble.

Could it actually be a symbiotic relationship that is so intertwined that neither side sees it for what it is?

We will touch on this again next week.

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Arghhhhhh........

This will be the fifth post in our series this week. On Monday I will post a summary and my conclusions/thoughts.

Post #1 can be read here. Post #2 here. Post #3 here. And Post #4 here.

China as Canada's economic saviour

It's stunning the number of people who believe that, regardless of the US sovereign debt position, Canada will be okay because our resource based economy will be in demand by the emerging economic behemoth of China.

It won't be.

China's foreign exchange reserves stood at the astonishing level of $2.4 trillion at the end of 2009. About $2 Trillion of that is in US Treasuries.

That's $2 Trillion dollars in IOU's from the United States. If the sovereign debt crisis leads the United States to default, just who do you think is out all of that money?

Notwithstanding this small fact, the current economic situation in China is not as rosy as you might think.

Yes, they have invested an astonishing amount of foreign reserves in American debt, but did you know that China's proposed annual budget for 2010 will produce a record deficit?

Now, granted, this deficit is just $154 billion, or 2.8% of China's gross domestic product. In contrast, the Congressional Budget Office projects the US budget deficit for fiscal 2010 at $1.3 trillion. That's equal to 9.2% of GDP.

But let's take a closer look at China's finances. The following data comes to us from Jim Jurbak's journal.

There's a good argument to be made that if you look at all the numbers, instead of just the ones the budget magicians want you to see, China has far more debt than meets the eye.

If you look only at the current position of China's national government, the country is in great shape. Not only is the current budget deficit at that tiny 2.8% of GDP, but the International Monetary Fund projects the country's accumulated gross debt at just 22% of 2010 GDP. US gross debt, by comparison, is projected at 94% of GDP in 2010. The lowest gross-debt-to-GDP figure for any of the Group of Seven developed economies is Canada's 79%.

But China has a history of taking debt off its books and burying it.

If we go back to the last time China cooked the national books big time, during the Asian currency crisis of 1997, we can get an idea of where its debt might be hidden now.

The currency crisis started in 1997 with the collapse of the Thai baht—and. Like dominoes, the currencies of Indonesia, South Korea, Malaysia, and the Philippines collapsed. In each case, the country had built up an export-led economy financed by foreign debt. When the hot money that had been flowing in reversed (and started flowing out), that sent currencies, stock markets, and economies into a nosedive.

China escaped the first stage of the crisis because the country's tightly controlled currency and stock markets, and its economy, had kept out hot money from overseas.

China had built its export-led economy on domestic bank loans instead. The majority of bank loans, then as now, went to state-owned companies — about 70% of the total.

Those loans were all that kept the doors open at many of China's biggest state-owned companies. It's estimated that about 75% of China's 100,000 largest state-owned companies lost money and needed bank loans to continue operating.

That became a problem when, in the aftermath of the currency crisis, China's exports fell. That sent revenue plunging at state-owned companies that were already losing money. Suddenly, China's banks were sitting on billions and billions of debts that anybody who'd taken Bookkeeping 1 in high school could tell were never going to be paid.

This was especially a problem for China's biggest banks, all of which had ambitions to raise more capital — and their international profile — by going public in Hong Kong and New York. But no bank could go public with this much bad debt on its books.

So what did China do? They buried the bad debt.

The Beijing government created special-purpose asset management companies for the four largest state-owned banks, the Industrial and Commercial Bank of China, the Agricultural Bank of China, the Bank of China, and China Construction Bank.

These asset management companies — China Cinda, China Huarong, China Orient, and China Great Wall — would ultimately wind up buying $287 billion in bad loans from state-owned banks. The majority of those purchases were at book value.

So how did the asset management companies pay for the purchase of that $287 billion in bad loans? They certainly didn't pay cash. Instead, they issued bonds to the banks in exchange for the bad loans. The bonds, of course, were backed by the promise that the asset management companies would gradually sell off or collect on the bad loans in time to redeem the bonds. And in the meantime, they'd pay the banks interest on those bonds.

Neat, huh? In one sweat move, the state-owned banks got $287 billion in bad loans off their books and turned deadbeat loans that would never pay off into streams of income from these bonds. To read more on this neat bit of financial engineering, check out this research paper.

Of course, that still left the little issue of where the asset management companies were going to get the approximately $30 billion in annual interest they had promised to pay the state-owned banks. There was also the small matter of how they were going to pay off these bonds when they came due in ten years, especially since the cash recovery rate on these bad loans would run at just 20.3% in the first five years.

But who really cared? The Beijing government and the state-owned banks had kicked the problem ten years down the road. (A favorite tactic of politicians, Republicans, Democrats, and Communists alike, is to punt, so that today's problem becomes somebody else's problem in the future.) The bonds issued by the asset management companies didn't have an explicit government guarantee, but everybody assumed that at some future date the government would either pay up or punt again.

The ten-year punt of 1999 came to earth in 2009, and, lo and behold, there has been some more magic.

In some cases — China Huarong, for example — the asset management companies simply declared that they were done disposing of bad debts, that profits were soaring, and that they were seeking strategic partners in preparation for a public offering.

In others cases, the magic was more complex. In October 2009, for example, China Cinda said it had secured government approval for a restructuring plan that would create a company to dispose of the $30 billion in bad loans still on Cinda's books. The company said it would then look for strategic partners in preparation for a public offering.

Who in their right minds would be a strategic partner and investor in one of these asset management companies? Well, how about one of the original state-owned banks, China Construction Bank, that Cinda had bought the bad loans from in the first place. "The hardest thing," China Construction Bank chairman Guo Shuqing said in this October 17, 2009 interview, "is evaluation."

Really?

When the government runs the books, does all the accounting, and decides what assets to send where, I think evaluation would be very easy. Any wonder, then, that today's huge run-up in loans — and bad loans — by China's banks is making some critics nervous?

The bigger problem, though, isn't so much China's big banks, but the country's local governments.

By now, everyone knows that the country's banks went on a lending spree in 2009.

On top of official government stimulus spending of $585 billion, banks, encouraged by the government, doubled their lending in 2009 to $1.4 trillion from the previous year.

(Please remember when judging these figures that China's economy was an estimated $4.8 trillion in GDP in 2009, according to the CIA World Factbook. We banter around such large numbers that it's easy to have these figures gloss our eyes over. To appreciate the size and scope of China's debt consider that estimated US GDP was about three times larger, at $14.3 trillion. So China's 2009 bank lending of $1.4 trillion would be equal to lending of $4.2 trillion in the United States, and China's $585 billion government stimulus package would equal a $1.7 trillion US package, more than twice the $787 billion size of the US stimulus package of February 2009.)

China's banks hit the ground running even harder in 2010, lending out an additional $309 billion in January and February. If the banks had continued at that rate, they would have passed the official lending ceiling of $1.1 trillion by August.

So China's banking regulators, spooked by the increase in bank lending, tightened the reins. For 2010, they set a lending target 20% lower than 2009 lending levels.

They raised reserve requirements so banks would have less capital to lend. And they told banks to hit the capital markets to raise an estimated $90 billion through 2011.

It's not clear that those steps will be enough to balance the huge number of bad loans that China's banks made during the lending boom. But China's regulators have clearly learned a lot about how to address a bad loan problem in the banking system since the 1997 currency crisis.

But as the US Federal Reserve has so amply demonstrated over the past decade, regulators tend to gear up to fight the last war. That leaves them vulnerable to the next crisis precisely to the degree by which it differs from the last one.

China's new debt problem is the thousands of investment companies set up by local governments to borrow money from banks and then lend it to local companies.

By law, China's local governments can't borrow directly. But the incentives for local governments to set up investment companies were huge.

By making loans to local companies, local governments could produce thousands of jobs and drive up the value of local enterprises. And by funding commercial and residential construction, they could drive up the price of land. Those results were important to local officials who often profited personally, but they were also essential to the survival of local governments. By law, those units also aren't allowed to raise their own taxes for local expenditures. To meet local demands—and to fulfill the directives issued by Beijing—local governments are dependent on frequently inadequate revenue transfers from Beijing and what they can collect from such transactions as local real estate sales.

So how much did these investment companies borrow and then lend?

Local government investment companies had a total of $1.7 trillion in outstanding debt at the end of 2009, estimates Victor Shih, an economist at Northwestern University and the author of Factions and Finance in China. That's equal to about 35% of China's GDP in 2009.

In addition, banks have agreed to an additional $1.9 trillion in credit lines for local investment companies that the companies haven't yet drawn down, Shih says.

Together, the debt plus the credit lines come to $3.8 trillion. That's roughly equal to 75% of China's GDP.

None of this, Shih points out, is included in the IMF calculation of China's gross-debt-to-GDP figure of 22%. If it were, the number would be closer to 100%.

It means China's actual gross debt is almost the same as the United States.

Exactly how important is this number, tho?

It depends on how many of those loans at local investment companies will go bad.

Shih estimates that about 25% of current outstanding loans — totaling $439 billion — will go bad. (For comparison, remember that in the aftermath of the 1997 currency crisis, the newly established asset management companies swallowed $287 billion in bad loans.)

It also depends on how much of China's huge reserves and huge base of personal savings are available to offset the debt.

So far, I've been talking about gross debt. But China, like Japan, has a huge domestic pool of savings it can use to buy debt. Economists point out that Japan has carried what looks like a crippling gross-debt-to-GDP ratio for years — 188% in 2007, 197% in 2008, 219% (estimated) in 2009, and 227% (projected) in 2010 — without disaster, because the country funds its debt internally from savings.

China, the argument goes, could easily do the same, so what's the problem?

The problem for both China and Japan is that it's not clear exactly how much of their huge pools of domestic savings are actually available in the long run to buy debt.

Japan has a woefully underfunded retirement system, and it's by no means clear how the population of the world's most rapidly aging country is going to pay for retirement.

China has, for all intents and purposes, no public retirement system. As a result of its one-child policy, the country has also begun to age quickly, and by 2030, its population will be as old as that of the United States.

In the US, the national accounts may lie about the effect of the problem by putting Social Security and Medicare off-budget on the argument that, since these programs have their own dedicated revenue streams, they don't count as part of the national debt.

But that lie aside, because the benefits of these programs are defined, it is possible to put a dollar figure on the government's future liabilities in this area (with all the uncertainty that comes with forecasting inflation, of course).

China isn't hiding any future liability for pensions or retiree health care off the books. The government hasn't promised future payments. In an accounting sense, then, there is no future liability that ought to be on the nation's books.

But that doesn't mean China won't have to consume some portion of its accumulated savings to pay for its post-65 population in 2030.

The country, either through the government or through private citizens, will have to cover the costs of old age, however it defines that cost.

And any savings it will use to pay for those costs really aren't available now to pay current debts.

I think the Chinese leadership is profoundly aware of the need today to not waste money that the country will need tomorrow.

That's one reason Beijing has taken steps recently to rein in local investment companies. On March 8, the Ministry of Finance announced plans to nullify all guarantees by local governments for loans taken out by their investment company vehicles. And the national government plans to sell $29 billion in bonds for local governments this year, giving those governments an alternative to setting up local investment companies.

But the big job — the reform of China's tax system so that local governments don't have to rely on real estate and stock market bubbles for funding — didn't make it on the to-do list announced by the National People's Congress this week and last.

I think you will find that as the United States founders under it's debt load, so will China. Particularly if the United States opts to default on any or all foreign treasury obligations or if the United States opts to monetize the debt.

The world is placing China, today, on the same lofty pedestal in which Japan was placed in the early 1980s.

The outcome will be the same.

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China and gold

I got a kick out of a story earlier this week from Reuters that reported that China had renewed its commitment to the U.S. Treasury market but said it would be wary of substantially boosting its gold holdings.

Uh-huh.

The headline to the story was "China says committed to U.S. debt, wary on gold", and it was the headline that caught everyone's attention.

"It is, in fact, impossible for gold to become a major investment channel for China's foreign exchange reserves. I have 1,000 tonnes now, and even if I doubled that holding, according to current prices, that would be about $30 billion," said Yi Gang, China's chief currency regulator.

The comment caused the price of gold bullion fell about $3 an ounce. The price has come down a further $25 an ounce as the week comes to a close. Analysts contribute most of the drop, however, to unwinding of speculative bets linked to Greece's debt woes rather than disappointment over Yi's remarks.

Does that mean that China isn't buying gold anymore?

As one of the world's largest holders of US Treasury bills - the general estimate is that China owns close to $1 trillion of US Treasury securities - Chinese leaders have become more vocal in expressing their concerns over the United States' fiscal discipline and in calling for an alternative international reserve currency.

Since the outset of 2009, Beijing has taken pains to diversify its monetary risks, which include signing multiple bilateral currency swaps, and pushing for the restructuring of international financial institutions.

And diversifying includes China's actions in gold. In 2009 China reportedly bought 454.1 tons of gold from its domestic market, which is equivalent to nearly 50% of the total purchases of 890 tons of gold made by the world's central banks last year.

Add to this reports from the Guangzhou Daily newspaper that reported in 2008 that China's central bank was considering raising its gold reserve by 4,000 metric tons from the then 600 tons to diversify its forex risks (China's gold reserves currently total 1,054 tonnes, meaning that China is still looking to acquire 3,000 tons to match that 2008 goal).

A China News report last year (2009) cited Ji Xiaonan, the chair of the supervisory board for state-owned companies, who said that "China's gold reserves should reach 6,000 tons in the next three to five years and perhaps 10,000 tons in eight to 10 years".

Do you still think China has lost interest in acquiring gold?

By way of reference, US gold reserves totaled 8,133.5 tons in September 2008, accounting for 76.5% of its total forex reserves. Japan's 765.2 tons accounted for 1.9% of its forex reserves.

The inscrutable Chinese are hardly likely to inform the world that they are on a gold buying spree for fear of sending the gold price through the roof before they can finished their acquisition plans.

And while China is the largest gold producer in the world, with more than 300 tons of gold produced annually and while it is true that they will consume all 300 tons locally, the reality is that this internal production won't come anywhere near achieving China's goals for the acquisition of gold... especially if that goal is 6,000 - 10,000 tons within 10 years.

China increased its gold reserves by 76% in six years (2003) to 1,054 tons in 2009.

That dramatic increase of 76% caught the world completely off guard as those huge gains were garnered under the world's radar screen. It wasn't until it was suddenly announced to the IMF at the beginning of 2009 that anyone realized what China was doing.

In 2007, China surpassed South Africa as the world's largest gold producer, and in 2009 they passed India as the world's largest consumer of gold.

In 2009 China bought nearly 50% of the total gold purchases by central banks in 2009.

The Chinese PR machine tells you that China is "committed to US Treasuries and wary of gold."

So after all this activity, after all these surreptitious moves, after all the hand-wringing over America's finances, after publically stating their goal and objectives regarding gold holdings; China would have you believe they aren't moving out of US Treasuries and are wary of gold.

You believe that, right?

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