China’s Coming Assault on the Western Financial System

We know none of this matters, but thought we’d discuss it anyway.

Spanish 10-year bond yields went through 7% (again) last night. That’s usually the point at which the eurocrats push the emergency summit button. Maybe they’re just hoping nobody noticed this time.

US initial weekly jobless claims of 386,000 badly missed expectations of 365,000. US existing home sales dropped 5.4% in the month of June, significantly missing expectations. And the Philadelphia Fed’s business survey index came in at -12.9, against expectations of -8. Ugly scenes.

Of course there were some ‘better-than-expected’ earnings results to buoy investors from the likes of IBM and Microsoft. But the earnings guidance game is so old that we’re not sure why anyone takes notice anymore. Companies expertly guide analyst expectations lower during the quarter, only to ‘beat’ those expectations on earnings release day. It makes for a nice headline.

And with Middle East tensions flaring up again, the strong oil price rise provides some bullish momentum for investors looking for a short term trend to ride.

But as we said, all this is not important. It’s just another gust of wind to put you off the scent. That whiff you got back in May and June was the rotting corpse of the financial system. TPTB (The Powers That Be) in Europe and the US — as well as China — noticed the stench too. It was embarrassing. Something needed to be done. So they managed to rig up some industrial size fans and blow the smell away…for the time being.

But the body’s still there, dear reader…decomposing. Don’t let them make you think otherwise.

While the overnight breeze from US markets always makes its way to Australia’s shores by the next day, the swirls and eddies closer to home are of much more importance. And so we look to China’s economy, where recent developments have been interesting, to say the least.

After getting all worked up about China for weeks (which coincided with our own China Bust presentation), investors have all of a sudden decided that the China slowdown is not a big deal. After all, communist China can write its own ticket economically…it can stimulate just where and when it wants.

In the short term, stimulus always works. But ordering more of the same is no way to cure an imbalance. China’s slowdown got out of hand over the past few months. Their leaders panicked. So they eased monetary policy again and sped up the approval process of thousands of investment projects…the same ones contributing to the country’s gigantic imbalance.

Evidence of that ‘stimulus‘ is emerging. In the first two weeks of July, the big four banks doubled the amount of loans they made compared to the previous month. This is good for short term growth momentum, but does nothing to address the imbalance that led China’s leaders to try to engineer a ‘soft landing’ in the first place.

They’re starting to understand that planning for a soft landing after creating a huge boom is nearly impossible. Only starting, mind you…they still have the fatal conceit of all central planners. That is, they think they know best.

Back in the world of private ownership, things are a bit different. Reuters reports that German footwear giant Adidas is closing its only manufacturing plant in China. It’s only 160 jobs, but it’s a sign that events in Europe affect China too. That’s something that China’s leaders can’t do much about.

While the external demand issue bubbles away for China, the sanguine attitude towards its economic slowdown is back. Today’s Financial Review has a headline ‘China little threat to house prices’, with a sub-heading ‘It would take a perfect storm’.

Gee, lucky you don’t see perfect storms that often. Like the ones that have knocked the US, UK, Irish, and Spanish property markets around over the past few years. Apparently the same thing won’t happen here in Australia, because we don’t have excessive oversupply.

Incidentally, neither did Japan at the end of their massive property boom, but that didn’t stop the property market sinking for the next 20 years.

If you ask most interested and impartial observers why the Aussie property market survived the crash that afflicted most other Western economies, we’d bet ‘China’ would feature amongst the most popular responses. It helps us on the way up, and has no impact on the way down. Cool.

Suffice to say we don’t really agree with this contorted logic. Back in March we wrote about the link between China and Aussie property. We haven’t changed our opinion since.

But we’re not all negative on China. If you watched our presentation you’ll know that we think China has plans to mitigate the impact of its upcoming painful economic rebalancing. The plan involves China buying gold, lots of it.

So we were interested to read via the Goldcore website about China’s plans to become a major gold trading centre.

‘Chinese officials have spoken of China’s aspirations to have gold reserves as large as the U.S. in order to help position the yuan or renminbi as a global reserve currency. Indeed, it would be only natural for China to aspire to have their currency become the global reserve currency in the long term.

‘In the longer term, being a major gold trading center would make China a more powerful financial and economic player and indeed could allow them to influence commodity and other important market prices.’

New York and London are the world’s financial centres. London is the centre for OTC (over-the-counter) gold trading, which involves physical gold, while New York owns gold futures trading via the COMEX.

Financial and economic power stem from gold ownership. You might not realise it, but gold trading in London is second in volume and turnover only to the US bond market. And Bernanke thinks central banks only own gold based on ‘tradition’. More duplicitous rubbish. Gold is at the base of the global financial system. Always has been, always will be. It’s the only check on dubious human behaviour when it comes to money.

We know from available statistics that the flow of gold is moving from west to east. There’s probably a lot more gold flow that China is not letting anyone know about. So is China planning an assault on Western financial markets by draining their physical supply of gold?

It’s something to think about…

Have a great weekend.


Greg Canavan
for Markets and Money

From the Archives…

The Biggest Load of China Bull
13-07-2012 – Greg Canavan

Using Gold as Wealth Preservation, for Self Preservation
12-07-2012 – Greg Canavan

The Grapefruit Currency Hindering China’s Economic Growth
11-07-2012 – Dan Denning

The LIBOR Alarm – When Governments and Banks Disable An Early Warning System
10-07-2012 – Dan Denning

Australia’s Economic Boom in Reverse
09-07-2012 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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