Rumor PBoC Governor Zhou "John Meriwether" Xiaochuan Has Defected From China After Suffering Half A Trillion In UST-Related Losses

Tyler Durden's picture

Today's stunning if true news comes from Stratfor which has just issued a blast notifying of circulating rumors "in China that People’s Bank of China (PBC) Gov. Zhou Xiaochuan may have left the country." If proven true, this will be the proverbial first rat bailing on the sinking ship. It gets scarier vis-a-vis prospects of US bonds: "The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBC, including Zhou." Um, $430 Billion in losses? Hopefully this explains why next month's TIC report won't show any incremental increase in Chinese holdings of Treasuries (and most likely quite the opposite). Stratfor continues: "Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China." Even if Zhou is safe and sound in Beijing, the fact that China has experienced nearly half a trillion in losses on its UST holdings is shocking, and means that the US Treasury bubble may be approaching the popping phase.

From Stratfor:

STRATFOR has received no confirmation of the rumor, and reports by state-run Chinese media appeared to send strong indications that Zhou is in no trouble at the moment. However, the release of this rumor and its dispersion throughout the public is significant, particularly as the Communist Party of China (CPC) is preparing for a leadership transition in 2012.

Chinese state-run media and official government websites have run several high-profile reports about Zhou, which should be seen as a move to refute the rumors. The PBC website published two articles on its homepage reporting on Zhou’s meeting with visiting Japanese Financial Services Minister Shozaburo Jimi during the third China-Japan high-level economic dialogue as well as a meeting with an Italian delegation. Xinhua news agency reported that Zhou told the PBC Party Committee Enlargement Meeting on Aug. 30 it should “continue to implement justice, and strengthen legislative work in the financial system.” Prior to this news, Zhou appeared at the 2nd annual conference of the heads of the Chinese, Japanese and Korean central banks held on Aug. 3, and his most recent public appearance was Aug. 10 for China’s Financial System Anti-corruption Construction Exhibition.

Zhou is known to have lofty political ambitions and is believed to be a close ally to former Chinese President Jiang Zemin, as well as a core figure for Jiang’s “Shanghai Gang.” There has been no shortage of rumors about Zhou’s possible dismissal in the past five years, as he is believed to be associated with several high-level financial scandals. For example, Zhou was rumored to be under “shuanggui,” a form of house arrest administered by the CPC, during the massive crackdown of Shanghai Party Secretary Chen Liangyu in 2006, which was perceived in the country as a crackdown of the Shanghai Gang and part of Hu’s effort to consolidate power ahead of the 2007 power transition. There was also a rumor that he might have been detained following the investigation and arrest of Wang Yi, the vice governor of the China Development Bank, along with several other officials in the financial circle. Currently, several financial scandals are still under investigation, and it is likely that Zhou, as PBC governor and one of the most powerful economic players in the country, could be associated with some cases. Therefore, whether or not the rumor is true at this time, the leaking of this news is very likely to be associated with a power struggle within the Communist Party’s economic hierarchy.

We will bring you more as we get it on this potentially groundbreaking development.

Some math:

Assuming average 6 Year duration on holdings (completely arbitrary), and a 2% drop in rates, means $430 billion is 12% of total notional, so somehow China must be short $3.5 trillion in notional or synthetically. Not good.

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Cheeky Bastard's picture

Tha fuck ? Isn't that almost a 25% loss on their entire UST holdings ?

egdeh orez's picture

And how could you lose that much money in UST if you're long and yields have gone down so much in the last month?

Cheeky Bastard's picture

That is exactly what I want to know. Maybe they were long yields and/or playing the spreads without hedging. I can not even compute how such a loss could be incurred by simply being long/short the cash. I mean given that the most probable outcome of monetary policy over the last 2 years would be higher yields [did not happen], lower cash value [did not happen]; I would say they fucked up everything; meaning both the yield play, the cash play and the spread play. Multi-year lows/highs [or even all time low/highs] could have done a serious damage.

Turd Ferguson's picture

Makes me feel a little bit better about the beating I've been taking in TBT.

Additionally, this could be...could be...the true trigger. Not necessarily a black swan in the traditional sense but the trigger nonetheless.

Cheeky Bastard's picture

I think this would constitute as a Black Swan. No one, and I literally mean NO ONEexpected this. RE imploding, civil unrests, tight credit and implications of said tight credit coming out of China; yes; but not this. This is enormous if true.  

SWRichmond's picture

CB, I agree, if true this is a genuine black swan.  Even if it's not true, this could be some rumor started by someone massively short USTs, and if the markets can't disprove it quickly then the reaction could be swift.  It doesn't take much to pop the biggest bubble in history.

Sudden Debt's picture

Black swan or not, I bet the man is sweating bullets right now :)

I bet that anybody who even slightly looks like the guys doesn't dear to leave his house :)

Spitzer's picture

I bet Hugh Hendry and David Rosenberg are sweating bullets too.

Nassim Taleb ? not so much...

George the baby crusher's picture

Let's hope it's just a rumor, cause this is of biblical proportions, and not the good parts of the bible either.

hedgeless_horseman's picture

Speaking of the Old Testament...

...scapegoat, bitches?

equity_momo's picture

Ok i may have had one too many Harvey Wall Bangers this afternoon but can someone explain how China losing money on USTs is possible when they have had a monster rally this year unless this guy was sidebetting with synthetic shorts? If they are short to that extent on a sidebet then you dont want to be betting on an implosion in bonds anytime soon...

if hyperinflation is for real all i care about is food and a safe place to live. right now i have to trade it as i see it , and that has been for the past 2 years deflation (longer if you look at trends) and will be deflation for the next 2 years.  enjoy stepping in front of that truck - when the poom part of ka eventually comes those betting against UST will all be broke and not able to profit.

calling bonds a bubble is as dumb as saying stocks are a buy and hold.   TRADE IT.

Strider52's picture

They fell for the Tungsten Treasuries.

nonclaim's picture

Assuming this is, at least partially, true, who was on the winning side of the trade?

Cheeky Bastard's picture

Fuck me if I know. But if 3.5 T is the total amount of their short position, I would think everyone of any greater significance. That means probably the top 10 CBs and cca. 200 other financial institutions. You need to use the whole Universe to for this trade. Probably hundreds of counterparties involved in this; IF TRUE.

hedgeless_horseman's picture

Maybe this has something to do with the short position?

This scandal at the heart of the secret world of global high finance made a brief entry into the public conscious in June, 2009 when two Japanese carrying $134.5 billion worth of government bonds were detained in Italy. The corporate propaganda media wrote about this incident before dismissing it by saying the “bonds were fraudulent.” These corporate so-called journalists failed to follow up on why the Japanese individuals, Watanabe and Yamaguchi, were carrying diplomatic passports. That meant their arrest was illegal and that the Italian authorities did not have the right to confiscate the bonds.


The Italian government tried to sell the bonds to the Chinese government at 40% of their face value but the Chinese said that if they bought the bonds the Italians would also then have to pay back their debts to China. The Italian authorities realized this would bankrupt Italy.

Instead, the Italians then asked a Vatican Banker by the name of Daniele Dal Bosco to try to sell the bonds back to their original owners, an organization known as the Dragon Family, at 10% of their face value. The Dragon family refused to buy back their own bonds.

Mont Bleu's picture

this article you quote is full of BS....


my favorite excerpt "according to the CIA", oh really the CIA makes official statements now?

Mont Bleu's picture

tmosley, think before posting please?


(anyone else noticed ZH being more & more polluted by conspiracy freaks comments here?)'s picture

then spin for the you hope, as being coincidental.

spin your heady attempt, spin for every member

spin the cold fish & the strange dish

spin for every gender.

tmosley's picture

You act like the CIA is some super-secret organization that doesn't have a public face and never makes public statements.  The fact is that they publish huge volumes of information, from basic geopolitical research (ie the world factbook) to in depth analyses of any number of subjects (white papers).

Who the hell mentioned any conspiracy?  Certainly not me.  I just pointed out the facts. 

Spitzer's picture

yes, I noticed too, just bring up 9/11.

nonclaim's picture

That is my point... it's too much money to be unknown. I'd assume the value is greatly exaggerated, a decimal point misplaced in the currency conversion, maybe.

Spitzer's picture

""Gold bugs"" expected it and still do.

Trouble in the treasury market, whatever form that trouble takes is irrelevant.

Keep buyin those 30 year treasuries....

tmosley's picture

Only in a very vague way, ie "hyperinflation will be triggered by the popping of the treasury bubble".  You are right that no-one expected China to be short.  I'm not sure I really believe it at this point.

It's a crazy, mixed up world we're living in, though.  Who is John Galt?

Mako's picture

Don't waste your breath on these wacko's Cheeky.

Cheeky, Spitzer is the same guy that was promoting Peter Schiff nonsense.  I am sure he expected this... hahahaha.

I for one would like to see additional information.  Seems pretty unlikely but if there is smoke most times there is fire.  We'll see, the numbers seems kind of far fetched though.


Spitzer's picture

Even if this story is BS, (STRATFOR hates China, listen to his interview with Themadhedgefundtrader) there will be trouble in the bond market in the future. Use this story as a warning.

Use your head and just get the hell out. Why participate in the most unbalanced market manipulated market the world has ever seen ? 

Peter Schiff and most Austrian economists expect trouble in the bond market.PERIOD

Mako's picture

Peter said to go to the Europe and Asia... good luck. 

Then he said not to short US stocks. 

If anything you would think Peter would be short Ts and getting his ass handed to him or more like his stupid client.

I would guess the rumor is false but I will wait and see.


Mr. Anonymous's picture

Firmly in the camp of 'This is an absurd, BS rumor'.  On the other hand, if it were true, it would seem to explain Treasuries historic lows and set the stage for the hyperinflation many see as the next stopping point.  It would also set the stage for a colossal ass-raping of the dumb money piling into bonds.  Max pain, anyone?

Spitzer's picture

I will  concede that this story is more or less bullshit but it should be taken as a warning for everyone that is pretending that treasuries are gold.

STRATFOR knows nothing about economics, just listen to the recent interview with the CEO on themadhedgefundtrader website. For some reason, he thinks the US economy is in a position of strength right now.

How can any good come out of the news that the US's financier took a half trillion dollar loss ?




SDRII's picture


Friedman is a shill; he used to have a talkback blog up back in 2006-7 timeframe when the NIE came out upon which his posts were systematically ripped to shreds/discredited. He ended that "experiment" in engaging the audience when he seemingly determined that the audience knew far more than he did. That his economic analysis is lacking is clear (understatement of the day) which makes him incapable of tying together his geopolitical hearsay with things macro.

Eternal Student's picture

Cheeky! Great to see you again. It's always a pleasure to see someone with obvious intelligence here.


Mr. Anonymous's picture

Fourth.  Cheeky has always been a bigtime personal favorite.

silvertrain's picture

6X FOR ME ..Great to see you back my friend..Hope all is well for you...'s picture

you all, must be H O M O's, just speculating though, h a r d on, for some cheeks.

BobWatNorCal's picture

Right, there would be all kinds of complications if China stops buying US debt.
But probably it is just a rumor.

SDRII's picture

Any sense of what the relative short position would have to be to offset the long side gain? If the position is that big (counterparty Sack?) would not the UST know who the owner of record is on that position (and perhaps act accordingly)? Sov CDS spreads have moved all that much. Sounds like disinfomazia. Good to know th Carrier killer ABM is ready to go (see link in comments)


Ben Graham Redux's picture

Perhaps Robert Citroen (Orange County) was an advisor to Zhou - that would explain everything.

knukles's picture

Just being LONG treasuries this year has been a gift from GOD.  The returns have been positive, outshining just about everything else on a risk/duration adjusted basis (eg, 30 yr. vs. S&P 500) 

If there have been losses in the portfolio related to treasuries, been currency related.  But that's not the dollar treasury position, that's currency.

But Wait There's More!
What about any funky derivatives, hedges, twisties that they'd put on the books to "hedge" their exposure?  Hah!  Betcha therein lies the rub.  And that would be a great reason to get the hell outta Dodge.

Own one of the best performing asset classes of the year and screw it up.  Opppppps.

Long ago in countries far away, when the advisers to the Kings rendered bad advice imperiling the kingdom, they were summarily executed, impaled for public display upon pikes surrounding the Gates to Heaven. 

Might be a good lesson for some of our own kind.  Pay attention now, ya'll hear?

Tyler Durden's picture

Official holdings of $840 billion means losses of more than half on notional. Which would also mean that China has been shorting far more bonds (which would not show up on TIC) than it has been buying, ostensibly via London. If true the implications are huge. Also, if true, begs the question how much of the recent bond move was due to Chinese covering.

Bad Lieutenant's picture

Ah, ok, thanks.  I was with Cheeky and egdeh on how this loss would be possible.