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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william the bastard's picture

That'd be a GINORMOUS short. Bet it pays off big nonetheless!

Cheeky Bastard's picture

Oh, thanks man. I dont know why I had the 2T number in my head [too lazy to Google it].

nopat's picture

I think you and I talked about it at length some time ago.  IIRC, China is also a significant player in GSE debt with exposure in the T's.  Several economists (don't have the link handy ATM) guesstimated their total exposure ~$2T.

Cheeky Bastard's picture

Fuck; I knew it that 2T was, somehow, in play. True, we had a lengthy talk about this. I think the number [total] is smaller now. IIRC; they liquidated some of the holdings in May/June. So, lets say 1.75 T. Still, a big fucking loss if this is true.

boricuadigm-shift's picture

This is the cover they will use to explain how they unloaded ~$440B in Treasuries without anyone noticing.

"Ups, bad trade" - BS, we unloaded bonds first!  True China bond holdings decrease >50% in a month.


Yepecayey modafokeeer!!

nopat's picture

What also isn't being discussed is the degree to which currency manipulation plays into these losses.  I have no idea how it works, but I would imagine but you don't necessarily have to have a short position against UST's to have downside exposure to liquidity flights.  Simply being long EUR or JPY is probably enough, especially when those countries figure out they can export their losses into the Chairman's welcoming bosom just as we've done for several decades.

Liability/equity is the opposite of asset.  What's the opposite of [reserve] currency?  I think they just figured it out...'s picture

H I . i have to be very careful cause i don't have a delete button, kinda like when your ? question mark key went out a while back, well maybe about a year ago. glad you still use the word F U C K a lot especially at the beginning of your sentences and of course, man. that is your style. so ........... c u around a little more, maybe? nice lipstick.

ZackAttack's picture

Which means the last month's move has been about leaning on the fsckers until they puke and cover.

C'mon, throw it up, get it off your books. It'll feel so much better...

Hu's your daddy?


OrdellRobbie's picture

Thousand times Dubai debt crisis

Spitzer's picture

Yes, the United States has at least 10 times the debt crisis as Dubia.

Sudden Debt's picture

and as many Muslim citizens

tmosley's picture

Why on earth would they be short UST with the Fed's printing brigade?

Only thing I can think of is that it was a hedge entered into with the consent of the Fed and the US Treasury which was designed initially to prevent the Chinese from openly dumping treasuries.  But Xiaochuan got greedy, and went net short, and got burned by the printing press.

Seems like the next stop is China dumping treasuries en masse, but that is probably my bias talking.  Am I anywhere close to being on the mark here?

OrdellRobbie's picture

was the parabolic move a chinese short squeeze?

ZackAttack's picture

That's what we're speculating.

If so, they're so screwed. They threw away basically 7 years worth of trade surpluses on that trade. They weren't buying treasuries, so they couldn't sterilize that surplus. Then they let their currency rise due to our pressure.

Bwahahahaha! Smart money SWFs FTW!

tmosley's picture

Hmmm...or release information about a fake loss on a non-existent short of gargantuan proportions, then dump treasuries into the rally as "short covering".  Take the dollar profits and buy everything that isn't made of paper, everywhere, during the ensuing confusion.

Again, that might be my bias talking.

Sudden Debt's picture

WAW Tyler, you really nailed this one. But that's like attacking America at it's weakes point.

But that doesn't mean they won't dump to cover the loses right?

Looks like we're going to go hyper pretty soon now.

Sudden Debt's picture

Tyler, what do you do when you know you think you'll make billions.

You already spend a heck of a lot of it on bullshit projects.

What I mean is, they will soon turn out short on some projects pretty soon.

Nobody takes such a position without a very good reason to do so. Just greed doesn't cut it, I rather thing it's to cover up some other big loss.

Young's picture

If the move is from short covering, all I care about is where the flow will go from there. Any idea Tyler?

Minyan Vince's picture

it makes sense that a (huge) short position would cost them that much notional, but the only way to lose that much scratch from a short UST position, since they have such a large long UST position, is to lever up that short UST I missing something?

Getagrip's picture

Wonder how much more they'll need to cover...

hedgeless_horseman's picture

China has been shorting far more bonds (which would not show up on TIC) than it has been buying, ostensibly via London.

Not London, Tyler, but via the tried-and-true Italy-Japanese Businessmen-Suitcase With Hidden Compartment-Swiss Border market.


Arthor Bearing's picture

WOW everyone follow this link and read this article

hedgeless_horseman's picture

It happened again a few months later.  I believe that both times the smugglers were allowed to get away.  No big deal, you know...a few hundred billion dollars...and I can't seem to find my previous postings regarding this little matter on Zero Hedge using the search function, either. 



rsi1's picture

Isnt that just impossible when you are long US Bonds and they have only been going up in price? This article as it is just does not make sense, if they were short UST ok, but they certainly are not.

wowser22's picture

I call bullshit on this one.  How in the blue fuck could anyone have losses on a treasury position ?  What was the chinaman doing?  Buying TBT?

trav7777's picture

not if they're short.

I mean with the massiveness of the bond rally, they should be giving this guy a parade.  China's decision to cease accumulation and actually roll off while the bonds have done nothing but rally like shows them to be the dumb money

Djirk's picture

No here is a real solution....the US should also punish traders who lose too much! AIG boyz and girlz the Fed is coming after you, I here they have some room in guantanamo!

themosmitsos's picture

Be calefur ... Rrrrook Rrrike sneaky busy-ness

cindycheng's picture

I want to express my admiration of your writing skill and ability to make readers read from the beginning to the end. I would like to read newer posts and to share my thoughts with you. oilseed expeller

Cpl Hicks's picture

Any chance our losers will defect?

Timmy to Greece, Ben to Zimbabwe, Larry to Iceland, Bro to Indonesia or Kenya..(wait, wouldn't that be just returning?)

Sudden Debt's picture

I say we should all donate 1 penny to pay for their ticket!

And if we come short, we can always drop them from a cargo plain at half price without a parachute.

Chump's picture

Swap the order of those two choices and I'm in.

MayIMommaDogFace2theBananaPatch's picture

I heard they're hiring in Hell.  Only PhDs need apply.

mikla's picture

It would be great if some of the US Treasury and Fed officials would similarly defect.

Their losses are *far* more than this piddly $half-trillion.

godfader's picture

In order to lose money on US government bonds in the last couple of years you would have had to be SHORT. The PBoC was short the 10y? LOL

Spitzer's picture

That doesn't make sense because they could initiate the run if they wanted to.

homersimpson's picture

I'm sure he'll find save haven here since he probably was one of the guys who were willing to fund US's addiction to debt.

Internet Tough Guy's picture

He got out before they could harvest his organs.

walcott's picture

 gold and silver the only thing left of any actual value.


walcott's picture

tax credits now to buy foreclosed homes. Of course if you foreclose you can never buy a home again. The only thing that keeps everybody from foreclosing.

walcott's picture

the damn comment page fd up! sorry folks.

DosZap's picture


simply delete the post, and put an asterisk in it.

Less space, and words.(Dupes)

Apocalypse Now's picture

It would be nice to know if these were real losses or missed opportunity costs.

With currencies pegged for so long we should be able able to rule exchange rate losses out.

With deflation, we have been experiencing lower interest rates and therefore existing yields should be higher.

Perhaps this is a YOY loss on interest based upon China shortening up on LT Treasuries in favor of shorter durations.

I wonder if he bought TBT?

contrabandista13's picture

In the political climate in China, missed opportunities are the equivalent of realized losses.


As I understand it, there are temporary collateral and hedging issues, related to the Treasury holdings, that can narratively  be transformed for political opportunity.


Yes, I believe that you are correct in your assumptions....


Best regards,