Yuan

Markets are quiet halfway through the European session as most are awaiting the outcome of the meeting between German Chancellor Merkel and French President Sarkozy in Berlin at 1230GMT. The meeting is likely to centre around Greece, as well as the PSI update that, according to the FT may see the holders of Greek bonds accept higher losses as the contentious negotiation over writing down Greece’s debt burden are due to be concluded soon. German Industrial Production figures for November came in roughly in line with expectations, with the German Economic Minister commenting that this measure is likely to remain subdued over the winter months. Data released from Switzerland today shows Retail sales performing much stronger than expected, showing strong consumer demand in Switzerland across November.

All you need to know.

Overall, there are both internal structural factors and external global factors, which contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.

While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency (the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.

It was three short years ago that the small former British colony of Zimbabwe was spewing forth 100 trillion dollar bills. Since then, courtesy of a few trillion extra percent of inflationary RDA, the country had given up on its currency and replaced it with US Dollars. Now, the country's cult central banker Gideon Gono has made it clear he wishes to avoid another episode of transplant currency hyperinflation courtesy of his counterpart in the Marriner Eccles building and "has warned that Zimbabwe’s nascent economic recovery is at the mercy of the United States dollar, which is facing new pressures from the Euro-zone debt crisis." Yet the screaming sarcasm is the following: "Gono says Zimbabwe should in fact be looking to the Chinese yuan as its main currency, while urgently seeking to restore its own currency which was abandoned in 2009 after a dramatic loss of its value. With the continuous firming of the Chinese yuan, the US dollar is fast ceasing to be the world's reserve currency and the Euro-Zone debt crisis has made things even worse." And the terminal slap in the face of all that is American: "As a country, we still have the opportunity to avoid being caught napping by adopting the Chinese yuan as part of consolidating the country's look East policy." Well, if recently hyperinflating Zimbabwe is complaining about the US as being on the same path as itself, and instead wants to become a Chinese FX vassal state, perhaps alarm bells should go off somewhere. So the next time Tim Geithner is up on stage somewhere, it may be prudent for a question to be be asked: how and why is it that the world's (formerly) de facto banana republic is complaining that the next up and coming B-Rep is about to replace it in the annals of idiotic monetary policy?

In yet another accounting error (or not), a sovereign nation accidentally missed a large amount of debt that it owed. Bloomberg (via The Economic Observer) is citing data from Beijing Fost Economic Consulting that ~3tn yuan ($473bn) of debt in township governments was not included in China's National Audit Office reports. This is not a drop in the ocean as it raises the local government debt load by around 30% and represents debt in vehicle financings and bank loans. Of course, we should remain calm and walk (not run) to the exits as GDP, inflation, and whichever macro data point you choose that has subliminally met expectations recently is completely accurate - have no fear.

Hong Kong, the world's third-largest gold trading centre, has become the world's first place to offer gold trading in yuan, further positioning the yuan or renminbi as a potential global reserve currency. Hong Kong’s Chinese Gold & Silver Exchange Society, a century old bullion bourse, has introduced gold trading quoted in Chinese yuan, making it more convenient for Chinese people and high net worth individuals (HNWs) holding yuan to invest in the precious metal and opening a new way to hedge. The move comes amid the continuing push by Chinese authorities for a more international role for its currency and as an alternate reserve currency to the embattled dollar and euro. With gold now traded in yuan, it is only a matter of time before oil is traded in yuan thereby positioning the yuan as ‘petro yuan’ and a rival to the petrodollar’s status as the global reserve currency. The move reinforces Hong Kong’s status as an offshore hub for the Chinese currency and as a rival to New York, London and other cities as a global financial capital. The Chinese Gold & Silver Exchange said that the service, dubbed "Renminbi Kilobar Gold," is targeting retail and institutional investors. The product is among the latest offerings designed to tap the fast-growing pool of yuan deposits within Hong Kong banking system. "By attracting both local and international investors, the Renminbi Kilobar Gold is a significant step towards internationalizing the renminbi," said Haywood Cheung, president of CGSE.

Earlier we speculated that the one thing that could throw this whole fiasco into a complete tailspin is for China to float the renminbi, which would catch an already frazzled America unawares, as China submits a formal bid for its currency to become the de facto global reserve. Well, that didn't quite happen. However, at a massive 0.23% change in the fixed overnight rate, a move that very much hurts China, it is about as symbolic of an intraday change as can be. The PBoC set the Monday USDCNY fixing at a record high of 6.4305, up from 6.4451. While it is unknown whether this near record rate of FX change will be sustained, China just sent a very clear message to the US, following the previously noted opeds in both Xinhua and FT, in which various Chinese individuals blasted the current situation America finds itself in. The only question now is whether China will proceed with a very demonstrative dump of US bonds tomorrow to reinforce the purely political statement it just made in FX.

In a glowering example of humanist magnanimity, the tax expert, who also on occasion pens missives describing in detail the destruction that would ensue should dealers be hindered from perpetuating the US Treasury ponzy, known as Tim Geithner, just advised China that its low exchange rate impairs China's ability to curb inflation. This, coming from the man under whose watch the dollar has gotten pounded eight ways to Sunday. The announcement came as part of the semi-annual report issued to congress, which was due originally back in April, yet which as everyone knew was delayed for no other reason that more theatrics. And just to confirm how utterly toothless US game theory bluffs have become, Geithner, contrary to much bristling rhetoric to the contrary, decided not to name China a currency manipulator, a move that is sure to require the CME to promptly issued five margin hikes of Chuck Schumer's blood pressure. But lest someone accuse Tiny Tim of being not only a tax fraud, and a liar, but also a coward, he did add that the Yuan is "substantially undervalued." And so the USDCNY revaluation debate has been pushed back for at least one more year. And to those who experience a feeling of deja vu upon reading this, worry not: Geithner had exactly the same conclusion 3 months ago. Bottom line: China 2; US 0.

The China customs bureau just released its April trade data, which came at a surprisingly strong $11.4 billion, a $11.3 billion jump over March, well over consensus of a $3.2 billion surplus, and was the highest trade surplus posted by China in 2011. Net exports to both the EU and US, the traditionally biggest export partners for China, increased M/M from $9.5 billion to $10.3 billion, and from $13.0 billion to $15.1 billion, respectively. Overall, the key trading partners did not see a major change, and the marginal variable appears to have been the Rest of the World category which in April jumped from a trade surplus of $8.0 billion from $2.9 billion the month before. Of course, with even Europe now disclosing openly it is lying in disseminating data, it would be foolish to assume any of this data is even remotely realistic, and is likely nothing more than a politically palatable smoke screen for the ongoing Strategic and Economic Dialogue (discussed earlier), and will be used to indicate that even as Chinese exports once again pick up, Geithner can not really blame it on the USDCNY, which hit a new record high of 6.4950. No matter the data, this most recent jump in exports, will surely force the peanut gallery to renew squawks for unpegging the currency.

The world's most anticipated currency revaluation continues at its traditional glacial pace. And while it is not a surprise to anyone, the overnight PBOC fixing for the CNY dropped below the psychological 6.50 level (or 6.4990 to be precise) for the first time since 1993. Granted, if the US and Chuck Schumer in particular were to stop pushing China to revalue, it would have long since done so at a faster pace, however in light of the diplomatic effort to force it to do so, the ongoing snail's pace shift in FX will continue (and may well reverse now that even more legislation is introduced to the "enforce" China's currency manipulator status). Yet what is notable is that over the past 4 days the CNY has seen a dramatic 0.75% appreciation: easily one of the most aggressive weekly moves by PBoC bands. Is this move merely a political ploy to silence the critics, or is China truly starting to crack under the weight of its own inflation? We shall know soon enough.

The Chinese yuan is going strong again, breaking the 6.5-dollar-level over night: Thanks Ben! In the meantime, gold demand in China is surging... what does this all mean?

Despite relentless calls that the Chinese currency is undervalued, and that it really is China's fault that Brent is nearly at $130, in March the world's fastest growing economy posted an import number of $152 billion: an absolutely monthly record. Still, this was almost precisely offset by total exports which at $152.2 billion represent the third highest monthly total ever (following only November and December of 2010), and leading to a trade surplus of $140 million, in essence implying that the CNY is rather correctly priced (at least per the Politburo's calculations of imports and exports). This is substantially stronger than the consensus which was looking for a trade deficit of $3.35 billion in March, arguing that following February trade deficit which came at a multi year high, in part blamed on the Chinese New Year, the country is once again in aggressive inventory restocking mode. A detailed look at China's two main trade partners, the US and EU, shows that exports to the US surged back to $25.1 billion from $15.8 billion in February, while imports from the US were $12.1 billion. Yet despite a strong euro, it is the EU that exported a record amount of goods to China in March: an all time high of $19 billion. Still, this was more than offset by $28.5 billion in imports from China for a trade surplus of $9.5 billion with the European Union. Ironically, it was the Rest of the World (excluding the US, EU, Japan, ASEAN, Korea, Hong Kong, Australia and Taiwan) which benefited the most, after it exported a record amount of goods to China, or $53.9 billion in March. At least someone (who actually has worthwhile goods to export) is seeing their economy grow, regardless of just how undervalued, or fairly priced, the CNY may be.

That China's February inflation just came out at a consensus-beating 4.9% is no surprise. After all, the country miraculous slipped just below the consensus so the Department of Truth had to keep things somewhat symmetric. And yes, while this is the 5th consecutive month that Chinese inflation is higher than the official target of 4%, this is not the news of the evening: a press release just issued by the PBoC however is...

The lack of animal spirits in the gold and silver bullion markets is also seen in the decline of the gold ETF holdings (see chart above) and the Commitment of Traders open interest (see below). Neither show any signs of speculative fever whatsoever. This would suggest that the recent record prices are due to short covering on the COMEX (possibly by Wall Street banks with concentrated short positions as alleged by the Gold Anti-Trust Action Committee or GATA and being investigated by the CFTC) and buying of bullion in the Middle East and Asia, particularly in China. While all the focus is on the geopolitical risk in the Mediterranean, the not insignificant risks posed by the European sovereign crisis, the possibility of a US municipal and sovereign debt crisis and continuing currency debasement internationally are the prime drivers of gold today. Quantitative easing, debt monetisation and competitive currency devaluations have not gone away and are leading to deepening inflation which will likely result in much higher prices in 2011 and 2012.

World Bank's Robert Zoellick, who has recently been on a truth-telling roll, suggesting a return to the gold standard, and also highlighting that surging food prices have suddenly pushed 44 million to extreme hunger around the world raising the likelihood for many more revolutions, penned an oped in yesterday's FT, sharing his vision for a "monetary regime for a multipolar world" in which, not surprisingly he warned that the current monetary system is perilous, and that China's Yuan should be added to the SDR, as well as other currencies "over time." This is yet another dig at the dollar's status as a reserve currency, yet without China taking proactive steps to indicate its interest at becoming the new de facto world currency, the status quo may be stuck with the greenback. Essentially, China is waiting until the right moment emerges, a time when it has stockpiled enough resources, when it can, unilaterally, or in collaboration with Russia and potentially a post-EUR Europe, make an announcement that the Yuan is the new reserve currency, backed by a basket of commodities. This is precisely the step-change that Zoellick is trying to avoid: "A framework to manage a monetary system in transition may be less headline-grabbing than sudden regime change, but it is a lot more realistic. Modernising the management of international monetary affairs could prove an important contribution to future growth. The time of powerful kings is long gone. But today’s leaders still have the chance to stamp their mark on the monetary framework of tomorrow." Unfortunately, the possibility of a gradual transition in which the US willingly cedes ever increasingly more of its reserve status is unthinkable: after all the bulk of the Fed's disastrous policy is dictated that no matter what the Chair does, the world has no choice but to continue using dollars. Which will work until it doesn't (and with total US debt at almost 100% of GDP, the "doesn't" part is approaching.