Yuan

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.

As long as the Chinese government hates foreign hedge funds and speculators, no one will make a killing buying the yuan. (CYB).

In a direct affront to congressional scapegoaters and idiots everywhere, the EU's Junker has just hit the tape saying that not only is it wrong for the CNY to follow the USD's erratic movements, but that he does not believe the CNY is too strong. Well of course, it isn't: relative to the dollar, it is at parity. And looking at what the money printing idiot is doing it will get much weaker, which will make life for Europe an even bigger hell. Disturbingly for German exporters, Juncker said he does not expect concerted action to stop USD fall vs. EUR. Lastly, Junker notes what everyone knows - there is too much volatility between the main global currencies. This is also known as the initial phase in currency war. Just wait until India, and finally China, gets involved in devaluation. That's when it gets really "volatile." But when you have tapped all the organic growth in a failed economic system, what else can you do to avoid the hudnreds of millions of pitchforks politely demanding one's scalp.

Just because somehow it is the Yuan's fault that America has exported its entire manufacturing industry over the past 30 years to lower cost countries, our idiot leaders have decided to take the next big step toward an all out trade war. The House of Idiot Representatives has approved legislation designed
to combat the manipulation of currency by China that results in
unfavorable trade conditions for the United States. As CNN reports, the
legislation, which authorizes the Commerce Department to impose duties
on imports from countries with undervalued currencies, passed by a vote
of 348 to 79. Somehow, because it was framed as a "jobs issue", everyone in Congress went full retard and confirmed they have not the first clue about how Economics actually works. But yes, please revalue the Yuan: the next thing will be exploding prices at Wal Mart, which have so far successfully masked the fact that the US has been exporting staple product inflation. We wonder how those same "workers" on whose behalf this law was allegedly passed will feel when their bill anywhere is double what it used to be... Not to mention that their currently unemployed status will certainly not have changed.

"For the Chinese, restarting the creeping revaluation of the renminbi has many benefits. Near the top of the list is gently moving its manufacturing base toward higher value added items and shifting production from servicing exports to satisfying domestic demand. Way down the list is appeasing the international critics of Chinese policy. The promotion of the domestic market is already underway, but the pace will be glacial – at least from the point of view of bank traders and US politicians – taking at least a decade to have a major impact on the composition of the Chinese economy. And there is no guarantee that any shift is coming, as the Japanese economy remains basically unchanged despite the dramatic increase in the value of the yen. We can only hope that the authorities in Beijing have a more adaptive and global view than those in Tokyo have shown and will adjust their banking and financial support system to integrate the renminbi and the Chinese economy with that of the West. Although the renminbi could rise to the 4.00 area by the end of this decade, the impact of this move will be felt inside of China, not outside. Furthermore, we can be sure that the Chinese leadership will do its best to manage this process in a way that has the most positive feedback for the Chinese society. Although the stronger renminbi will be a boon for China’s neighbors in Asia, it offers no help to the US or Europe." - John Taylor