Goldman Explains How Big China's Rehypothecation Problem Is (Hint: Very)

Tyler Durden's picture


The highlighted text below, from Goldman Sachs, explains it all.

Step 4: Repeat Step 1-Step 3 as many times as possible, during the period of LC (usually 6 months, with range of 3-12 months). This could be 10-30 times over the course of the 6 month LC, with the limitation being the amount of time it takes to clear the paperwork. In this way, the total notional LCs issued over a particular tonne of bonded or inbound copper over the course of a year would be 10-30 times the value of the physical copper involved, depending on the LC duration.

And in context:


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Tue, 06/10/2014 - 08:45 | 4840018 Jannn
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Chinese Gold Demand Stable (823 MT YTD), Shanghai Silver Scarce

Tue, 06/10/2014 - 08:56 | 4840061 LawsofPhysics
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The Chinese invented paper money for christ sake.  They understand that when fraud is the status quo, possession is the law.


The phyz stash is fine, but I do still wonder when the miners are going to catch a break.  I know two former marines in charge of security for mining operations in south america, so I know they are still mining.  WTF Tyler?

Tue, 06/10/2014 - 08:58 | 4840068 Tyler Durden
Tyler Durden's picture

Perhaps read the article first

Tue, 06/10/2014 - 09:21 | 4840081 LawsofPhysics
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Simply put, nothing changes until everyone with a paper claim demands physical.

Same as it ever was...


Tue, 06/10/2014 - 10:06 | 4840337 firstdivision
firstdivision's picture

The other issue is even if you have a paper claim, demand physical, there are some courts that have determined that financial settlement is as good as physical delivery. 

Tue, 06/10/2014 - 11:01 | 4840555 CrazyCooter
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Sometimes I wonder how the China bulls reconcile shit like this, and all the other crap that gets reported. Cleanest dirty shirt?



Tue, 06/10/2014 - 11:40 | 4840727 WMM II
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LofP, unless i am mistaken, much of the paper market has now inserted the 'no, this piece of paper does not entitle you to delivery of "this commodity" into their fine print. at least 'gld' did.




Tue, 06/10/2014 - 08:59 | 4840069 localsavage
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Common folks....whats a little 10-30 times leverage amongst friends?

Tue, 06/10/2014 - 12:42 | 4840976 ich1baN
ich1baN's picture

Actually the Egyptians invented paper money 3000 years before the Chinese did. 

Wed, 06/11/2014 - 00:33 | 4843433 old naughty
old naughty's picture

Actually humans from the future returned to specific time in his-story to "insert" various relics, instruments, weapons, and human-vehicles to re-vamp his-story.

So, many generations after this period of time, no one remembers paper money, FRN or others.

Tue, 06/10/2014 - 08:46 | 4840021 Ivanovich
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I just want this shit hole to collapse finally.

Tue, 06/10/2014 - 08:52 | 4840048 Cognitive Dissonance
Cognitive Dissonance's picture

The system is presently constipated.

Working the problem. Please hold

Tue, 06/10/2014 - 09:08 | 4840107 Headbanger
Headbanger's picture

And stand clear!!

Tue, 06/10/2014 - 12:19 | 4840874 krispkritter
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What this market needs is an enema!

Wed, 06/11/2014 - 00:36 | 4843439 old naughty
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From the sound of it, when it does collapse, we'd be all sucked in with, physical or paper.

Tue, 06/10/2014 - 09:15 | 4840128 Postal
Postal's picture

The last time constipation was the diagnosis, I was not particularly fond of the prescribed treatment.

Tue, 06/10/2014 - 10:38 | 4840488 detached.amusement
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except this time its going to be like poking a hole in that beached whale...

Tue, 06/10/2014 - 09:51 | 4840266 papaswamp
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Prunes first..... Its when the enema is applied that things get messy...

Tue, 06/10/2014 - 08:49 | 4840035 Government need...
Government needs you to pay taxes's picture

Somehow, all credibility was lost following the two words 'Goldman says'.

Tue, 06/10/2014 - 08:57 | 4840064 Bernoulli
Bernoulli's picture

Started reading the headline: Gold... [In my head: oh, cool, what's that about?]

Then: Goldman... [In my head: oh fuck. Not them again. Better stop reading.]

Tue, 06/10/2014 - 08:51 | 4840043 NuYawkFrankie
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And Goldman should know ;)

Tue, 06/10/2014 - 08:54 | 4840053 pods
pods's picture

30x legerage?  They need to send some advisors to the City of London to learn how you can get this to their level.


Tue, 06/10/2014 - 08:55 | 4840057 Badabing
Badabing's picture

Why do i get the feeling Goldman is pissed that China is makeing money the way Goldman does.

expose China and eliminate the competition tactic

Tue, 06/10/2014 - 10:54 | 4840538 JRobby
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Tue, 06/10/2014 - 08:56 | 4840060 Calculus99
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Remember the old days when you were perhaps bullish on a commodity? You bought it, stored it, price rallied and then you sold it for a profit, or vice-versa.

Now, it's just a game of fucking musical chairs where the commodity might as well be thin air (that goes up and down doesn't it).

Tue, 06/10/2014 - 09:03 | 4840086 AlaricBalth
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Trading thin air. Isn't that what the carbon credit scam is all about?

Tue, 06/10/2014 - 10:07 | 4840345 firstdivision
firstdivision's picture

No, the carbon credit idea was for Al Gore to get rich and buy cheap beach houses.

Tue, 06/10/2014 - 11:16 | 4840615 Ban KKiller
Ban KKiller's picture

With Russian roulette thrown in. Five bullets in a revolver for more flavor.

Tue, 06/10/2014 - 09:01 | 4840079 RagnarDanneskjold
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A Chinese article last year estimated anywhere from 5 to 30 billion yuan in bad debt. China Copper Scandal May Have Spread to Penglai; Bad Debt Could Reach Billions of Dollars

Also, not entirely unrelated since these guys are using the loans on their rehypothecated copper to speculate in real estate:

Shenzhen Vacancy Rate Estimated At 85%; Centaline Says Prices Will Be Cut in September and Last For 3 Years
Tue, 06/10/2014 - 09:02 | 4840082 youngman
youngman's picture

Who thinks this crap up...they are the ones that should be arrested and put away for a long long time....we dont need this crap to invest...lets get back to simple..stupid...

Tue, 06/10/2014 - 09:05 | 4840088 Bernoulli
Bernoulli's picture

IMHO, looking at the last weeks VIX readings, Goldman nicely positioned themselves for a 30-40% correction of some major indices.

All they need is something to start the panic and then they push the thing over the cliff. "China Rehypothecation Disaster" sounds like a great detonator!

And at the same time, there would be somebody to blame for the correction & haircuts & drastic measures to follow immediately in the US and EU.

Then my guess is that GS will be one of the few that won't need a bailout after the big crash and they will STRONGLY ADVISE governments to not rescue banks this time ("we have to finally let the free markets regulate things again!").

And when the dust settles, guess who will own 5 times more stuff?

Tue, 06/10/2014 - 09:12 | 4840114 AccreditedEYE
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Whoa! Easy there big fella...

Tue, 06/10/2014 - 09:05 | 4840094 yrbmegr
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A is paying cash to C and getting IOU's from B 10-30 times in an LC cycle.  Seems like A is effectively loaning money to B.  And it is done this way to avoid some tax or regulatory scheme in China?  And the problem they're now having is that the same copper is being used as collateral for multiple such cycles and the chain of receivables has been broken somewhere?

Tue, 06/10/2014 - 09:10 | 4840109 AccreditedEYE
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And thru it all, like magic, we deliver the Federal Reserve what they greatly desire (signs of inflation) and the Banking Cartel what they greatly desire (volatility). Just. Great.

Tue, 06/10/2014 - 09:13 | 4840121 praps
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Wait until the problem spread to another port, and then another country, another continent, another commodity, another asset class.  


The world is full of money but little collateral or assets to support it.  Watch out below as the entire world's financial system collapses into a smouldering heap.

Tue, 06/10/2014 - 09:17 | 4840134 AccreditedEYE
AccreditedEYE's picture

I respect your spirit but don't hold your breath on that last bit.

Tue, 06/10/2014 - 09:15 | 4840125 Peter Pan
Peter Pan's picture

I guess the problem is that banks can't print real copper. 

The other problem is that this fraudulent chain has not been created by banks but at the expense of banks which makes it a sore point.

I just love it when the shoe is on the other foot.

Tue, 06/10/2014 - 11:23 | 4840386 Wild Theories
Wild Theories's picture

I'm pretty sure the CCFD scheme was originally created by banks, then the Chinese companies added their local touch to it(namely the endless LC cycle and the non-existant copper) and it became an expense.


But even in its orginal legal form, without endless rehypothecation of imaginary coppper, it still would have created an artifical demand in copper and would have eventually had to be unwound.

Tue, 06/10/2014 - 09:15 | 4840126 astoriajoe
astoriajoe's picture

Jiminy Christmas!

Tue, 06/10/2014 - 09:15 | 4840129 Dubaibanker
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Please do see this to understand a bit about China before calling for its collapse.....

Here is a US Professor...

This is an American too....

The liberalization has just started..Here are the Spanish.....

These are the Aussies...

The reports of China's death have been greatly Mark Twain would have said.

The difference between Western capitalist model and China's capitalist model is that China prepares everything in advance. i.e. slow liberalization, 30 years of savings and economic growth, USD 2 trillion worth exports pa for the last decade, massive FDI receipts totalling USD 1 to USD 1.2 trillion per decade, some of the world's largest factories and ports and then some Top 4 banks and now some Top 4 tech companies and a few global car companies and then finance almost every single project around the globe.

However, in the West, they first loosen the rules, make a mockery out of everything and then throw good money after bad and call it a nice 'save'. Then they expect that everyone should play by the same rules. Ha! That's the second mistake. First one is to expect someone to collapse!

Life is simple, lets not complicate it. A bad bank can be created in China, money can be printed just like in US or just be wiped off as bad debt....all these solutions are possible....If we think China has a credit problem, then just look at ONE BANK called Deutsche and see when they will fall with USD 75 trillion in derivatives. Until Deutsche goes down or Spain collapses, China is not moving nowhere!

Tue, 06/10/2014 - 09:19 | 4840143 LawsofPhysics
LawsofPhysics's picture

Correct.  Besides, consider the composition of Chinese society and the values they practice.  Now consider the average american and the values they practice. 

You tell me who is really fucked.  Shut off the SNAP cards already it's time to sort this all out.

Tue, 06/10/2014 - 10:07 | 4840344 waterwitch
waterwitch's picture

And roll out the MRAPs.

Tue, 06/10/2014 - 09:21 | 4840151 AccreditedEYE
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While I don't agree with *all* of this, I do agree that peeps on ZH continually discount these people's ability to pull a rabbit out of the hat. There will be no implosion. You would think after 5 years of losses people would start catching on to this. (Well, losses for those using fundamentals in global capital markets)

Tue, 06/10/2014 - 09:57 | 4840290 benbushiii
benbushiii's picture

Isn't this the same thing all of the Banks do.  Factor, lend, rehypothecate until someone asks for their money or their collateral back?  "Ooops, you will have to wait a couple of days so 1) We can ask for a bailout 2)Claim some rogue trader did it 3) Start the printing presses to pay you back with money conjured out of nothing.

Tue, 06/10/2014 - 11:13 | 4840599 Ban KKiller
Ban KKiller's picture


Tue, 06/10/2014 - 10:20 | 4840411 desirdavenir
desirdavenir's picture

No doubt, JP Morgan really was lucky to have dropped its commodities business just a few weeks ago. 

Tue, 06/10/2014 - 10:25 | 4840433 icanhasbailout
icanhasbailout's picture

Hmmm 30x leverage... where have I seen that before?

Tue, 06/10/2014 - 11:21 | 4840633 Ban KKiller
Ban KKiller's picture

Long bloated corpses floating in rivers. 

Bullish for pms? 

Tue, 06/10/2014 - 12:43 | 4840984 mastersnark
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The US can print a gazillion greenbacks and let 2 gazillon toxic derivatives float around with an unemployment rate of 30% without a collapse, but China is going to lose its sh*t over missing copper? Does not compute.

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