Yuan

Overnight sentiment is decidedly negative, following the across the board cut of growth forecasts by the IMF late yesterday. The only bright light was the PBOC dumping 265 billion yuan ($42.1 billion) in reverse repos in an open-market operation (a liquidity adding operation) whose only purpose was to roll the massive reverse repo from before the Golden Week. The resulting 2% jump in the Shanghai Composite came as traders expect an imminent rate cut by the PBOC. The irony of course is that as long as Reverse Repos are the liquification instrument of choice, the local central bank will do nothing else in an economy which is once again overheating in several industries, the most important of which continues to be housing. Furthermore, as long as the spectre of a 15% surge in pork prices is over the horizon, the PBOC will do nothing. Period. Elsewhere, as BBG summarizes, FX is mostly modestly lower with the AUD outperforming on rising iron ore price. Metals mostly modestly lower despite the crippling South African strike which has now migrated to catch iron ore mines as well. Treasury yields moderately lower, partly in catch-up after yesterday’s holiday. Bund yields modestly higher sovereign-to German yield spreads mixed with mostly modest changes. Few if any macro economic news today.

Alan Wheatley, Global Economics Correspondent for Reuters has written a very interesting article, 'Analysis: China's currency foray augurs geopolitical strains’ where he emphasizes China’s desire to wean out the US dollar’s currency reserve status. China is actively taking steps to phase out the US dollar which will decrease volatility in oil and commodity prices and deride the ‘exorbitant privilege' the USA commands as the issuer of the reserve currency at the centre of a post-war international financial architecture which is now failing.   In 1971, U.S. Treasury Secretary John Connally said, "It's our currency and your problem". China is frustrated with what it sees as the US government’s mismanagement of the dollar, and is now actively promoting the cross-border use of its own currency, the yuan, or also called the renminbi, in trade and investment. China’s goal is to decrease transactions costs for Chinese importers and exporters. Zha Xiaogang, a researcher at the Shanghai Institutes for International Studies, said Beijing wants to see a better-balanced international monetary system consisting of at least the dollar, euro and yuan and perhaps other currencies such as the yen and the Indian rupee. "The shortcomings of the current international monetary system pose a big threat to China's economy," he said. "With more alternatives, the margin for the U.S. would be greatly narrowed, which will certainly weaken the power basis of the U.S."

This one is for the the no good Keynesian deed goes unpunished files. As part of its 8 day Golden Week celebration, China's central planners decided to do a good thing for the people and remove all tolls from expressways. That was the populist explanation. The fundamental one was that this act would somehow spur the economy. Alas, while the same people may have saved some transit money in the process, what they did not save was on transit times. As South China Morning Post reports, millions were promptly stuck in traffic jams as a result of the politburo's generosity. From SCMP: "A bid by authorities to stimulate the economy by suspending road tolls for the "golden week" holiday brought huge tailbacks across the mainland yesterday as almost 86 million travelers took to the roads. That's 13.3 per cent more than on the first day of the National Day holiday last year." And then the fun began: "One traveller blogged that he could only move 200 metres in an hour on the Zhengzhou to Shijiazhuang expressway in Henan province. Others said the queue of cars on the Guangzhou to Shenzhen expressway was 40 kilometres long. All roads leading out of Guangdong were jammed, with cars moving at about a kilometre an hour in front of some toll gates. Provincial traffic-management authorities estimated traffic on expressways would increase by 40 to 80 per cent compared with the same period last year, the Shenzhen Special Zone Daily reported. The People's Daily reported dozens of accidents on 24 highways across the mainland, further aggravating the congestion."

Chinese local governments are facing the prospect of major unemployment problems should the swathe of solar panel makers, that have been subsidized from birth to now-near-death, continue to suffer from US and European tariffs (as well as simple gross mis-allocation of capital amid massive over-capacity). However, as is the way of the mal-investing world today, no barrier to rational economic theory is too low for government status-quo maintenance as it would appear that local banks have been strong-armed into extending loans to keep them alive. As Reuters reports, debt-laden (NYSE-traded) SunTech Power Holdings  - which is close to removal from the exchange due to its dismal equity price - has just received new 'bailout' loans. First, it was a race to debase. Now, we have the race to bailout the world's most worthless companies (especially in channel-stuffed industries) as the New Normal trade wars continue.

It will not come as a surprise to anyone who has spent any time reading Zero Hedge (here, here, and here very recently) but now yet another one of our 'crazy fringe blog' non-consensus ideas - the fact that China is cornered by inflation concerns and unable to ease aggressively - has now been confirmed by none other than the Bank of China and Bank of Korea themselves. As the WSJ reports, "The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices." The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. "This contributes to a monetary-policy dilemma for Chinese authorities", he added. While markets have looked for signs of more forceful action by China's leaders to rekindle growth, some officials attribute the government's caution to fears of reigniting inflation. This confirms previous comments by the PBoC that "A domestic policy may be optimal for the U.S. alone. However at the same time it is not necessarily optimal for the world," he said at the time. "There is a conflict between the U.S. dollar's domestic role and its international settlement role."

While most "developed world" people have heard of Hong Kong and Macau, far fewer have heard of China's province of Guangdong, which is somewhat surprising. With over 100 million people, a GDP of nearly $1 trillion - the biggest of all Chinese provinces, this South China Sea adjacent territory is perhaps China's most important economic dynamo. One of the key cities of Guangdong is Dongguan, which as the map below shows is a stone's throw from Hong Kong, has a population of nearly 10 million, and has long been considered Guangdong's boomtown and one of China's richest cities. One notable feature about Dongguan is that it is home to the New South China Mall, which is the world's largest. It also happens to be mostly empty ever since it opened in 2005. Which perhaps is a good segue into this story. Because while for the most part the city of Dongguan has been a story of prosperity, a wrinkle has appeared. According to the South China Morning Post, which cites researchers at Sun Yat-sen University, this city is now on the brink of bankruptcy.

After seeing its stock market tumbling to fresh 2009 lows, the PBOC decided it couldn't take it any more, and joined the Fed's QE3 and the BOJ's QE8 (RIP) in easing. Sort of. Because while the PBOC is prevented from outright easing as we have been saying for months now (even as "experts" screamed an RRR or outright rate cut is imminent every day while we warned that Chinese inflation has proven quite sticky especially in home prices and food and China's central bank will not attempt to push its stocks up as long as the situation persists, so for quite a while) it can inject liquidity on a ultra-short term basis using reverse repos (or what are called repos here in the US). And shortly after it was found that Chinese companies industrial profits fell 6.2% in August after tumbling 5.4% in July, we learned that the PBOC added a record 365 billion Yuan to the financial system in order to prevent a creeping lockup in the banking system. While this managed to push the Shanghai Composite by nearly 3% overnight, this injection will prove meaningless in even the medium-term as the liquidity is now internalized and the PBOC has no choice but to add ever more liquidity or face fresh post-2009 lows every single day. Which it won't as very soon it will seep over into the broader market. And as long as the threat of surging pork prices next year is there, and with a global bacon shortage already appearing, and food prices set to surge in a few short months on the delayed effects of the US drought, one thing is certain: China will need a rumor that someone- even Spain- is coming to its rescue.

Desperate North Korea has exported more than 2 tons to gold hungry China over the past year to earn US $100 million. Even in tough times during the Kim Il-sung and Kim Jong-il regimes, North Korea refused to let go of its precious gold reserves. Chosun media reports that “a mysterious agency known as Room 39, which manages Kim Jong-un's money, and the People's Armed Forces are spearheading exports of gold, said an informed source in China. "They are selling not only gold that was produced since December last year, when Kim Jong-un came to power, but also gold from the country's reserves and bought from its people." This is a sign of the desperation of the North Korean regime and also signals China’s intent to vastly increase the People’s Bank of China’s gold reserves.

Imagine if the world found out that China’s growth and recovery post 2008 were largely based on fraudulent data and garbage development projects fueled by easy money and rampant corruption on the part of Chinese officials?

We have seen consecutive weeks of bullish strength in the gold and silver markets. Gold has completed what is known as a ‘Golden Cross’ and silver is poised to complete one in the coming days. A ‘Golden Cross’ occurs when not only the current price, but also shorter-term moving averages such as the 50 day moving average “cross” or rise above the longer term 200 day moving average. Gold’s 50 day moving average (simple) has risen to $1,651/oz and is now comfortable above the 200 day moving average (simple) at $1,645/oz and accelerating higher. Silver’s 50 day moving average (simple) has risen to $29.86/oz and will soon challenge the 200 day moving average (simple) at $30.47/oz.

Presented with little comment since our jaws just hit our chest - these stunning headlines from a PWC report:

*CHINA TOP 10 LISTED BANKS' OVERDUE LOANS REACH 489B YUAN END-1H
*CHINA OVERDUE LOANS RISE FROM 112.9B YUAN END-2011: PWC
*INCREASE IN CHINA OVERDUE LOANS SHOWS NPLS MAY RISE, PWC SAYS
*PWC CITES BANKS' REPORTS FOR OVERDUE LOAN DATA

What Do the Experts Say?  Are People Actually ACCEPTING Gold As Money?

One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially. Naturally, among such assets are not only paper representations of securities, mostly stock and bond certificates held by the DTC's Cede & Co., but physical assets, such as bars of gold held by paper ETFs such as GLD and SLV. In fact, the speculation that the physical precious metals in circulation have been massively diluted has been a major topic of debate among the precious metal communities, and is the reason for the success of such physical-based gold and silver investment vehicles as those of Eric Sprott. Of course, the "other side" has been quite adamant that this is in no way realistic and every ounce of precious metals is accounted for. While that remains to be disproven in the next, and final, central-planner driven market crash, we now know that it is not only precious metals that are on the vaporization chopping block: when it comes to China, such simple assets as simple steel held in inventories, apparently do not exist.

Over two weeks ago we first described what at that point was merely the hint of trouble at Australian mega-miner Fortescue which is slowly but surely losing the fight with insolvency courtesy of plunging iron ore prices, whereby it was once again proven that bonds always have a better grasp of the situation than equities. Sure enough the cash crunch which we predicted was imminent at Fortescue, has since hit the company over the past several days, as the firm is currently in dire liquidity straits, desperate to renegotiate covenants and get waivers that allow it to continue operations even as creditors get the short stick (in exchange for some serious money upfront). It is unknown whether it will succeed, although judging by its halt from trading until next week by which point it hopes to restructure its debt, things are certainly not rosy for the megalevered iron-ore company. In retrospect, FMG AU is lucky to be alive as is, having had a comparable near-death experience back in 2007/2008: should its bondholders end up owning the equity, so be it. However, another far more troubling and certainly underpriced covenant renegotiation has struck, this time impacting Chinese conglomerate Sany Heavy Industry, a company which is the Chinese equivalent of US Caterpillar and Japanese Komatsu, which is owned by Liang Wengen who is mainland China's richest man with a $10 billion net worth, and which is so big and diversified that under no circumstances should it be forced to request covenant waivers, especially not under a soft-landing scenario for China. And yet this is precisely what it did.

• Italy Says It Won't Seek Aid (WSJ)... and neither will Spain, so no OMT activation, ever. So why buy bonds again?
• European Lenders Keep Ties to Iran (WSJ)
• Fink Belies Being Boring Telling Customers to Buy Stocks (Bloomberg)
• Dutch Voters Buck Euro Debt Crisis to Re-Elect Rutte as Premier (Bloomberg)
• China's Xi cited in state media as health rumors fly (Reuters)
• China vs Japan: Tokyo must come back 'from the brink' (China Daily)
• Manhattan Apartment Vacancy Rate Climbs After Rents Reach Record (Bloomberg)
• Well-to-do get mortgage help from Uncle Sam (Reuters)
• Princeton Endowment Expected to Rise Less Than 5% in Year (Bloomberg)
• Protesters Encircle U.S. Embassy in Yemen (WSJ)
• US groups step up sales of non-core units (FT)