Hong Kong

The run into Chinese Lunar New Year has again seen higher than expected Chinese demand for gold and China's voracious appetite for gold is surprising even analysts who are positive about gold. As Chinese people's disposable incomes gain and concerns grow over inflation and equity and property markets, Chinese consumers and investors are turning to gold as a long term investment hedge. There is informed speculation that commercial Chinese banks may have taken advantage of the recent price dip to build stocks of coins and bars and accumulate bullion. China's demand for physical gold bullion has rocketed past India with the country now overtaking India in the third quarter as the largest gold jewellery market according to the World Gold Council. There is also informed speculation that some of the buying was from the People's Bank of China with one analyst telling Bloomberg that “there is always the possibility that some purchases were made by the central bank.”

All you need to read.

Simply put, "it does not last for ever" should be ringing in the ears of every investor in the world with more than a few millisecond return horizon. And neither do any and all chartalist conventions which rely on the articial construct of reserve permanence, for one simple reason - being artificial, means the theory is flawed from the beginning. But it is JPMorgan's Michael Cembalest who frames it the best, "I am reminded of the following remark from late MIT economist Rudiger Dornbusch: 'Crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.'"

The miracle that is a global economy in which everyone is looking for export growth has been discussed here at length along with the simple math that makes it nonsense. Today's 'wonderfully' positive improvement in the trade deficit data for the US - which will be extrapolated into a spike in GDP growth and why the S&P should be at 1500 by month's end - does seem a little odd given all the uncertainty. Sure enough, thanks to Sean Corrigan of Diapason Securities, we have our answer. A massive spike in Exports to - drum roll please - Hong Kong!!A 76% rise in exports to this once glorious colony. The US trade deficit fell by $1.8bn thanks to a $2.5bn rise in exports (of which $2.03bn was to Hong Kong). Has Hong Kong become the channel-stuffing center of the world? It appears so since China's exports to Hong Kong have remained extremely high.

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.

Our recent discussion on the four potential catalysts for a 'crash landing' in China seems to have been quite prescient as Markit Economics reports tonight that HSBC Hong Kong's PMI experience another month of deteriorating operating conditions as demand contracted further and the consensus outlook became increasingly downbeat. On the heals of JPMorgan's earlier downgrade of global growth to only 1.7% annualized for the next three quarters and HSBC's cutting of Asia Ex-Japan GDP growth expectations, citing Europe's financial stress as already taking a toll on growth and the US economy remaining 'decidely lackluster', things appear to be weakening rapidly as mainland China growth was insufficient to overcome domestic declines. Output fell at the fastest rate in just under two-and-a-half years.

Today in Hong Kong at the Bank of China main branch on Queen’s Road, I bought an ‘unsealed’ Maple Leaf (i.e. loose coin) for just 0.5% over spot; I also purchased a ‘sealed’ Maple Leaf (i.e. collector-ready) for an additional $60, or about 4.5% over spot. Funny thing, it wasn’t even the best price in town. You can buy gold for as low as 0.2% over spot (practically a rounding error) in Hong Kong. Unfortunately, just about every bank was out of stock. This is a special holiday week they call ‘Golden Week’; it’s one of those manufactured holidays that the government uses to encourage domestic consumption. Given the name, a lot of people traditionally scoop up gold bullion… they apparently think it’s lucky to buy gold during Golden Week. Go figure. Needless to say, the banks start running out of stock and the premiums go up; if I had timed my visit a bit better, I could have gotten a better deal. Such is life. Now, let’s be clear about something– I didn’t buy this gold as a speculation. I’m not constantly refreshing my screen so that I can run back down to the bank and make a quick profit. You don’t buy something that’s appreciated 10-years in a row and has increased 7-fold in the same period as a speculation.

Wondering why you may not have heard of hacking collective Anonymous for a while? Because, as it appears, the ad hoc organization has been busy assembling Anonymous Analytics, a public equity research entity (and we venture to guess focused mostly on the short side) whose motto is "Acquiring information through unconventional means" and follows up with "You should have expected us." Think of them as Muddy Waters on steroids: no regulation, no supervision, no accountability - just pure content, and credibility-driven merit (or, of course, lack thereof): a model which if validated will totally revolutionize the field of public company research. Well, someone who certainly should have expected AnonAnalytics is Chaoda Modern Agriculture, a HK$ 8.5 billion market cap company, or on par with Sino Forest from its pre-fraud days, which as Anon alleges is one of "Hong Kong Exchange’s largest, and longest running frauds." As the below report demonstrates, Anon has presented a serious case to prove just that stunning allegation, and if ultiamtely validated, the outcome for stock longs will be very unpleasant: "Theoretically, Chaoda may be worth HK$0.60 per share (currently Hk$2.50) derived from a blended NAV and DDM approach. However, based on the evidence in this report, as well as information we have decided not to release, we believe Chaoda may face delisting." If proven correct, this report will have an even greater impact on capital markets than Muddy Waters take down of Sino Forest, as it will finally integrate the two formerly completely disparate worlds of hacking and software analysis, opening up a world of very concerning possibilities for the world's public companies.

As of 8 pm Eastern, the Comex' monopoly to the precious metals futures is over. As we reported previously, today, at 8 am local time, is when the Hong Kong Mercantile exchange would start trading the inaugural Asian precious metal futures contract: the 32 ounce /1 kilo/ gold futures. In the first 30 minutes of trading it appears to have been a subdued session, with just 22 contracts changing hands in the August 2011-June 2012 frame. How this trading will impact prices: nobody knows (yet). The spot price of gold has barely budged in the past hour. That said, now that PM futures fragmentation is starting, we expect that within 2 years we will have various deranged HFT algos trading tonnes of gold, quote stuffing globally, and otherwise creating one of the most volatile trading environments imaginable. And since we know you are asking: the margin schedule for the HKMerx will be kept and listed by the same LCH.Clearnet that hikes and lowers Irish and Portuguese bond margins by 10% on an almost weekly basis. Let see now how the Comex hikes its gold margins with impunity if it has competition that keeps margins "artificially" low, and provides disgruntled Comex clients with an alternative venue that accepts far less cash collateral to trade.

30 years ago, Bunker Hunt, while trying to demand delivery for virtually every single silver bar in existence, and getting caught in the middle of a series of margin hikes (sound familiar), accused the Comex (as well as the CFTC and the CBOT) of changing the rules in the middle of the game (and ws not too happy about it). Whether or not this allegation is valid is open to debate. We do know that "testimony would reveal that nine of the 23 Comex board members held short contracts on 38,000,000 ounces of silver. With their 1.88 billion dollar collective interest in having the price go down, it is easy to see why Bunker did not view them as objective." One wonders how many short positions current Comex board members have on now. Yet by dint of being a monopoly, the Comex had and has free reign to do as it pleases: after all, where can futures investors go? Nowhere... at least until now. In precisely 9 days, on May 18, the Hong Kong Mercantile exchange will finally offer an alternative to the Comex and its alleged attempts at perpetual precious metals manipulation.

A month ago, Zero Hedge observed the collapse in March real estate prices and number of transactions in Beijing (here and here), speculating that this could be the beginning of the end of the Chinese real estate bubble. Today, courtesy of the Hong Kong land registry service, we find that the drubbing has shifted from mainland China to Hong Kong. "The number of sale and purchase agreements for all building units received for registration in April was 10,386 (-23.1% compared with March and -27.4% compared with April 2010). Among the sale and purchase agreements, 7,635 were for residential units (-27% compared with March and -37.6% compared with April 2010)." This number of transaction is the lowest since March 2009. As for the actual money changing hands: "the total consideration for sale and purchase agreements in respect of residential units was $39 billion (-24.8% compared with March and -26.8% compared with April 2010)" - another low, as this is the biggest Y/Y drop since June 2010. Yet, not too surprisingly, the actual prices of real estate remain sticky. As Bloomberg reports: "Housing prices in the city, ranked the world’s most expensive place to buy a home by Savills Plc (SVS), have gained more than 55 percent in the past two years on record-low mortgage rates and an influx of buyers from China. The government in November increased property transaction taxes and pledged to boost land supply amid public protests that housing prices are becoming unaffordable and as the central bank warned about the risk of a “credit-fueled property bubble.”" The reason for this is that despite the cash-n-carry scheme described by Sean Corrigan recently, credit was suddenly become so scarce that it is only available to the wealthiest, who in turn are not, for now, in urgent need of hitting bids, thus preventing prices from attaining market clearing levels.

The geopolitical ramifications of the revolution in Egypt and the likelihood that it will spread throughout the Middle East, North Africa and possibly further afield is leading to volatility in markets. Equity indices in the Middle East and Far East were mostly down (except for China) overnight. European bourses were under pressure this morning but have recovered somewhat. Gold and silver are marginally lower after their strong showing Friday which resulted in silver closing the week 1.7% higher and gold being tentatively lower (-0.14%). Remarks by a People’s Bank of China advisor that the Chinese should diversify into gold and silver are very important (see below).

Get ready, get set, chop (I mean shop!)...

For those who wrongly believe that the biggest real estate bubble in the world is in Manhattan, the following may come as a surprise: according to Dylan Grice, in central Hong Kong, a 400 sq. foot property recently sold for HK$14MM, or about $1.8 million: an insane $4,500 per square foot. And that's just the beginning. Yet, as we have started to speculate recently, is this precisely the goal of Ben Bernanke - to create pockets of silly inflation within China so that the country is eventually forced to unpeg the CNY? If so, this is a huge gamble, as the bulk of the country still has far more slack than America ever can. And while China, and the bulk of its wealthy citizens, continue to pretend there is no bubble (created by the same free credit mechanism that results in the 2008 near-death of the US economy), has, as Dylan muses, China "already lost control? And if so, who's to say what will happen if the asset inflation goes into reverse? Maybe when the authorities engineer the slowdown they desire and tell investors it's safe to buy again, those investors  won't want to buy. In which case a hard landing shouldn't be beyond the realms of imagination." Grice then proceeds to explain the obvious, namely that the fall out of the inevitable collapse of the Chinese bubble will be unprecedented, as not only the EM world, but the developed economies have all hitched their fates upon the successful continuation of the Chinese bubble - the same bubble Bernanke has to unwind to get the much desired CNY reflation. Grice says "Go to Ireland and ask them how they feel about bubbles. They'll tell you a bubble is a curse, not a blessing." Of course, Ireland is about to be bailed out. Who, however, will be able to bail out China when the overheating economy gets it trillions in loan supports taken out? That one not even Chairman Ben will be able to rescue...

www.google.cn is now officially redirecting to http://www.google.com.hk/

Sure explains the rip in GOOG stock over the past few minutes: Goldman is still learning how to let a piece of bad news go without inciting a historic short squeeze in the process.

Update: Google advises this is merely a way to provide legal, uncensored data access. The company warns that China's government can now cut access to Google at any minute. Which should be, indeed, any minute.