QAS30 Trading Journal: Asian

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S.Korea to launch 20-yr T-bond futures, monitor forex deposits

Published on: Kamis, 20 Februari 2014 in Asian, Bank and Financial, Business News, economy, Forex News, Global Economy, Market News

South Korea's financial regulator said on Thursday it plans to establish a 20-year government bond futures market by 2015 to boost derivatives trading activity and offer investors' more hedging options.
The Financial Services Commission (FSC), in an annual report to the president, said a greater variety of derivatives products will offer investors the ability to properly manage their investment risks.

This measure comes as the South Korean government seeks to increase the proportion of longer-term debt to reduce potential refinancing risks and meet demand from institutional investors for such products. A futures contract for longer-tenored debt would help investors cope with risks associated with the less liquid paper.

The FSC also said it will closely monitor a recent spike in yuan-denominated deposits and any similar trends involving other foreign currencies for potential risks.

Yuan deposits by South Korean residents jumped nearly nine-fold between September to January as investors searching for higher yields invested in short-term, asset-backed commercial paper that results in simulated yuan deposits in local branches of Chinese banks via currency swaps.

Bank of Korea Governor Kim Choong-soo said last week that the spike in yuan deposits was not a major cause for concern, and policymakers have so far ruled out any change in regulation to curb the yuan deposit growth.

Finally, the FSC said it plans to announce additional measures to manage household debt conditions by end-February. Though it did not disclose specifics, new measures will add to existing debt restructuring efforts such as boosting the amount of longer-term and amortising home mortgages to push borrowers towards more financially sound loans. (Reporting by Se Young Lee; Editing by Kim Coghill)

Wall Street Panicked by Chinese House Wives Gold Buying

Published on: Rabu, 19 Februari 2014 in Asian, China, gold, other

An article surfaced today in China discussing a new player in the gold market that has Wall Street running scared The new player is the Chinese housewife. This typical Chinese housewife as described in the article is between 40 to 60 years old with investable assets of between $10,000-$10 million dollars. This representative housewife in addition to her assets also has what approaches zero knowledge of investment knowledge.

The article goes on to give one example Of these “Mad hunters of Gold” whom they call Auntie Kimmy. Auntie Kimmy has purchased $2 million Yuan ($330,00 USD) worth of gold over the last year. When asked if she was disappointed by the decline in gold prices, Aunti Kimmy said, “Not at all, ..this gold is going to my children.”
It is this mentality that has Wall Street nervous. Quoted in the article is State Council Development Research Center, Institute for International Economics Visiting Researcher Zhang Jie who was quoted as saying Wall Street and the Fed should be very nervous. The business of loaning out based on gold reserves is over as once the gold arrives in China, it is never going back.

As Fed, China pull back, so do global markets

Published on: Jumat, 14 Februari 2014 in Asian, Global Economy, Market News, market watch

The global economic crisis may be a receding memory, but investors and businesses around the world took stock this week of two big new potholes on the road to recovery

Fresh evidence that the Chinese economy is slowing triggered a sell-off in global stock markets that capped the worst weekly losses on Wall Street in more than a year. The Dow Jones industrial average and the S&P 500-stock index each declined about 2 percent Friday, with weekly losses of about 3.5 percent and 2.5 percent, respectively.

Markets in Europe and Asia suffered similar declines after a measure of Chinese manufacturing activity fell.
Across a number of developing countries, meanwhile, the adjustment to the slowdown of Federal Reserve monetary stimulus began to accelerate, as traders dumped local currency in Turkey, South Africa and elsewhere — a rout that touched off concerns of a new crisis brewing in one or more of the world’s once-vibrant emerging markets.
The sell-off in the markets, which are down since the start of 2014, follows a dramatic run-up that many analysts said was unlikely to continue, even with the U.S. economy gaining steam.
However, the confluence of events behind it emphasized the tight linkages in the global economy and the uncertain effect that the Federal Reserve’s tapering will have over time.
China has become a major prop of world economic growth, and a slowdown there will show up on the books of virtually every major trading nation and company — affecting orders for metal ores from Indonesia and Brazil, heavy equipment from the United States and Germany, and the flow of money to African nations where China has become a major investor.

Compounding the trouble is a growing fear that China’s massive investment in building and infrastructure in recent years — part of its effort to stoke growth during the 2008 financial crisis — will show up in unsustainable levels of debt and bad loans for local governments and banks.
Officials and analysts downplay the likelihood that China’s troubles will touch off global problems akin to those caused by the U.S. financial system. The country’s capital markets and banks are not as closely interwoven with the rest of the world, and the Chinese government has stashed away trillions of dollars in foreign reserves to use as a buffer.

But there is still a fear that the country — the world’s second-largest economy — is facing major financial and demographic constraints that could limit its growth and force a major correction to its banking sector.
Authorities there “are aware of that,” World Bank chief economist Kaushik Basu said in a recent interview with reporters. “The bad news is that there is no science for this,” and efforts to limit credit and investment in the country could slow its economy even further.

The impact of Federal Reserve policy is another unknown. Analysts at the International Monetary Fund, for example, have been generally sanguine about how the Fed’s slowdown in bond buying will affect the world.
There was a brief “taper panic” in mid-2013, when the Fed appeared ready to start its drawdown — a moment that marked, in a sense, the formal end of the U.S. crisis response.

After that, many analysts said that a gradual end of Fed asset purchases would be offset by a strengthening U.S. economy, because the Fed would not reduce its monetary stimulus otherwise.
But the impact may still be serious in some nations, notably those that rely on foreign currency to finance trade and other deficits.

The tremors started showing up this week as currencies in Turkey, South Africa and elsewhere plunged.
There may be less likelihood that problems in one of those places turns into a global disease, as happened in the 1990s in Latin America and Asia.
Still, “we’re seeing a gradual and cumulative realization that the growth prospects for many [emerging market] economies, long seen as a given, are in fact problematic,” Patrick Chovanec, managing director of Silvercrest Asset Management, said in a research note.

Source : http://www.washingtonpost.com/business/economy/as-fed-china-pull-back-so-do-global-markets/2014/01/24/c8791244-8539-11e3-8099-9181471f7aaf_story.html

Are Chinese Market Under Control..?

Published on: Rabu, 12 Februari 2014 in Asian, market watch

It’s hard to know exactly what degree of control the PBoC has over the events unfolding in China’s interbank markets.
On the one hand, making the smaller banks and shadow finance entities sweat fits with the central bank’s new high-priority goal, introduced late last year, of containing ‘financial risks’, and also with a broader government theme of clamping down on excess.
On the other hand, Chinese liquidity is also being affected by external forces (shrinking capital inflows) and the shadow financing calendar (WMP end-of-quarter maturities). Michael Pettis says he suspects the PBoC was “caught flat-footed” by this combination of events, and it certainly isn’t hard to imagine. He also points out that this is a central bank which has almost no experience of any market conditions other than credit creation and expansion.
WMP redemptions could certainly be a problem this week. But WMPs have turned bad before, even affecting mid-sized banks in big cities, and their effect has been contained. That’s the (ahem) beauty of a command economy, in which banks and the media are under state control. Bank runs don’t spread so easily if people don’t hear about them.
Yet could this Chinese ability to conceal and contain financial panic be a double edged sword?
Pettis argues that for many years now, China has been able to use its opacity and control to boost its reputation for financial stability through low volatility. Those days may now be over (our emphasis):

Chinese financial markets often seem less volatile than one would expect for a poor, developing country, largely because of administrative measures that intentionally or unintentionally suppress normal volatility. These kinds of systems, however, are not less volatile. They seem less volatile because small shocks have minimal impact. Larger shocks, however, tend to cause a much greater than expected surge in volatility. Perhaps last week was a case in point.
Going forward we will probably see more of this in China. Volatility will be suppressed for periods of times only to erupt in greater than expected volatility from time to time. This is not only a China problem, of course. One can easily argue that the Fed’s actions under Alan Greenspan seemed to induce a “great moderation”, but only temporarily, and when the great moderation became less moderate, the economy was always likely to be more disorderly than expected. The euro, similarly, sharply reduced volatility in peripheral Europe for many years until it suddenly exacerbated it. Of course no student of Hyman Minsky would be surprised by any of this.

In fact, even suppressing bad news can backfire, he suggests. Pettis points to the panic in China over SARS early last decade as a possible case in point: although news of individual cases was often successfully damped down, rumours only grew and resulted in a panic that was arguably disproportionate to the outbreak. “(T)he attempt to suppress them can actually undermine credibility and so exacerbate the impact of the shock.” He writes that Argentina’s experience in 2001, when the government tried to deny it faced a payments crisis, is another situation where suppression of information may have made the resulting response even worse than if it had been admitted upfront.
Pettis, like StanChart’s Stephen Green, doesn’t think we are seeing a Lehman moment in China. But he does think there are three unanswered questions about this situation: if liquidity is adequate, as the PBoC says, where is it being hoarded?
Secondly, why hasn’t it received more attention from the mainland press (we think Pettis maybe answers his own question by wondering if it was an attempt to prevent depositor panic).
Thirdly, if there are large net redemptions from WMPs, where will that money show up? Writes Pettis:

None of which seem like particularly worthy destinations, if the PBoC is hoping its tactics will help improve the quality of credit allocation.

Again, the immediate facts prompt the question about how equipped the PBoC is to handle these situations, and whether the advantages it’s had in the past will continue to work at all, or even backfire.
Central banking is a confidence game. As Anne Stevenson-Yang of J Capital Research writes, the PBoC has to maintain the confidence of not just domestic financial participants; it also has to persuade speculative overseas capital that the country, and its currency, are still stable enough to invest in.
At the moment, the most likely end game of all of this is more realisation of misdirected investments that have resulted from the vast wave of credit growth over the past few years (which has in turn taken the place of export growth as China’s primary key of growth).

Recognising the misallocation — or being forced to recognise it — would in turn imply a steeper growth slowdown. Just look at how the sub-8 per cent growth has shaken global confidence. Nomura are now putting a 30 per cent chance of sub-7 per cent growth in H2.
Here’s another thought. Stevenson-Yang, who closely watches the amazingly rapid innovations in China’s shadow finance world, sees a risk that China’s feted huge foreign capital reserves could dry up.
That would be a shock.

Cross-posted from Kate Mackenzie at FTAlphaville.

Japan battles China for influence in Africa

Published on: Selasa, 11 Februari 2014 in Asian, Business News, economy, Market News, news

Japan’s rivalry with China is going global. After years of jousting over obscure islands in the East China Sea and competing for Asian influence, the two countries are now battling for power in a new arena: Africa.
It’s a region that Tokyo has long ceded to the Chinese, allowing Beijing to pile up massive economic and political capital across Africa. But on Friday, in a major shift in strategy, Japanese Prime Minister Shinzo Abe arrived in Ivory Coast to begin his first tour of sub-Saharan Africa – and the first by any Japanese prime minister in eight years.

Mr. Abe is expected to announce more than $14-billion (U.S.) in trade and foreign aid agreements during his five-day African tour. It’s a dramatic escalation in Japan’s stake in the African battleground, although certainly not enough to threaten China’s commanding edge in trade and investment in Africa, nor its political clout here.

China’s state media were quick to portray Mr. Abe’s visit as an attempt to challenge Beijing in the African arena. Quoting several Japanese sources, state-owned China Daily said the Japanese leader is seeking to “contain” China’s influence in Africa.

Another Chinese newspaper, Global Times, quoted Japan analyst Geng Xin as saying that Tokyo was “cozying up” to Africa to try to dispel Japan’s image as an “economic giant and political dwarf.” He said Japan is wooing the votes of African countries for its bid to become a permanent member of the United Nations Security Council.

A spokeswoman for the Chinese Foreign Ministry, Hua Chunying, issued a veiled warning to Japan. “If there is any country out there that attempts to make use of Africa for rivalry, the country is making a wrong decision, which is doomed to fail,” she told a press conference this week.

Japan criticizes Beijing for its tendency to build lavish headquarters and office towers as donations for African politicians – including, most famously, the new $200-million headquarters of the African Union in Addis Ababa, where Mr. Abe is scheduled to give a policy speech next week.

“Countries like Japan … cannot provide African leaders with beautiful houses or beautiful ministerial buildings,” Mr. Abe’s spokesman, Tomohiko Taniguchi, told the BBC.
Japan, he said, prefers to “aid the human capital of Africa.”
But while the two countries take verbal shots at each other, the reality is that China has adopted a far more aggressive strategy in Africa, and has been enormously successful so far. China’s investment in Africa was reported to be about seven times that of Japan in 2011, and its exports to Africa were about five times greater.

China has become the top trading partner, or second-biggest trading partner, of about half of Africa’s countries. It is a major investor in Africa’s resources sector, and the biggest buyer of oil and minerals from many African countries. Its construction companies are building roads, highways, railway lines, sports stadiums, transit systems and hospitals across Africa.

Japan will find it difficult to catch up to China’s political influence here. China’s leaders are frequent visitors to the continent. Chinese Foreign Minister Wang Yi is currently in the middle of an African tour, and Chinese President Xi Jinping visited Africa last year on his first overseas trip as President. Beijing has cultivated close relationships with Africa’s ruling parties, routinely inviting their officials on junkets to China.
Japan has lagged far behind in this race. Most of its engagement with Africa is as an aid donor. Last year it promised up to $32-billion in public and private assistance to Africa over the next five years, but this only confirmed its reputation as a donor, rather than a business partner.

Only a handful of Japanese investors are active in Ivory Coast, Ethiopia and Mozambique – the three countries that Mr. Abe is visiting in his current tour. According to a fact sheet by the Japanese government, there are only two Japanese companies in Ivory Coast and only one in Ethiopia.

Mr. Abe, who calls himself Japan’s “top salesman,” seems determined to propel Japan into a much more active role on the world stage. Last year, in the first year of his latest term as Prime Minister, he visited 25 countries around the world – including all 10 countries in Southeast Asia and most of the oil-producing countries in the Persian Gulf. He is expected to visit another six countries this month alone.
Africa is “a frontier for Japan’s diplomacy,” he told reporters as he departed on his latest overseas tour. He is bringing a delegation of Japanese business leaders with him on the tour, signalling his goal of shifting from aid to trade.

The Secret Door Of China finds leading out of dollar trap

Published on: Senin, 10 Februari 2014 in Asian, gold

Sun Zhaoxue is president of China National Gold Corporation, China’s largest gold mining company. He is on record indicating that in order to have a strong currency, it must be backed by significant gold reserves.
Below are his comments taken from an article written in 2012 titled “Building a Strong Economic and Financial Security Barrier for China.” It was published in Qiushi maganzine, the main academic journal of the Chinese Communist Party’s Central Committee:

“Gold now suffers from a ‘smokescreen’ designed by the United States, which stores 74 percent of global official gold reserves, to put down other currencies and maintain U.S. dollar hegemony. Going to the source, the rise of the U.S. dollar and British pound and later the euro from a single-country currency to a global or regional currency was supported by their huge gold reserves.”

Mr. Zhaoxue is very influential in monetary policy circles within China. In 2011, he received the economic person of the year award and is well known for advocating the importance of gold in promoting monetary strength and stability.

The rising frequency of such statements from various official Chinese sources makes it clear that the Middle Kingdom is becoming increasingly irritated with what it considers reckless U.S. monetary policy.
One such source is the Chinese news agency Xinhua, who published the following statement in August of 2011 with respect to the U.S.,

“International supervision over the issue [printing] of U.S. dollars should be introduced and a new, stable and secured global reserve currency may also be an option to avert a catastrophe caused by any single currency.”

The catastrophe Xinhua is concerned about is not hard to visualize if you are familiar with the severely skewed percentage of official foreign exchange reserves held in US dollars by the world’s central banks, as shown in the chart below.

Composition of Worldwide Foreign Exchange Reserves

Again from the 2012 commentary “Building a Strong Economic and Financial Security Barrier for China,” Sun Zhaoxue contextualizes the above chart wonderfully:

“Especially noteworthy is that in the course of this international financial crisis, the United States shows a huge financial deficit but it did not sell any of its gold reserves to reduce its debt. Instead it turned on the printer, massively increasing the U.S. dollar supply, making the wealth of those counties and regions with foreign reserves mainly denominated in U.S. dollars quickly diminish, in effect automatically reducing its own debt.”

In other words, Quantitative Easing (QE) is, at least in part, a means for the U.S. to quietly default on its debts without saying so.

China holds $1.27 trillion in U.S. Treasuries and other U.S. dollar denominated assets, making them the United States’ largest lender. As a result, the Chinese government is particularly sensitive to monetary policies affecting the value of their massive holdings.
Another critical facet of China’s concern is the fact that they are the world’s largest consumer of a wide variety of natural resources. The chart below highlights the country’s trade share of several major commodities. Notice China is well over 50% in gold and iron ore and approaching 50% of world trade for many others, and they are the 2^nd largest oil consumer behind the U.S..

Since the early 1970’s, starting with oil, the U.S. has used its economic and military muscle to coax the world into an odd arrangement that requires countries to buy natural resources with U.S. dollars. This means that for major commodities, countries must take the additional step of buying dollars before buying resources.
This state of affairs puts China in a difficult position. Although they have no shortage of U.S. dollars with which to buy resources, thanks to a perpetual trade surplus with its largest trading partner (the United States), they are especially susceptible to U.S. dollar risk from the U.S.’s aggressive dollar devaluation policy of QE-Infinity.

Given China’s voracious and growing appetite for commodities to feed a massive economy that’s finally coming of age, the current U.S. dollar dominant international monetary arrangement is no longer a viable option.

China’s demand for commodities is massive and continues to grow. At the same time, oceans of new U.S. dollars are being force fed into the global economy, which will ultimately put enormous inflationary pressure under prices.

China has clearly recognized their dollar risk and has responded by aggressively expanding the use of their currency, the renminbi (aka yuan), in international trade.

They are rapidly intensifying their efforts to provide not just themselves, but their global trading partners with an alternative to the inherent dollar trap built into the international commodity trade.
China is in essence developing an escape route for what they perceive as a looming currency crisis in connection with shortsighted US monetary policy and a dollar dominant world.

They are mitigating this issue in a couple of key ways, both of which we have written about before. They are expanding the use of the Renminbi in international trade while simultaneously developing a robust domestic gold market.

We Prefer Ours, Thanks Though…

On the currency front, currency swap agreements with major financial centers and trading partners make renminbi readily available to merchants through banks in their various home countries. This allows them to settle trades quickly and conveniently for natural resources without having to buy dollars.
These swap agreements lessen the necessity for central and commercial banks to hold U.S. dollars, thereby reducing exposure and the devaluation risk associated with holding the dollar.
China’s largest swap agreement is with South Korea in the amount of US$62.3 billion. Their second largest is with the European Central Bank in the amount of US$60.8 billion. These agreements are typically valid for three years and are renewable.

China has established swap agreements with 23 countries in all, totaling approximately US$412.6 billion, and the list of participating countries continues to grow.

List of countries that have concluded swap agreements with China-1

A New Trend Emerges

Another way the use of the renminbi has been expanding is through trade finance. This refers to the facilitation of capital in the form of cash, credit, investments, and other assets that is essential for international trade to flow.
According to the Society for Worldwide Interbank Financial Telecommunication, or as the organization is more commonly known, SWIFT, the Renminbi overtook the Euro in October to become the second-most used currency in trade finance.
And although the U.S. dollar is by far the most utilized currency for trade finance, representing 81.08% of worldwide transactions, there is a newly emerging trend since last year that is worth taking note of.
In January 2012, the renminbi accounted for just 1.89% of global trade finance. By October 2013, this percentage had risen 4.6 times to 8.66%. Over the same period the U.S. dollar fell in this category from 84.96% to 81.08%.

Below are two pie charts that highlight the change. It may not seem significant at first glance, but we believe it is fairly apparent that this is just the beginning of a tectonic shift in the international monetary order. Note the rapid expansion of the use of the Chinese yuan in just 22 months.

(Click on image to enlarge)

Anyone want to hazard a guess at what the pie chart will look like in another 22 months?

In response to this development Reuters reported that, “[T]he world’s second-largest economy [China] is accelerating the pace of financial reform to promote its currency to international players beyond Hong Kong. China aims to lift the yuan’s global clout and reduce its reliance on the U.S. dollar.” [Emphasis added]

China = Gold

As discussed above, China is concerned about the quality of its foreign exchange portfolio, especially the sizeable component made up of U.S. dollars. Because of this, they are aggressively working to diversify both their foreign exchange reserves and their citizens away from dollars by developing the largest gold market in the world.
We have repeated ad nauseam the fact that China is now the world’s large producer and consumer of gold…by far.
They have not only opened the golden floodgates via production and imports, but they are also developing the laws, institutions, exchanges, financial vehicles, and incentives to encourage large-scale gold trade and ownership by its citizens.
At the same time, the People’s Bank of China (PBOC) is accumulating gold reserves at an unprecedented pace in an effort to diversify its U.S. dollar dominant foreign exchange reserves.
The PBOC is estimated to add 600 tonnes of gold to their reserves by the end of this year, which is roughly 25% of the world annual mine production (excluding China’s production).
In association with substantial PBOC purchases, China’s net gold imports from Hong Kong in October were 131.19 tonnes, the second-highest import month on record.
Taking into consideration this latest data, China has now imported, through Hong Kong alone, 1,586 tonnes of gold, or 66% of annual mine supply (again excluding China’s production).
To conclude this week’s commentary on the Chinese gold market, we would like to revisit an article we published back in July titled “China to Buy Barrick Gold.”
The synopsis of that piece was that China’s hunger for gold and its stated strategic initiatives for developing their gold market would lead them inevitably to secure part of this gold supply through the acquisition of a major gold producer. The logical target we posited at the time was mega-major Barrick Gold Corp.
This week, Barrick’s board announced that John Thornton, a former president of Goldman Sachs, would be their next chairman. In an effort to right Barrick’s many woes, Mr. Thornton is reportedly trying to establish partnerships with Chinese companies.

One potentially interested party is rumoured to be China Investment Corp. (CIC), the sovereign wealth fund responsible for investing China’s massive foreign exchange reserves. Mr. Thornton just happens to be a member of their international advisory board.
It’s probably just a matter of time now.

The Writing is on the Wall

“The writing is on the wall” is an idiom for “imminent doom or misfortune” suggesting “the future is predetermined.”

We believe China sees “the writing on the wall” in regard to the U.S. dollar and is taking action to position themselves for a new international monetary regime. This suggestion is echoed in a statement made by Liu Zhongbo of the Agricultural Bank of China in January of this year:

“Because gold has capabilities to absorb external economic shocks, growth of its use in the international monetary system will be imminent”

This statement suggests that China expects a monetary shift to happen sooner rather than later. Their aggressive push to internationalize the renminbi and back it with substantial gold reserves, along with their sustained commitment to opening up and building the infrastructure for world leading domestic gold market, supports this contention.
China is taking concrete steps toward reintroducing gold to the world as a core component of monetary, trade, and global economic stability. Given China’s economic heft, particularly in the realm of natural resources, this is bullish for gold and puts a very strong patron squarely in the yellow metal’s corner.
In this context, we believe that gold generally, and the shares of gold mining equities in particular, are deeply undervalued. To help us separate the wheat from the chaff, we developed our Gold Miners Comparative Analysis Table, which has a multitude of critical metrics to use in evaluating and comparing gold mining companies.
In the pages of our newsletter we educate our subscribers on what to look for when discerning between the different gold miners and guide them towards those that suit their individual appetites for risk.

China's Impact on Gold Prices in 2014

Published on: Jumat, 07 Februari 2014 in Asian, fundamental analysis, gold, Market Analysis, Market News, market watch

Gold prices, as yet, remain unmoved by the Chinese New Year of the Horse...

WHAT should gold investors and traders expect from the Chinese New Year, marked with near-month long celebrations from tomorrow? asks Adrian Ash at Bullionvault, now in Chinese.

First, expect yet more press coverage of housewives and single young men buying gold hand over fist to mark the start of the Year of the Horse.

Expect also to learn that China is (drum-roll please) the world's No.1 gold miner and No.1 consumer, but not why (the long collapse of South African output, and the 2013 collapse of Indian imports thanks to the government's attack on the trade deficit).

The lunar New Year marks an auspicious time to buy gold, you'll be told. It also marks a retail frenzy, pictures from Shanghai and Shenzen shopping malls will show.

But will that push gold and silver higher?

Nope. The New Year move in world prices would have already come if it mattered, before the celebrations, not when shoppers hurry home with their treasure. Sure, wholesale demand from Chinese stockists did indeed seem to coincide with January 2014's rising bid for gold. But in terms of China's impact on world gold prices, the inflows themselves would have come earlier, giving importers time to arrange and land new shipments. Which they did. Only prices fell.

There was a "rapid rise in local inventory in August-November 2013 by local traders," as consultancy Metals Focus notes, "in order to avoid running out of stocks before the Chinese New Year." November and December then both saw gold imports through Hong Kong, the major point of entry, fall below 100 tonnes per month (net of re-exports). Lower Chinese import demand did coincide with a nasty retreat in the world gold price, back towards the three-year lows set in mid-2013. But whatever relationship China's import demand had on world gold prices, its impact was again far from simple. Because premiums for gold delivered from the Shanghai Gold Exchange, over and above world prices, again spiked as gold hit $1180 per ounce, rising to $20 after hitting $30 per ounce at the same mid-summer low.

Might that Chinese premium reflect the impact which China would have on gold prices if only the world followed Shanghai as its benchmark rather than London? If so, then the world's No.1 mining nation and physical buyer would still have done little to stem 2013's slump in gold prices. The end-June premium would scarcely have kept prices above $1200 per ounce at the low. And yet China's importers bought gold hand over fist to feed its wholesalers who met unprecedented household demand.

What gives? The simplest explanation, we suggest, is that final end-consumer gold buying doesn't move world prices. Not from people who buy gold because it is gold. They tend to want more when prices fall, and vice versa. The people who count are instead those who buy gold because it isn't anything else.

Witness the loss of India, former world No.1, in mid-2013. Driven by religious, cultural and social forces running back to pre-Roman times, Indian households were on track for a record year as prices slumped last spring. Because prices were slumping.

That huge call on physical gold then got cut off from the world market by the government's anti-import rules (aimed at reducing India's massive trade deficit). Yet the back-half of 2013 then saw sideways price action overall. Gold ended December back where it was at the end of June, which was when India's import restrictions (effectively a ban) really got started.

Now, just as the loss of India failed to pull prices lower (and even with India locked out of new imports ahead of Diwali, its own peak demand season), so China's New Year surge won't reverse much of last year's slump. Not yet.

Money managers in the developed West continue to drive, moving prices by pouring in cash (or sucking it out) that would otherwise go into other, financial assets. Remember how last year's crash was all done by midsummer? Seventy per cent of the 550 tonnes of gold leaving the giant New York-listed SDPR Gold Trust in 2013 was gone by end-June. Speculators in US gold futures and options had by then slashed their net bullish position by four-fifths, cutting it to what proved the low for 2013, equal to barely 100 tonnes.

What might give China's demand to buy gold more impact on prices this year? Analysts are split either way. One calls it "make or break" for gold in 2014. But they are all watching what the world's new No.1 is doing very closely.

And with Western money managers cutting their interest in gold to levels last seen at the bottom of the previous 20-year bear market, the sheer weight of China's wealth might start to count soon. After all, per head of the population, the world's second-largest economy creates GDP more than four times the size of India's, the former gold No.1.

What's more, China's fast-growing middle-class is set to enjoy a new, broader range of financial services products to choose from. Late 2013's third plenum of the current politburo made "market-based reform" a top priority.

Some gold analysts think wider financial choices mean Chinese investors and households will buy less gold. That's a guess. But it would most certainly mean people stop buying gold for its own sake, and can start buying (or selling it) because of what they expect will happen to other, financial asset classes.

Already, the growth in China's gold demand since deregulation began in 2002 has been extraordinary:

China's GDP has grown four-fold over the last decade; private gold demand by value has risen 15 times;
On top of being the world's No.1 gold mining nation, China almost doubled its net imports in 2013 to more than 1,000 tonnes;
That's five times the weight the country consumed as a whole in 2002, and pretty much matched the outflow of metal from Western gold funds and private accounts.

Why did 2013 gold prices sink then, pulling silver down too?

Because China's private households remain, in the main, a gold consumer, not investor. So they are price takers, not price setters, as leading analyst (and now Hong Kong-based) Philip Klapwijk put it in this presentation in December.

Speculation (whether from Western journalists or analysts) that China's surging 2013 demand included gold buying by Beijing's central bank still leads to the same conclusion. The People's Bank would a price taker, and happy to be so when prices drop 30% in a year. If only it were a buyer. Which on its own balance-sheet, and in its public statements (repeating a long-stated desire not to drive prices higher...hurting would-be household buyers...by unleashing Western speculative dollars into the market), it made plain it wasn't in 2013. The PBoC added no gold to its reported reserves for the fourth year running.

Still, looking back to the last adjustment in 2009, that's not to say another state agency didn't buy gold in 2013, and now holds that metal ready for the PBoC to take into reserves sometime in future.

Equally uncertain, but a Beijing-based rumor instead, is that the politburo has opened up China's gold-import quotas to foreign banks for the first time. Letting HSBC and ANZ Bank import gold won't necessarily support or grow the level of gold demand this year. But it plainly shows the Communist regime is serious about liberalizing China's gold market, and about ensuring future supplies.

Now why would the bureaucrats in charge of the world's second-largest economy want to do that?

Back to this weekend, and Chinese New Year will likely mark the peak season for household gold buying. The Year of the Horse starts Friday 31 January 2014, but the lunar cycle can push Xīnnián back to late February. And by value, China's private end-consumer demand over the first 3 months of the Western calendar year has set new quarterly records 11 times in the last 12 years.

At current prices, a new record for the first quarter of 2014 would see Chinese households and investors buy more than 385 tonnes of gold. And yet here we are, with gold recovering a mere 7% from its second trip to $1180...a level first seen on the way up in December 2009.

Yes, public statements from People's Bank officials have put the gold market at the heart of China's broader financial reforms. So both at the household and state level, China's affinity with physical gold looks set to keep growing. And yes, Beijing also continues to open up its domestic gold market, inviting foreign banks to join the Shanghai Gold Exchange and now (perhaps) inviting a couple to start shipping bullion into the Middle Kingdom as well.

That would cut both ways, bringing more influence to the global market from the world's No.1 gold miner and end-consumer economy. But there's no rush. The PBoC remains wary of encouraging Western speculators to boost prices on word that it's buying for China's reserves. Instead, Beijing continues to allow and encourage private households – whose demand doesn't as yet touch the world wholesale price – to accumulate growing quantities at record values.

If you feel that's smart long-term thinking, then it might also be smart to think about holding a little of your long-term money in the same stuff. Certainly here at Bullionvault, Chinese speakers the world over offer a market we'd be pleased to assist.

Source: http://goldnews.bullionvault.com/china-gold-012920142

The largest traders in the Chinese gold market

Published on: in Asian, gold, Market News, news

Last week we released a report that looked in to the depths of the Shanghai Gold Market. In the report we revealed the volumes that pass through the exchange as well as the huge amounts of delivery taking place.
We concluded that the SGE would not yet be a force for competition when it came to the New York and London Gold powers of price discovery. But it could, however drive that wedge between the paper and physical gold market.
We now ask who it is that is driving this wedge and are they consistently buying up, or selling down, gold. So we turn our attention to those who are participating in this market.
In our previous article we outlined the levels of participation on the Shanghai Gold Exchange. We quoted the Chairman and President of the Exchange who said, ‘though institutional clients are still the most important participants in the market the market share of individual investors has soared in recent years.’ The graph below is not just institutional investors but those who were make up the top ten market participants. However as our research shows, individuals barely touch the trades coming from institutions.

Since 2011, the following names have dominated the top ten total gold trading table on the Shanghai Gold Exchange. We have calculated the data in the following tables and graphs by taking each of the SGE’s top ten tables for total gold trading, buying and selling. We have then taken the amounts (in kg) each member traded across the months and worked out a percentage representation of the total volumes traded in the 30-month period.
The data shows which institutions feature and account for more than 1% of volumes of the ten largest traders, and also what percentage of activity they accounted for withinthe ten largest traders. There were approximately 45 institutions featured.

Total gold trading

It is clear that whilst individual investors may well be taking up more room on the exchange, there are a few major institutions who represent the lion’s share of the volumes, namely Bank of China and ICBC.
In terms of total gold trading, Bank of China accounted for over 21% of the largest ten members’ activity between January 2011 and June 2013. They were swiftly followed by ICBC and ICBC Personal.

	% proportion of top ten active members in total gold trading
Bank of China	21.78
ICBC Personal	13.23
ICBC	6.32
China Gold	6.32
Agricultural Bank of China	5.92
Construction Bank	5.59
Shanghai Pudong Development Bank	4.98
Societe Generale personal	4.12
Shandong Mining	3.54
Minsheng Bank	3.32
Bank of Communications	3.03
Bank of Shanghai	2.93
Zhaojin Group	2.70
Individual	1.58
ANZ	1.32
Industrial Personal	1.26
Shanghai Banking	1.14
Zijin Mining	1.13

NB: Due to putting SGE data through Google Translate there seemed to be a difference between ICBC and ICBC personal. There may also be some misnamed institutions

Individually ICBC and ICBC Personal accounted for 13.2% and 6.3% (respectively) of total gold activity in the period covered. If, as we suspect, they are the same organisation then they still fail to overtake Bank of China.
Note, no foreign banks make it into the top five of those who accounted for the most activity on the exchange. Societe Generale account for less than a fifth of Bank of China’s total activity. ‘Individual’ we take to mean non-institutional and they top the only other foreign institution, ANZ, in terms of activity on the exchange.

Whose buying gold?

When it comes to the ten largest participants in the buy side of the market on the exchange the story hasn’t changed by much. The Bank of China continue to lead the race, accounting for over 17% of the volumes from the ten largest traders going through the exchange in the last 30 months. Once again ICBC and ICBC personal quickly follow up the Bank of China, with 14.7% and 7.12%, should these two be combined then they overtake Bank of China by a significant percentage, over 4%.

	% proportion of top ten active members (bid)
Bank of China	17.88
ICBC Personal	14.75
ICBC	7.12
Societe Generale personal	5.85
Shanghai Pudong Development Bank	5.36
China Gold	4.81
Construction Bank	4.35
Agricultural Bank of China	4.17
Chinese Gold	4.15
Zhaojin Group	2.78
Old Phoenix	2.59
Shandong Mining	2.42
Bank of Communications	2.36
Bank of Shanghai	2.28
ANZ	1.97
Shenzhen Greenery	1.86
Shanghai Bank	1.69
Shenzhen Public Hang Lung	1.41
Industrial Bank	1.21
Minsheng Bank	1.20

However, one thing that is interesting to note is that Societe Generale has a larger presence in the buy side of the market, than it does in overall volumes.
Meanwhile on the sell side of the market Bank of China dominate once again, with 23% with ICBC Personal quickly following them with over 13%.

	% proportion of top ten active members (Offer)
Bank of China	23.68
ICBC Personal	13.29
Agricultural Bank of China	7.23
Construction Bank	5.91
Societe Generale personal	5.32
Minsheng Bank	5.09
Shandong Mining	4.61
ICBC	4.48
Shanghai Pudong Development Bank	3.30
Shanghai Bank	3.28
Zhaojin Group	2.62
Bank of Communications	2.52
China Gold	2.46
Zijin Mining	2.01
Bank of Shanghai	1.58
Industrial Bank	1.50
ANZ	1.35

Just to give you a quick insight into the changes in those participating on the exchange we bring you three snapshots of the top ten largest traders in the buy-side of the gold market over the last 30-months.

Interestingly the Bank of China has fallen a position in each year, accounting for less and less of the total bid each time. Whilst 2013’s data only accounts for 6-months, the difference in total bid participation between now and 2011 has fallen by over 6%. In contrast ICBC has managed to climb positions.
Another interesting point of note is that both Societe Generale and ANZ have fallen out of the top buyers this year. In fact, ANZ does not feature at all in the 2013 data.

Concluding remarks

As we said previously in our opening comments, we do not believe that the Shangai Gold Exchange is in a position to impact the international gold price in a dominant way quite yet.
However, it is interesting to take note of who the main players are in this market. Given the power JP Morgan et al are said to have in the paper gold market and the price of gold, we suspect their Chinese contemporaries are also going to be significant in the future. Particularly as we suspect pushing up the value of the dollar will not be at the top of their remit.

Source : http://therealasset.co.uk/traders-chinese-gold-market/

China hates to back down from a fight

Published on: Selasa, 04 Februari 2014 in Asian, Market News, market watch

Good economic sense may not stop China from retaliating against Japan’s devaluation of the yen

China hates to back down from a fight, especially against its most reviled opponent, Japan. But while the two countries trade political barbs regularly, they are hardly at odds economically. The two countries cooperate in many industries and occupy different places in global supply chains with Japan operating in higher-value sectors befitting a developed country and China still geared toward less complex exports, such as more basic electronic components, and product assembly.

However, the countries may now be on an economic collision course. Japan set out to massively devalue the yen at the end of 2012 as part of an effort to end more than a decade of economic stagnation and deflation. Since the currency first began its march downward in October, the yen has weakened roughly 22% against the renminbi and US dollar.

Japan’s new Prime Minister Shinzo Abe has continued to back devaluation efforts after his election in December. The value of the yen will likely continue to fall: Bank of Japan’s massive monetary easing announced April 4 will inject as much money into the financial system as needed to hit 2% annual inflation. The weaker currency appears to be already working its magic on the economy. The countries nagging trade deficit declined, particularly in relation to China, and incoming investment increased in February to create a current-account surplus.

China itself has long been under pressure from the US and others for maintaining currency controls and allegedly keeping the value of the renminbi artificially low. But despite the hypocrisy, Chinese officials have blasted the devaluation as passing off the country’s economic ills on its neighbors and warned that Japan should not start a currency war.

Analysts say China may slow or reverse the gradual appreciation of the renminbi in retaliation, although any moves to devalue the yuan have been minor and short-lived to date. Beijing is undoubtedly displeased with American hypocrisy as well: While the House of Representatives has launched a new bill to pressure China into allowing the yuan to appreciate, lawmakers have hardly reacted to Japan’s much larger currency intervention.

Chinese leaders may not like it, but this is one battle in which they should back down. All currency manipulators are not created equal and examining Japan’s justification for devaluation spells out clearly why the world is correct to ignore the yen and maintain pressure on China.

The Chinese populace generally bristles at any perceived affront by the Japanese as psychological wounds from World War II continue to fester. The more China makes this economic problem into a political dispute with Japan, the less able Beijing will be to back down. If leaders go down that road, politics may yet trump good economic sense.

Why we fight

Few countries look good in the currency debate, and there is more than enough hypocrisy to go around. “With central banks in advanced economies themselves pursuing unconventional monetary policies that appear to deliberately weaken their domestic currency, who is in a position of moral authority to mediate currency tensions?” asked investment bank Citi in a January note when the currency battle was just taking off.

While there are hardly ethical absolutes in currency manipulation, Japan has certainly done enough economic penance to gain some moral authority to take action. The country has suffered bouts of deflation since the 1990s when its economy overheated and stalled coming off the booming ’80s.

Japan has borrowed and spent to hold back already large declines in nominal GDP. That path is not sustainable as Japan’s debt has now ballooned to more than 200% of GDP.

After decades of economic stagnation and rising debts, Japan simply needed to do something to escape this spiral. The Bank of Japan and the country’s leadership sees its massive monetary easing as a way to boost inflation, pushing up nominal GDP growth while pushing down the value of the yen.

What’s China got to do with it?

The Chinese worry that Japanese devaluation could affect them on several fronts. First, it could damage China’s export competitiveness with Japan. However, this concern is likely overplayed, since China and Japan make few of the same products. According to a Citi report in January, Korea stands to lose out most because it competes with the Japan on cars, followed by Taiwan and Singapore which will be hurt by cheaper Japanese electronics.

Second, Chinese may worry that Japanese inflation will push up China’s own inflation. As HSBC phrased it in a note immediately after Japan’s central bank announced its monetary easing scheme: “This is not just a Japan story: Liquidity will pour into regional financial markets already drowning in the stuff.” Money generally flows into emerging markets when inflation rises as investors seek out higher returns. But with China still firmly in control of cross-border capital flows and its exchange rate, this threat too seems overplayed.

Last, but perhaps more important, is not how yen devaluation actually affects China but how it makes China look. The US continues to put pressure on China to allow the renminbi to rise, including the bill currently being considered in the House. The Obama administration did criticize Japan for devaluing its currency in its semiannual report on exchange rates released Friday, but the closer relationship and lack of perceived economic threat compared to China means that Japan is unlikely to see similar vitriol in Congress. With the US and Europe also in the midst of monetary easing, which pushed down the values of their currency, Chinese leaders likely think they’re being unfairly singled out.

China may be right on that account. However, that’s not sufficient reason to oppose these devaluations. The dire straits that Europe, Japan and the US are now facing demand that these economies do something to restore growth. In the end, if easing and devaluation helps these economies back on their feet, the global economy as a whole stands to benefit – including China. These efforts are simply a necessary short-term evil. In the meantime, China’s economy remains relatively robust, giving it little reason beyond political posturing to justify holding down its currency.

Playing to a Chinese audience

For now, China will likely continue to complain but take only token actions to retaliate against Japan. The risk remains, however, that Chinese rhetoric could turn into a full-blown currency war. If China reverses on yuan appreciation and virtually all of the world’s largest economies are devaluing in unison, it could lead to devastating global inflation. But the more Chinese leaders turn the discussion into an us-versus-Japan debate, the less it can back down without looking weak to a domestic audience.

Beijing will likely keep their rhetoric on currency to a low roar unless another conflict with Japan arises – a very real possibility if tensions over disputed islands in the East China Sea flare up again. Those tensions over the Diaoyu/Senkaku islands drew mass boycotts and vandalism of Japanese companies in the mainland late last year. If such fierce anti-Japanese sentiment rears its head again, China will be even less able to back down in any respect, including on the currency, or risk appearing weak to its citizens.

Therefore, all sides should seek to maintain the current status quo. China can continue to make remarks and take the moral high ground on the currency. The US should keep up mild pressure on China to continue allowing the yuan to appreciate. Japan, for its part, should seek to diffuse tensions with China in the East China Sea in the midst of its devaluation.

All this will allow China to maintain face, which will be the best way to keep the peace on currency. To some observers, China’s lack of retaliation may be seen as conceding ground to Japan. But Chinese leaders likely won’t consider it as backing down against its historic enemy, so long as the Chinese public doesn’t see it that way.

China's Stealth Move in the Currency Wars

Published on: Senin, 03 Februari 2014 in Asian, fundamental analysis, Market News, market watch

Five years on from the Great Financial Crisis and whilst it might feel like little's changed for us as individuals, different nations and their central banks are engaged in heated currency wars. In a race for exports and to inflate away huge debts it often looks like a game to print as fast as you can.
However, amidst all this China is stealthily pursuing another strategy, little noticed by most in the West.
Whilst ensuring her banking system has sufficient liquidity, China is quietly accumulating stunning amounts of gold bullion. The Chinese authorities are also actively encouraging their citizens to stock up on gold bars too. Some of the most powerful politicians, bankers and academics in China are overseeing China's gold plan.
China has identified gold as a strategic financial asset and is acting on this conviction.

Explaining China's gold fever

Like many exporting, mercantile nations China has been building up large reserves in other currencies, most notably in US dollars. Like other holders of dollars China is vulnerable to Federal Reserve money printing, which devalues her hard earned national savings. After experiencing such devaluations in her savings, and with the long-term goal of launching the yuan as a global, reserve currency, China has naturally looked for alternative savings, less affected by inflation. Hence the focus on gold.
This is not something China has done in a knee-jerk reaction after the crisis of 2008, although this phenomenon has got a lot more impressive to behold since then.
In the late 1990s China was already paving the way for more use of gold in the Chinese economy and banking system. In the early 2000s things started to hot up, before even greater developments over the last five years really attracted attention. This infographic shows the trend evolving.

What's the end game for China?

In the short term China is looking to safeguard the value of her reserves, whilst in the medium and long-term she is looking to grow beyond American and Western financial power.
To meet her goals in the short-term China has not just been buying gold but also mines and mineral interests around the world. She wants to own real assets during a time of heavy currency debasement.
In the longer term gold is a crucial part of her strategy too.
Understanding the power and privilege of owning the world's reserve currency - something the Americans have enjoyed for over 50 years - China is looking to make the yuan a challenger to the US dollar. China wants a future where more trade is conducted with her currency than the dollar and to achieve this she needs to make her own currency the more attractive option to use.

Replacing the dollar

To make the yuan more attractive than the dollar China needs investors and speculators around the world to believe the yuan is safer and sounder.
China can achieve this by printing less and restricting supply of her currency, making it relatively more attractive compared to other more debased alternatives.
China can also back the yuan with gold, as the British pound and US dollar were for great stretches of their dominance. Holders of yuan can then go to the Chinese central bank and trade it in for gold bullion if they think supply of the currency is not being managed responsibly enough. This is why many in the gold market believe China is piling up gold in the vaults of the Peoples' Bank of China.
China is going back to the old-school when it comes to money.
Although this trend is something much commented upon in niche, gold market circles, it's amazing how little of the wider public are aware of what China is really up to here.
China has identified gold as one of the trump cards in the currency wars. She's now hard at work making her trump cards count.

Why China wants low Gold prices?

Published on: in Asian, gold, Market News, market watch

One question that has not been asked sufficiently is, “How can China buy well over 2,000 tonnes of gold without sending the gold price rocketing?”

In the U.S. people believe that the gold price will fall even further in 2014 despite indications that Chinese demand will continue at current high levels if not rise even more. This is because U.S. investors have been selling gold to move into the rising equity market. With the developed world focused on events in its own part of the world it is assumed that their influence will dominate the financial world including gold. But this ignores events in the emerging world and their hunger for gold.

With ‘normal’ annual supply to the gold market around 4,000 tonnes annually you would have thought that such a heavy Chinese demand would have propelled gold prices higher. But it didn’t. We have explained why in earlier articles last year. We will write more about this in the future, but in this article we will look at just why the Chinese prefer to see low prices continue.

There are two primary reasons why they want low prices to continue:

1) It encourages Chinese retail demand. - With Chinese middle class numbers set to rise considerably as the government there pushes their growth emphasis to the service sector, more and more Chinese will save and a good proportion of that will go into gold. So low gold prices will accelerate the volume of gold bought. Higher prices lower the overall volume of gold bought. The nouveau riche of China will invests in relation to the size of their disposable income, so the more gold they can afford with that, the greater the total volume bought.

2) It has increased the supply of gold to China. - Low gold prices has discouraged developed world demand and encouraged more selling of gold in 2013, making a greater volume of gold supply to be made available for the Chinese to buy as it implies that the rest of the world’s gold demand remains subdued. Add to this is the choking off of Indian demand since August 2013, taking the now second largest gold buyer out of the market. Over a year this would remove 800+ tonnes of demand from the market.

As simple market theory tells us, the greater the demand over supply is, the higher gold prices will rise. So how can one buy gold in huge quantities without driving up gold prices? The answer has to be by buying gold outside the market and not buying in the market where gold prices are set. Another answer is to ensure that where one does buy in a market where prices are set, one buys “on the dip”. In other words don’t buy when prices are rising, buy when they are falling and only take the gold that is on offer in the market.

Market Fragmentation

We know that China has and is buying gold mines and can direct the gold of those mines straight to China.

We also know that many gold producers, such as South Africa, are not bound to sell their gold to the London market or direct it to any market [such as they sold to the ‘gold pool’ in the seventies] in particular but can sell to anyone they want.

Traditionally, bullion banks made buying commitments to certain mints and producers to supply gold on a long-term basis, but today they do not have the same hold on newly mined gold, which can go to any solid buyer. A client like a non-banking Chinese importer for large quantities over a lengthy period is as attractive a client now as the bullion bank.

The price paid to the supplier is referenced to the market prices at the time of delivery. Because the gold does not pass through the London gold market it no longer plays a part in determining prices. The more gold that is bought that way [off market], the smaller the London/New York market becomes.

This leaves market like London and its five bullion banks pricing gold on the basis of only part of the global market, so not truly reflecting global demand and supply. If both demand and supply in the traditional markets, such as London, is lackluster the gold prices set there will continue to look weak, despite the massive and rising demand elsewhere.

Indian demand is routed through London, so the loss of such a big buyer knocked the stuffing out of London’s demand. Add to that U.S. selling [also routed through HSBC to London] and it is no wonder that prices fell in 2013. Should Indian demand return once more then gold prices will turn higher.

The loss of traditional demand from India and the additional supply of gold from the U.S. has supported falling or stable low gold prices in London and will continue to do so, ignoring Chinese demand.

We have no doubt that China will continue to buy in a way so as to be a neutral influence on gold prices in 2014.

Agreement between the U.S. and China for lower gold prices?

Some commentators believe there is an agreement between China and the U.S. to suppress gold prices. It is a matter of history that the U.S. does not want gold to be seen as money, but wants the world to believe that the dollar is. China is moving towards elevating the Yuan to a position of a global reserve currency. It appreciates the monetary turbulence that this will bring as the Yuan challenges the dollar and becomes part of a multi-currency reserve currency system. That’s why it is buying gold as a factor that will give the Yuan global credibility. China, once it has acquired a certain level of gold reserves [it will keep increasing them after this point is reached], has every interest in seeing the gold price rise to a point where it is a reflection of true value, whereas the U.S. does not.

Consequently, the two do not have the same objectives or interests as the other. Hence, there can be no agreement between the two to suppress gold. Rather, China is taking advantage of the current state of the gold market and the persistent selling of gold from the U.S. based gold Exchange Traded Funds to acquire the gold that is being sold ‘on the dips’, so as to not drive gold prices higher.

Japan reports record annual trade deficit as energy prices soar

Published on: in Asian, fundamental analysis, Market News

Japan’s trade deficit has hit an all-time high as imports were swollen by higher energy prices and a weak yen.

Prime minister Shinzo Abe has been bidding to boost the Japanese economy with the help of huge monetary stimulus and public spending.

But import costs have risen and the country’s nuclear shutdown since the 2011 tsunami triggered a meltdown at the Fukushima plant, has increased Japan’s reliance on energy imports.

The trade deficit hit a 11.47 trillion yen (£68 billion) last year as exports rose 9.5 per cent but imports jumped 15 per cent.

It marks a third straight year of deficit in Japan — the country’s longest run on record — and comes after a trade gap of 6.94 trillion yen was posted in 2012.

The weak rupiah has caused Indonesia’s inflation rate to roughly double since the start of 2013

Published on: Kamis, 16 Januari 2014 in Asian, Indonesian Economy

The archipelago nation of Indonesia is part of the emerging markets bubble. The emerging markets bubble started inflating in 2009 as China embarked on an aggressive credit-driven construction and infrastructure boom that led to a surge in demand for raw materials, many of which are exported by emerging market nations. The growing commodities export boom bolstered the fortunes of EM nations, which piqued the interest of investors who were looking to diversify away from hard-hit Western economies.

Ultra-low interest rates in ailing developed economies combined with the Federal Reserve’s multi-trillion dollar QE programs led to a $4 trillion tsunami of “hot money” flowing into emerging market assets in the four years after the Great Recession ended.

A global carry trade developed in which investors borrowed cheaply from the U.S. and Japan, and plowed the proceeds into higher-yielding EM assets, especially bonds, while earning the difference or the “spread.” The surge of liquidity into emerging market assets created a bond bubble, which helped to push borrowing costs to abnormally low levels for such fast-growing economies, which in turn enabled a government-driven infrastructure spending boom, explosive credit growth, and property bubbles across the emerging world.

Massive capital inflows into Indonesia after the 2008 Credit Crunch contributed to a nearly 50 percent rise in the rupiah currency’s exchange rate against the U.S. dollar, and pushed the country’s 10-year government bond yields down to record lows of 5 percent from their 10 to 15 percent pre-Crisis range. In just two years, foreign holdings of Indonesian local currency government bonds rose from 14 percent to 34 percent, while the country’s external debt nearly doubled:

Foreign direct investment (net inflows, current dollars) more than tripled:

Source: IndexMundi.com

During this time, Indonesian equities quintupled:

The surging rupiah caused Bank Indonesia, the country’s central bank, to cut their benchmark interest rate from 12.75 percent to just 5.75 percent to stem export-harming currency appreciation:

Indonesia’s Growth Is Fueled By A Credit Bubble

Record low interest rates have fueled an epic credit and consumption boom in Indonesia, which is no small matter given the fact that domestic consumer spending accounts for nearly 60 percent of the country’s overall $878 billion economy. For the past half-decade, Indonesia’s annual GDP growth rate has averaged about 6 percent – the fastest in Southeast Asia – thanks largely to their consumer spending boom.

According to Moody’s, Indonesia’s compound credit loan growth rate has been over 22% for the past six years, while non-mortgage consumer credit nearly tripled in the last five years. During this time, credit card use has greatly proliferated, with the number of credit cards jumping by 60 percent, while the actual value of transactions almost tripled. Fears of a consumer debt crisis forced Bank Indonesia to limit the number of credit cards a single person is allowed to hold, while barring Indonesians who earn less than $330 (USD) a month from being issued credit cards.

The chart of loans to Indonesia’s private sector provides a graphical view of Indonesia’s credit bubble:

Domestic credit to Indonesia’s private sector as a percentage of GDP shows that leverage has been increasing as well:

With such rapid consumer credit growth, it’s unsurprising to see a concomitant rise in consumer spending:

Automobile registrations have more than tripled since 2004:

International automakers including Nissan, Toyota and General Motors have taken notice of Indonesia’s automobile boom, and committed up to $2 billion to expand their manufacturing operations in the country in the next few years. Cheap financing has also been fueling a surge in motorbike sales, an indicator of domestic consumption, which grew 13.9 percent in August from a year earlier, after growing 21.3 percent in July. Retail sales that have been growing at an annual rate of 10 to 15 percent in recent years have attracted numerous Western consumer brands like L’Oreal, Unilever and Nestle that are seeking to cash in on Indonesia’s spending boom.

Indonesia Also Has A Property Bubble

Cheap credit and property bubbles go hand in hand, and Indonesia’s bubble economy is no exception. Though data for all Indonesian property markets are scarce, property markets in Jakarta and Bali are becoming frothy, especially at the higher end of the market. Jakarta condominium prices rose between 11 and 17 percent on average between the first half of 2012 and 2013, after rising by more than 50 percent since late 2008. Luxury real estate prices in Jakarta soared by 38 percent in 2012, while luxury properties in Bali rose by 20 percent – the strongest price increases of all global luxury housing markets. A small two-room apartment on the outskirts of Jakarta can cost nearly $80,000 USD (RM253,373), making housing unaffordable for many ordinary Indonesians.

The surge in real estate activity spurred a 70 percent rally in Indonesian property shares in the first five months of 2013 (though they have sold off since then). Even Indonesia’s central bank has become worried about a property and credit bubble, causing them to issue new rules to curb speculation, including mandating a minimum 40 percent down payment for the purchase of a second house or apartment (bigger than 70 m²).

Bank Indonesia has plenty to worry about when it comes to a mortgage bubble: from June 2012 to May 2013, outstanding loans for apartment purchases nearly doubled from IDR 6.56 trillion (USD $659.3 million) to IDR 11.42 trillion (USD $1.15 billion). In July, the Bali branch of Bank Indonesia gave a warning that it was “on alert” for a possible bursting of the island’s property bubble. Indonesian property boom apologists cite soaring incomes and economic growth as a justification for the rise of property prices, but the problem with their logic is that the country’s economic growth itself is being buoyed by a credit-driven bubble.

Indonesia’s Bubble Is A Derivative Of China’s Bubble

While domestic consumption accounts for nearly two-thirds of Indonesia’s economy, raw materials account for much of the other third. Unfortunately, this part of Indonesia’s economy is also experiencing a bubble due to its reliance upon exports to China. In recent years, China has been building countless empty “ghost cities” and other wildly ambitious infrastructure projects for the sake of boosting economic growth, much of which is funded by a teetering multi-trillion dollar debt bubble. Indonesia provides a good portion of China’s coal needs, which have boosted the country’s exports:

The popping of China’s bubble will hit Indonesia’s export sector very hard (Australia’s as well), and the recent decline of the country’s exports due to China’s slowdown is a preview of what is ahead. The fading of Indonesia’s export boom has already contributed to the country’s record trade deficit:

Indonesia’s growing trade deficit and this past summer’s taper scare caused a panic in the country’s financial markets that pushed the rupiah currency down 13 percent, their stock market down 25 percent, and sent yields on their 10 year government bond to nearly 9 percent from 5 percent in just a few months. Though Indonesian financial markets have recovered slightly on the Fed’s taper delay, this doesn’t mean that the country is out of the woods – relief rallies are very common after violent market routs. Indonesia and other EM financial markets’ extreme sensitivity to U.S. monetary policy only serves to reinforce the assertion that the emerging markets bubble is driven by speculative “hot money.”

From a technical analysis standpoint, the Jakarta Stock Price Index (JCI) broke below its five year old rising trendline, which is hardly a positive sign and may indicate more declines ahead. The relief rally of the past month simply took the index back to its former trendline, which is now a resistance level. After breaking below important trendlines, markets often rally back up to those levels before embarking on their next leg down. Taper fears are likely to flare up again soon, which could be a catalyst for another decline. (However, if the index can break back above the trendline, the bearish signal would be invalidated.)

Indonesian Stock Market Technical Analysis

The weak rupiah has caused Indonesia’s inflation rate to roughly double since the start of 2013, which forced their central bank to raise its benchmark interest rate from 5.75 percent to 7.25 percent. (The chart below is the U.S. dollar to rupiah exchange rate)

My primary concern is that rising interest rates across the Indonesian yield curve will eventually pop the country’s property and credit bubbles – after all, it was record-low interest rates that caused them in the first place (just like the U.S.’ bubble from 2003-2007). The strong possibility of an Indonesian credit downgrade in the near future is another bearish catalyst to be mindful of.