Tags: China

Diamond Miners in Zimbabwe Told to Sell Gems to Central Bank as Collateralize for Chinese Loans

The exploitation of Africa by bigger, stronger and wealthier nations is nothing new. In contemporary times, it appears China has been making a particularly aggressive move considering its huge economy, enormous population and insufficient natural resources. While this topic has not been a focal point on this site, I have covered it in past. Most specifically in a Guest Post from late 2012 titled: Africa in the Crosshairs.

In the article below from Bloomberg, we learn that diamond miners in the country have been told they must sell their gems through the Central Bank to serve as collateral for government loans. The country’s deputy mines had said in earlier in may that “Zimbabwe may use mineral exports, including gold and diamonds, to underwrite loans from China.”

From Bloomberg:

Diamond miners in Zimbabwe have been told to sell their gems through the central bank, which will use the stones to secure a government loan, according to a letter written to them by the country’s mines secretary.

In the letter to miners, the secretary Francis Gudyanga, instructs that producers “prepare parcels of all your currently produced diamonds which must be sorted and evaluated with the involvement of the Minerals Marketing Corp. of Zimbabwe,” a state company, and payment will be made soon after.

The stones will be kept by the central bank and used to “securitize a government loan,” Gudyanga said in the letter. The letter, obtained by Bloomberg, was sent to miners April 28 and came into effect April 30.

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Gold Price Premiums Hit Record in India – 8% Above London Spot

This story is just further proof of the complete and total mess that has been made of the Indian gold market over of the course of this year due to government intervention. The other part of the problem is that when you are dealing in physical supplies you can’t just deliver paper contracts. Somehow I don’t think that would cut it for Indians on festival days or their daughters’ weddings.

From Reuters:

(Reuters) - Gold premiums in India, the world’s biggest buyer of the precious metal, hit a record $100 an ounce, about 8 percent over London prices, on a shortage of supplies to meet festival demand, traders said on Tuesday.

“There are no supplies in the domestic market, and there is a little demand due to festivals… what little supplies that come, go to exporters,” Bachhraj Bamalwa, director at the All India Gems and Jewellery Trade Federation (GJF) told Reuters.

Most suppliers in Mumbai and Kolkata have started quoting premiums in excess of $100 an ounce above London prices, more than double the $40 charged last week, Bamalwa said.

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Guest Post: Africa in the Crosshairs

A friend of mine and an extremely astute observer of news at the excellent new aggregator site Top the News, wrote the following piece and he has given me permission to post it.  Unfortunately, many of the proxy wars that are certain to be fought in the future will see Africa as a staging ground, and this piece does an excellent job giving the reader some background of where we have been and where we are headed.  So without further ado…

Africa in the Crosshairs
“The Dark Continent” as it is known to many, has a dim history of modern foreign influence.  While much of Africa was technically independent by 1960, memories of colonization and cronyism have lasted much longer. Infamous dictators like Sani Abacha and Mobutu Sese Seko held net worth in the $ billion category, due in no small part to the hypocrisy of western nations like the United States.  However, starting with the funding of a nearly-$500 million railroad known as the Tazara Line in the 1970’s, a new player started their emergence in the region: China. With its vast natural resources and geopolitical position, Africa is now in the crosshairs of the world’s two superpowers. The Sino-U.S. rivalry is an ‘open secret’ in the hemisphere, destined to only grow.

In a collection of essays published by Columbia University titled China Returns to Africa, the authors highlight the “Chinese government’s strategic pursuit of resources and attempts to ensure raw material supplies for growing energy needs within China.” The Chinese hierarchy understands that with limited resources in the world, commodities will only become more valuable based on supply and demand alone-before debased currencies are accounted for.  Africa’s “fertile land, ample water, and (its status) among the world’s lowest farming productivity” all add up to foreign investment. Trade between China and Africa quadrupled from 2005-2011, passing the United States along the way as Africa’s largest partner. Even the African Union’s Ethiopian headquarters were funded by a $200 million ‘gift’ from the Chinese. Largely avoiding military intervention on the continent, instead focusing on “diplomacy, trade deals, debt forgiveness, and aid packages,” has helped China to establish a strong foothold and relationship, comparatively to the United States. As Andrew Malone pointed out a few years ago: “The strategy has been carefully devised by officials in Beijing, where one expert has estimated that China will eventually need to send 300 million people to Africa to solve the problems of over-population and pollution.”

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Portugal Runs Out of Gold as Citizens Forced to Sell in Order to Eat

This story from Bloomberg is one of the most gold bullish items I have read in the last 12 months.  While many pundits like to get on their soapboxes and spout about how gold is in a “bubble” merely due to the fact that it has soared so much and they are bitter they didn’t see it coming, this article demonstrates quite clearly that gold is in the opposite of a bubble.  Let’s take a few quotes from the article:

Paulo Oliveira and his wife sold their wedding rings to pay the rent after he lost his job as a builder last month. They were the couple’s last pieces of jewelry.

“We have no more gold to save us from being kicked out this month,” the 46-year-old said as he stood in the area of downtown Lisbon popular with cash-for-gold stores. “Everyone I know is struggling, even the gold stores are empty because nobody has any more gold left to sell.”

“Business has gone from great to terrible in a matter of months,” Luis Almeida, whose family has owned a gold store near Lisbon’s Rossio Square for more than 40 years, said in an interview. “The sad truth is that most of my clients have already sold all of their gold rings.”

Portugal’s gold exports increased by more than five times to 519.4 million euros last year from 102.1 million euros in 2009, according to data published on the Lisbon-based National Statistics Institute’s website.

Oliveira said he now makes as little as 15 euros a day polishing shoes on a wooden stool in Lisbon’s central Barros Queiroz street, where gold traders complain competition is eating profit.

This all very much reminds me of an article I posted several months ago about how pawn shops in the U.S. were running out of gold.  Seems the U.S. serfs got fleeced a couple months earlier.  Good thing we have EBT cards and disability checks though!

The big macro point here is obvious.  Despite a depression and euro weakness, the Portuguese are not only unable to buy gold as protection, they are being forced to sell what little real wealth they have just to survive.  It is all going straight out the back door to China and others.  This is just a massive transfer of wealth away from Europe and once the metal dries up (which appears to be happening now), the gold price will resume its march toward much higher levels.  I believe this march is beginning now and will be very powerful over the next 3-6 months.

Full article here.

Mike

China to Boost the Global Economy? Nope it’s also a Total Ponzi

I fully get that people’s hopes on China being some powerhouse to the global economy have pretty much been dashed, but I have been calling bull on this meme for years.  Why?  The Chinese economy is just as much a ponzi of fraud, corruption and fiat money as the U.S. economy is.  The only difference is they are smart enough to be buying the gold that the imbeciles in the West are selling to them.  Down the road, when the West has no gold and is broke don’t blame those that bought it.  Blame our inept “leadership” for not having done the same.

Key quotes from the NY Times article:

TAIHE, CHINA — The Chinese investment vehicle known as Golden Elephant No. 38 promises buyers a return of 7.2 percent per year. That is more than double the rate offered on savings accounts in China.

Absent from the product’s prospectus is any indication of the asset underpinning Golden Elephant: a near-empty housing project in the rural town of Taihe at the end of a dirt path amid rice fields in one of the poorest provinces in China.

“Some banks have been using new proceeds to cover losses from previous products in the pool,” said David Cui, a strategist at Bank of America Merrill Lynch, referring to new wealth management products. “In our view, this is not fundamentally different from a Ponzi scheme,” a fraud in which early investors are repaid with money collected from later clients instead of proceeds from investments. “The music may stop at a certain point if and when” the assets the wealth management products are based on stop expanding.

In a review of more than 50 wealth management and trust loan products, with the aim of tracking where investors’ money in the products ends up, all but two failed to explain or even display the underlying assets behind the products.

The China Banking Regulatory Commission, which oversees banking products, said more than 20,000 wealth management products were in circulation, compared with a few hundred just five years ago.

Full article here.

China Better Have a Plan

Big Brother in the form of an increasingly powerful government and in an increasingly powerful private sector will pile the records high with reasons why privacy should give way to national security, to law and order, to efficiency of operation, to scientific advancement and the like.
- Justice William O. Douglas (1898-1980), U. S. Supreme Court Justice

Those who take the most from the table, teach contentment.  Those for whom the taxes are destined, demand sacrifice. Those who eat their fill, speak to the hungry, of wonderful times to come. Those who lead the country into the abyss, call ruling difficult, for ordinary folk.
- Bertolt Brecht (1898-1956) German dramatist, stage director, and poet

Idealism is the noble toga that political gentlemen drape over their will to power.
- Aldous Huxley

China Better Have a Plan
The fact that the Central Planners in China are basically standing around like deer in headlights as their economy plunges into the abyss is nothing short of astounding.  Sure they have lowered the bank Reserve Requirement but so what?  That is an epic joke of a move in light of the gargantuan problems that economy is facing, and is blatantly pathetic in its irrelevance.  I’m not going into detail for the thousandth time why China’s economy is nothing more than a Keynesian Centrally Planned house of cards on steroids with mal-investments that make the U.S. housing market look benign.  I have done that too many times over too many years to exert energy on that topic once again.  That said, what I do want to do is look back at the post 2008 period and try to figure out why they never really took polices to rebalance the economy away from fixed asset investment toward consumption.  In fact, not only did they not rebalance but they doubled down on the prior strategy!  Well now the chickens have come home to roost and we are about to find out if China has any real “long term” plan to get themselves out of this mess.

Although I never bought the “China bull” story over the last few years, where I did agree with a lot of these pundits was the notion that the Chinese currency, the yuan, was inevitably going to strengthen materially.  The primary reason that I agreed with this notion was the fact that I believed it to be the most effective means for the government to transfer global purchasing power to their citizens and also rebalance its economy more toward consumption.  Well the yuan did appreciate from mid 2010 to December of 2011, but the appreciation was a measly 8%.  That is basically nothing and in no way could have done anything to rebalance the economy in any way shape or form.  The lack of appreciation has been one of the biggest surprises to me, and indeed, now represents one of the scariest aspect of the macro backdrop globally.

As I mentioned recently in another piece, the cessation of the strengthening trend in the yuan back in July 2008 foreshadowed the collapse of the global economy.  Is the same thing happening now?

Chart of the Chinese Yuan (inverse so a decline represents strength vs. the U.S. dollar).

I have thought over and over again in my head why they didn’t allow the yuan to appreciate more, and at the end of the day, it comes down to one main point in my mind: Political Power.  As we all know, China is run by a very small group of bureaucrats that are fabulously wealthy and fabulously corrupt.  As is the case back here in the United States of Banana Republic, the Central Planners, politicians and financial/corporate oligarchs have made themselves fantastically wealthy and powerful through the parasitic controlled crony capitalist economy that they have put in place.  This is why they fight tooth and nail against reform.  Reform would restore power to the people and away from them; and of course, they don’t want that.  China and the United States are exactly the same in that regard, and since the old model has worked so well for the few in power they have been reluctant to change the model.  Indeed, they haven’t.

So here we are today and things are much different for China.  In fact, from a fundamental perspective it is now difficult to argue for a yuan appreciation.  The terms of trade have started to go against China and go against it strongly.  The entire export model was driven by the mobilization of rural workers from the interior to the coasts.  This seemingly endless cheap labor coupled with an undervalued currency made the cost of mass producing manufactured good exceedingly cheap relative to the rest of the world.  Factories in the West packed up and moved to China, the trade surplus boomed, and the rest is, well, history.

Those days are over.  Chinese wages have been skyrocketing and with global commodity prices elevated China’s trade surplus is not what it used to be.  There may even be a dollar shortage in China as the government foolish put its dollars into treasury bonds for some insane reason.  Why the government there would take a currency that is doomed in the long run and then put it in to an asset they will never be able to liquidate in an orderly manner is beyond my comprehension, but that is what they did and now they are stuck with that garbage.  There was a great article on this topic yesterday at FT Alphaville by Izabella Kaminska that I suggest everyone read.  You can find it here.

The following paragraphs I consider to be the most important part of the article:

The sad truth that many don’t realize is that these moves to internationalize the currency have less to do with Beijing’s wish to modernize and much more to do with a need to draw dollars into the system to cover the country’s growing “dollar short” position.

But what happens if the strategy fails? What happens if foreigners decide the last thing they want is yuan exposure (due to China economic bubble fears), and would much prefer to keep hold of their US dollars?

What happens if instead of a dollar inflow you get a mass capital outflow from China, with as many Chinese as possible converting yuan-denominated assets into dollars, seeing the yuan fall in value versus the dollar due to what is now an over-valued position?

Recent developments in offshore/onshore markets and forward markets, unfortunately, seem to suggest this is exactly what’s happening.

Wow, so if this article is correct then we have just made a 180 degree turn from where we were just a few years ago.  Rather than the market assuming a major appreciation in the Chinese currency, it seems as if financial players are becoming terrified of the currency considering the reversal in the terms of trade and the much more negative prospects for the economy going forward.  Believe me when I tell you that this is an absolutely terrifying scenario to be faced with for all of us.  If this is correct, the risk from China is likely to be as great if not greater than anything happening in Europe.  Here’s why.

The reason I say this is because I think there are two options from here, and both of them would have seismic effects on the global economy for the foreseeable future.  The first scenario assumes that China has a plan to deal with a loss of faith in its currency.  That plan in my view would be that they would come out with a gold backing to their currency.  This is something many people have written about for many, many years, including myself.  If China has enough gold to pull this off, they would immediately become the one currency in the world that everyone wants.  Capital would flee to China and the Chinese consumer would receive an overnight boost in purchasing power that will be written about for centuries to come.  This fits into the theme that I wrote about last year in my piece “Does China Need the U.S. to Collapse.”  The basic premise is that in a resource constrained world the only way China can ever actually utilize the massive excess capacity it has built is through a massive transfer in purchasing power to its citizens.  The West could collapse into third world status if this were to happen (it’s already on that path anyway).

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