Wednesday, 11 June 2014

Enter Dragon, Stage Left, with Smoke and Mirrors

China week in C@W continues, with another great story from the South China Morning Post

A mainland Chinese businessman, one Zhao Jingjun, bought 998 kg (worth HK$270m) of gold bullion in a consignment from Ghana (sic).  But when he came to sell it on, and his customer asked to check the goods, well bugger me it was a pile of base metal ! 

Just fancy that.  By coincidence he was staying in the hotel next door to mine, but I didn't hear any sobbing.

This immediately brought to mind the tale that FT Alphaville has been telling for a couple of years now: that the Chinese metals markets is massively distorted by the phenomenon of traders etc using metal inventories as collateral for finance - often indeed collateral against multiple loans - so that the huge quantities held in warehouses bear very little relationship to any underlying economic activity.  And if the gold turns out to be base, then presumably the base will sometimes turn out to be sand ...

Among the several consequences of this:
  • as per the item I recounted at the weekend on collapsing HK retail trade, when the Chinese government suddenly decides to intervene on these scams, there can be dramatic and instant consequences (often involving a bullet in the back of the head as well as economic stuff)
  • people who depend on Chinese metals demand (e.g. the whole nation of Australia) must be having a fairly nervous time
  • who can believe any of the economic data issing from China at all?  
A bit unnerving for the many decision-makers large and small who must cater for China as being the driver of the world economy or whatever it is people say.  They are all flying blind, which is bound to end up in some messy crashes.

Incidentally, why is Mr Zhao importing gold from, errr, Ghana?  That's another illuminating story.  It turns out that for several years, Ghana has been a gold-rush territory for thousands of Chinese, including some very modest individuals who have been prospecting in a manner not dissimilar to the old pan-handlers of California and the Klondike.   It's all coming to grief there now, apparently: the locals have decided they don't really like these Chinese incomers.

We read a lot about how China is quietly taking a dominant position in raw materials across Africa, and that we'd all better watch out.  Really?  I bet the details are a lot more complicated and, just as they found with their 'oil assets' in Libya when the old Colonel got the chop, these Chinese investments may not be very secure at all.

What a game.



MyUsualName said...

Not sure what to make of this, Nick. In the first instance quoting the FT on anything is shorthand for "viewed through a centre-left, Keynesian, pro-European, Hamstead-socialist prism..."

Surely, if these huge quantities of Gold are found to be 'sand' it'll cause a massive spike in prices, not a drop as you imply.

'Who can believe Chinese data'. Is this a serious question? Has anyone ever believed it. I recall 12-odd years ago an economics lecturer pointing out that all chinese regions reported growth rates well above the regional average.
Think about that for a moment.

On the FT, they'll believe Chinese (or any other) data when its suits their view (Anti-Gold, Pro-EU, Pro-govt intervention) and ignore any data that says otherwise. They were big, big cheerleaders for Krugman until he blundered recently and now its like he was never there. Touch of the socialist-fanboy about them.

James Higham said...

China sneezes and Australia gets a cold.

hovis said...

MyUsualName: this has been widely trailed on the ZH so I wouldn't worry about political affiliations too much.

Are we sure this is just a Chinese problem? After all why are the Germans being told to wait 7 years for their US held gold? Just wondering (and yes it is a ZH meme I'm following there)

Anonymous said...

"Are we sure this is just a Chinese problem?"

As I recall there was an American called Madoff who did the same - except it was virtual paper.

The Chinese do not have a monopoly on gullibility. Ask the UK voters.

Nick Drew said...

MUN - Surely, if these huge quantities of Gold are found to be 'sand' it'll cause a massive spike in prices, not a drop as you imply

agreed, of course: but on the other side of this complicated coin, if spec holders of physical metal are minded to dump it (e.g. if the financing regs were about to be tightened) it could go the other way

gold by the kilo is one thing, but base metals by the millions of tonnes is something else

Has anyone ever believed it? - fair point!