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.

ND