The second largest stock market in the entire world is collapsing right in front of our eyes. Since hitting a peak in June, the most important Chinese stock market index has plummeted by well over 20 percent, and more than 3 trillion dollars of “paper wealth” has been wiped out. Of course the Shanghai Composite Index is still way above the level it was sitting at exactly one year ago, but what is so disturbing about this current crash is that it is so similar to what we witnessed just prior to the great financial crisis of 2008 in the United States. From October 2006 to October 2007, the Shanghai Composite Index more than tripled in value. It was the greatest stock market surge in Chinese history. But after hitting a peak, it began to fall dramatically. From October 2007 to October 2008, the Shanghai Composite Index absolutely crashed. In the end, more than two-thirds of all wealth in the market was completely wiped out. You can see all of this on a chart that you can find right here. What makes this so important to U.S. investors is the fact that Chinese stocks started crashing well before U.S. stocks started crashing during the last financial crisis, and now it is happening again. Is this yet another sign that a U.S. stock market crash is imminent?
Over the past several months, I have been trying to hammer home the comparisons between what we are experiencing right now and the lead up to the U.S. financial crisis in the second half of 2008. Today, I want to share with you an excerpt from a New York Times article that was published in April 2008. At that time, the Chinese stock market crash was already well underway, but U.S. stocks were still in great shape…
The Shanghai composite index has plunged 45 percent from its high, reached last October. The first quarter of this year, which ended Monday with a huge sell-off, was the worst ever for the market.
Suddenly, millions of small investors who were crowding into brokerage houses, spending the entire day there playing cards, trading stocks, eating noodles and cheering on the markets with other day traders and retirees, are feeling depressed and angry.
This sounds almost exactly like what is happening in China right now. First we witnessed a ridiculous Chinese stock market bubble form, and now we are watching a nightmarish sell off take place. This next excerpt is from a Reuters article that was just published…
Shanghai’s benchmark share index crashed below 4,000 points for the first time since April – a key support level that analysts said had been seen as a line in the sand that Beijing had to defend, below which more conservative investors would start ejecting from their leveraged positions, widening the rout.
Chinese markets, which had risen as much as 110 percent from November to a peak in June, have collapsed at an incredibly rapid pace in since June 12, losing more than 20 percent in jaw-dropping volatility as money surges in and out of the market.
That drop has wiped out nearly $3 trillion in market capitalization, more than the GDP of Brazil.
Did you catch that last part?
The amount of wealth that has been wiped out during this Chinese stock market crash is already greater than the entire yearly GDP of Brazil.
Just as in 1929, flighty retail investors make up the bulk of China’s stock market and, just as in 1929 in the U.S., they have heavily margined their accounts. The Financial Times puts the number of retail investors in the Chinese stock market at 80 to 90 percent of the total market. Retail investors, unlike sophisticated institutional investors, are prone to panic selling, which explains the wild intraday swings in the Shanghai Composite over the past week.
Last night, the Shanghai Composite broke a key technical support level, closing below 4,000 at 3,912.77. The index is now down 24 percent since it peaked earlier this month and has wiped out more than $2.4 trillion in value. China’s stock market is the second largest in the world in terms of market capitalization, with the U.S. ranking number one.
Making world markets even more worried about the situation in China, its regulators are showing a similar brand of leadership as Mario Draghi. After previously pledging to trim back risky margin lending, they have now done a complete flip flop and are permitting individual brokerage firms to avoid selling out accounts that miss margin calls by setting their own guidelines on the amount of collateral needed.
I know that a lot of Americans don’t really care about what happens over in Asia, but when the second largest stock market in the entire world crashes, it is a very big deal.
1) Numerous emerging market countries to default and most emerging market stocks to lose 50% of their value.
2) The Euro to break below parity before the Eurozone is broken up (eventually some new version of the Euro to be introduced and remain below parity with the US Dollar).
3) Japan to have defaulted and very likely enter hyperinflation.
4) US stocks to lose at least 50% of their value and possibly fall as far as 400 on the S&P 500.
5) Numerous “bail-ins” in which deposits are frozen and used to prop up insolvent banks.
I tend to agree with most of that. I don’t agree that the euro is going to go away, but I do agree that the eurozone is going to break up and be reconstituted in a new form eventually. And yes, we are going to see tremendous inflation all over the world down the road, but I wouldn’t say that it is imminent in Japan or anywhere else. But overall, I think that is a pretty good list.
So what do you think is coming? Please feel free to join the discussion by posting a comment below…
As we move toward the second half of 2015, signs of financial turmoil are appearing all over the globe. In Greece, a full blown bank run is happening right now. Approximately 2 billion euros were pulled out of Greek banks in just the past three days, Barclays says that capital controls are “imminent” unless a debt deal is struck, and there are reports that preparations are being made for a “bank holiday” in Greece. Meanwhile, Chinese stocks are absolutely crashing. The Shanghai Composite Index was down more than 13 percent this week alone. That was the largest one week decline since the collapse of Lehman Brothers. In the U.S., stocks aren’t crashing yet, but we just witnessed one of the largest one week outflows of capital from the bond markets that we have ever witnessed. Slowly but surely, we are starting to see the smart money head for the exits. As one Swedish fund manager put it recently, everyone wants “to avoid being caught on the wrong side of markets once the herd realizes stocks are over-valued“.
I don’t think that most people understand how serious things have gotten already. In Greece, so much money has been pulled out of the banks that the European Central Bank admits that Greek banks may not be able to open on Monday…
The European Central Bank told a meeting of euro zone finance ministers on Thursday that it was not sure if Greek banks, which have been suffering large daily deposit outflows, would be able to open on Monday, officials with knowledge of the talks said.
Greek savers have withdrawn about 2 billion euros from banks over the past three days, with outflows accelerating rapidly since talks between the government and its creditors collapsed at the weekend, banking sources told Reuters.
All over social media, people are sharing photos of long lines at Greek ATMs as ordinary citizens rush to get their cash out of the troubled banks. Here is one example…
And if there is no debt deal by the end of this month, the Greek debt crisis is going to totally spin out of control and financial chaos will begin to erupt all over Europe. But instead of trying to be reasonable, EU president Donald Tusk “has delivered an ultimatum to Greece”, and it almost appears as if EU officials are more concerned about winning a power struggle than they are about averting financial catastrophe…
EU president Donald Tusk has delivered an ultimatum to Greece, claiming the country must ‘accept an offer or default’ at an emergency summit set for Monday – in a last-ditch effort to stop the debt-stricken nation crashing out of the euro.
‘We are close to the point where the Greek government will have to choose between accepting what I believe is a good offer of continued support or to head towards default,’ Mr Tusk said today.
His comments come as Greek Prime Minister Alexis Tsipras warned that his country’s exit from the eurozone would trigger the collapse of the single currency.
‘The famous Grexit cannot be an option either for the Greeks or the European Union,’ he said in an Austrian newspaper interview.
‘This would be an irreversible step, it would be the beginning of the end of the eurozone.’
While all of this has been going on, the obscene stock market bubble in China has started to implode. Just check out the following numbers from Zero Hedge…
As the carnage began last night in China we noted the extreme levels of volatility the major indices had experienced in recent weeks. By the close, things were ugly with the broad Shanghai Composite down a stunning 13.3% on the week – the most since Lehman in 2008 (with Shenzhen slightly better at down 12.8% and CHINEXT down a record-breaking 14.99%).
Under normal circumstances, numbers like these would be reason for a full-blown financial panic over in Asia. But these are not normal times. Even with these losses, stock prices in China are still massively overinflated. For example, USA Today is reporting that the median stock over in China is “trading at 95 times earnings”…
Margin debt in China has soared to a record $363 billion, according to Bloomberg, and the median stock in mainland China is now trading at 95 times earnings, which even tops the price-to-earnings multiple of 68 back at the 2007 peak.
That is absolutely ridiculous. When a stock is trading at 25 or 30 times earnings it is overpriced. So these numbers that are coming out of China are beyond crazy, and what this means is that Chinese stocks have much, much farther to fall before they get back to any semblance of reality.
Meanwhile, in the U.S. money is flowing out of bonds at a staggering pace. The following quote originally comes from Bank of America…
“High grade credit funds suffered their biggest outflow this year, and double the previous week (and also the biggest since June 2013). High yield outflows also jumped to $1.1bn, the biggest since the start of the year. However, government bond funds suffered the most amid the recent spike in volatility, with outflows surging to the highest weekly number on record ($2.7bn). This brings the total outflow from fixed income funds to almost $6bn over the last week, the highest since the Taper Tantrum and the third highest outflow ever.”
Yesterday during an interview on MSNBC, presidential candidate Donald Trump said he has some big names in mind for the Treasury secretary if he wins the White House. “I’d like guys like Jack Welch. I like guys like Henry Kravis. I’d love to bring my friend Carl Icahn.” He also opined on the economy and the stock market, admitting that the Fed has benefited people like him but that the economy and is in a “big fat economic and financial bubble like you’ve never seen before.“
Ron Paul also believes that this financial bubble is going to end very badly. Just check out what he told CNBC earlier this week…
Despite record highs in the market, former Rep. Ron Paul says the Fed’s easy money policies have left stocks and bonds are on the verge of a massive collapse.
“I am utterly amazed at how the Federal Reserve can play havoc with the market,” Paul said on CNBC’s “Futures Now” referring to Thursday’s surge in stocks. The S&P 500 closed less than 1 percent off its all-time high. “I look at it as being very unstable.”
In Paul’s eyes, “the fallacy of economic planning” has created such a “horrendous bubble” in the bond market that it’s only a matter of time before the bottom falls out. And when it does, it will lead to “stock market chaos.”
Yes, this financial bubble has persisted far longer than many believed possible, but all irrational bubbles eventually burst.
And you know what they say – the bigger they come the harder they fall.
When this gigantic financial bubble finally implodes, it is going to be absolutely horrifying, and the entire planet is going to be shocked by the carnage.
Did you know that the number of publicly traded companies declaring bankruptcy has reached a five year high? And did you know that Chinese exports are absolutely collapsing and that Chinese economic growth in 2014 was the weakest in over 20 years? Even though things may seem to be okay on the surface for the global economy at the moment, that does not mean that big trouble is not percolating just under the surface. On Wednesday, investors cheered as stocks soared to new highs, but almost all of the economic news coming in from around the planet has been bad. The credit rating on Greek debt has been slashed again, global economic trade is really slowing down, and many of the exact same financial patterns that we saw just before the crash of 2008 are repeating once again. All of this reminds me of the months leading up to the implosion of Lehman Brothers. Most people were feeling really good about things, but huge trouble was brewing just underneath the surface. Finally, one day we learned that Lehman Brothers had “suddenly” collapsed, and then all hell broke loose.
If the economy is actually “getting better” like we are being told by the establishment media, then why are so many big companies declaring bankruptcy? According to CNBC, the number of publicly traded companies declaring bankruptcy has hit a five year high…
The number of bankruptcies among publicly traded U.S. companies has climbed to the highest first-quarter level for five years, according to a Reuters analysis of data from research firm bankruptcompanynews.com.
Plunging prices of crude oil and other commodities is one of the major reasons for the increased filings, and bankruptcy experts said a more aggressive stance by lenders may also be hurting some companies.
It is interesting to note that the price of oil is being named as one of the primary reasons why this is happening.
And of course this oil crash has not just hurt the United States. All over the world, economic activity is being curtailed because of what has happened to the price of oil…
In the heady days of the commodity boom, oil-rich nations accumulated billions of dollars in reserves they invested in U.S. debt and other securities. They also occasionally bought trophy assets, such as Manhattan skyscrapers, luxury homes in London or Paris Saint-Germain Football Club.
Now that oil prices have dropped by half to $50 a barrel, Saudi Arabia and other commodity-rich nations are fast drawing down those “petrodollar” reserves. Some nations, such as Angola, are burning through their savings at a record pace, removing a source of liquidity from global markets.
If oil and other commodity prices remain depressed, the trend will cut demand for everything from European government debt to U.S. real estate as producing nations seek to fill holes in their domestic budgets.
But it isn’t just oil. We appear to be moving into a time when things are slowing down all over the place.
In a recent article, Zero Hedge summarized some of the bad economic news that has come in just this week…
Mortgage Apps tumble, Empire Fed slumps, and now Industrial Production plunges… Against expectations of a 0.3% drop MoM, US Factory Output was twice as bad at -0.6% – the worst since August 2012 (and lamost worst since June 2009). This is the 4th miss in a row.
If we are indeed heading into another economic downturn, that is really bad news, because at the moment we are in far worse shape than we were just prior to the last recession.
To help illustrate this, I want to share with you a couple of charts.
This first chart comes from the Federal Reserve Bank of St. Louis, and it shows that after you adjust for inflation, median income for the middle class is the lowest that it has been in decades…
This next chart shows that median net worth for the middle class is also the lowest that it has been in decades after you adjust for inflation…
The middle class is being systematically destroyed. For much more on this, please see this recent article that I published. And now we are on the verge of another major economic slowdown. That is not what the middle class needs at all.
We are also getting some very disturbing economic news out of China.
It appeared as though things went from bad to worse nearly overnight; China’s National Bureau of Statistics said that contrary to hopes that there would be a modest rebound, the average new home price in China fell at the fastest pace on record in February, from the previous year.
Reuters reported that average new home prices in China’s 70 major cities fell 5.7 percent, year to year, in February – marking the sixth consecutive drop after January’s decline of 5.1 percent.
Standard & Poor’s has just cut Greece’s credit rating to “CCC+” from “B-” with a negative outlook.
S&P said it expected Greece’s debt to be “unsustainable.” It cited the potential for dissolving liquidity in the government, banks and economy.
And according to the Financial Times, we could actually be on the verge of witnessing a Greek debt default…
Greece is preparing to take the dramatic step of declaring a debt default unless it can reach a deal with its international creditors by the end of April, according to people briefed on the radical leftist government’s thinking.
The government, which is rapidly running out of funds to pay public sector salaries and state pensions, has decided to withhold €2.5bn of payments due to the International Monetary Fund in May and June if no agreement is struck, they said.
So I hope that those that are euphoric about the performance of their stock portfolios are taking their profits while they still can.
Huge trouble is percolating just under the surface of the global economy, and it won’t be too long before the financial markets start feeling the pain.
The Chinese do not plan to live in a world dominated by the U.S. dollar for much longer. Chinese leaders have been calling for the U.S. dollar to be replaced as the primary global reserve currency for a long time, but up until now they have never been very specific about what they would put in place of it. Many have assumed that the Chinese simply wanted some new international currency to be created. But what if that is not what the Chinese had in mind? What if they have always wanted their own currency to become the single most dominant currency on the entire planet? What you are about to see is rather startling, but it shouldn’t be a surprise. When it comes to economics and finance, the Chinese have always been playing chess while the western world has been playing checkers. Sadly, we have gotten to the point where checkmate is on the horizon.
On Wednesday, I came across an excellent article by Simon Black. What he had to say in that article just about floored me…
When I arrived to Bangkok the other day, coming down the motorway from the airport I saw a huge billboard—and it floored me.
The billboard was from the Bank of China. It said: “RMB: New Choice; The World Currency”
Given that the Bank of China is more than 70% owned by the government of the People’s Republic of China, I find this very significant.
It means that China is literally advertising its currency overseas, and it’s making sure that everyone landing at one of the world’s busiest airports sees it. They know that the future belongs to them and they’re flaunting it.
This is the photograph of that billboard that he posted with his article…
Everyone knows that China is rising.
And most everyone has assumed that Chinese currency would soon play a larger role in international trade.
But things have moved so rapidly in recent years that now a very large chunk of the financial world actually expects the renminbi to replace the dollar as the primary reserve currency of the planet someday. The following comes from CNBC…
The tightly controlled Chinese yuan will eventually supersede the dollar as the top international reserve currency, according to a new poll of institutional investors.
The survey of 200 institutional investors – 100 headquartered in mainland China and 100 outside of it – published by State Street and the Economist Intelligence Unit on Thursday found 53 percent of investors think the renminbi will surpass the U.S. dollar as the world’s major reserve currency.
Optimism was higher within China, where 62 percent said they saw a redback world on the horizon, compared with 43 percent outside China.
And without a doubt we are starting to see the beginnings of a significant shift.
China’s yuan broke into the top five as a world payment currency in November, overtaking the Canadian dollar and the Australian dollar, global transaction services organization SWIFT said on Wednesday.
The U.S. dollar won’t be replaced overnight, but things are changing.
Of course the truth is that the Chinese have been preparing for this for a very long time. The Chinese refuse to tell the rest of the world exactly how much gold they have, but everyone knows that they have been accumulating enormous amounts of it. And even if they don’t explicitly back the renminbi with gold, the massive gold reserves that China is accumulating will still give the rest of the planet a great deal of confidence in Chinese currency.
But don’t just take my word for it. Consider what Alan Greenspan has had to say on the matter…
Alan Greenspan, who served at the helm of the Federal Reserve for nearly two decades, recently penned an op-ed for the Council on Foreign Relations discussing gold and its possible role in China, the world’s second-largest economy. He notes that if China converted only a “relatively modest part of its $4 trillion foreign exchange reserves into gold, the country’s currency could take on unexpected strength in today’s international financial system.”
Meanwhile, the Chinese have also been accumulating a tremendous amount of U.S. debt. At this point, the Chinese own approximately 1.3 trillion dollars worth of our debt, and that gives them a lot of power over our currency and over our financial system.
Someday if the Chinese wanted to undermine confidence in the U.S. dollar and in the U.S. financial system, they have a lot of ammunition at their disposal.
And it isn’t just all of that debt that gives China leverage. In recent years, the Chinese have been buying up real estate, businesses and energy assets all over the United States at a staggering pace. For a small taste of what has been taking place, check out the YouTube video posted below…
For much, much more on this trend, please see the following articles…
On a purchasing power basis, the size of the Chinese economy has already surpassed the size of the U.S. economy.
And there are lots of signs of trouble ahead for the U.S. economy at this point. I like how Brandon Smith put it in one recent article…
We are only two months into 2015, and it has already proven to be the most volatile year for the economic environment since 2008-2009. We have seen oil markets collapsing by about 50 percent in the span of a few months (just as the Federal Reserve announced the end of QE3, indicating fiat money was used to hide falling demand), the Baltic Dry Index losing 30 percent since the beginning of the year, the Swiss currency surprise, the Greeks threatening EU exit (and now Greek citizens threatening violent protests with the new four-month can-kicking deal), and the effects of the nine-month-long West Coast port strike not yet quantified. This is not just a fleeting expression of a negative first quarter; it is a sign of things to come.
In addition, things continue to look quite bleak for Europe. Once upon a time, many expected the euro to overtake the U.S. dollar as the primary global reserve currency, but that didn’t happen. And in recent months the euro has been absolutely crashing. On Wednesday, it hit the lowest point that we have seen against the dollar in more than a decade…
The euro last stood at $1.1072, off 0.90 percent for the day and below a key support level, Sutton said. It fell to as little as $1.1066, which was the lowest level for the euro against the dollar since September 2003, according to Thomson Reuters data.
The euro also declined to one-month lows against the Japanese yen, which was flat against the dollar at 119.72 yen to the dollar.
As the U.S. and Europe continue to struggle, China is going to want a significantly larger role on the global stage.
And as the billboard in Thailand suggests, they are more than willing to step up to the plate.
So will the road to the future be paved with Chinese currency? Please feel free to share what you think by posting a comment below…
Did you know that we buy nearly five times as much stuff from the Chinese as they buy from us? According to government numbers that were just released, we imported 44.9 billion dollars worth of stuff from China in September but we only exported 9.3 billion dollars worth of stuff to them. And this is not happening because our economy is so much larger than China’s. In fact, the IMF says that China now has the largest economy on the entire planet on a purchasing power basis. No, the truth is that this is happening because our economy is broken. Every month, we consume far more wealth than we produce. Because the outflow of money is far greater than the inflow, we have to go to major exporting nations and beg them to lend our dollars back to us so that we can pay our bills. Meanwhile, the quality of the jobs in this country continues to go down and our formerly great manufacturing cities are rotting and decaying. We are committing national economic suicide, and most Americans don’t seem to care.
Barack Obama is constantly hyping a “manufacturing resurgence” in America, but the numbers don’t lie. In September, our manufactured goods trade deficit with the rest of the world soared to a new all-time record high of 69.16 billion dollars. For the year, we are nearly 12 percent ahead of last year’s record pace.
When we buy far more things than we sell, we get poorer as a nation.
How do you think that we ever got into a position of owing China more than a trillion dollars?
We just kept buying far more from them than they bought from us, and their money just kept piling up. Now it has gotten to the point where our politicians literally beg them to lend our money back to us. They are the head and we are the tail.
And we did this to ourselves.
Once upon a time, the United States was the greatest manufacturing powerhouse that the world had ever seen. But now China manufactures more stuff than us and China also accounts for more total global trade (imports plus exports) than us.
This should never have happened. Several decades ago, the Chinese economy was a complete joke. But decades of incredibly foolish decisions by our politicians have resulted in the loss of tens of thousands of manufacturing facilities, millions of good paying jobs and the destruction of vast stretches of our economic infrastructure.
During the same time frame, gleaming new manufacturing facilities have gone up all over China.
China is literally wiping the floor with us on the global economic stage and most Americans don’t even understand what is happening. Here is more on the trade deficit numbers that were just released from the RealityChek Blog…
>The China goods deficit of $35.56 billion blew past the old mark of $30.86 billion, set in July, by 15.23 percent. The new deficit also represented a 17.77 percent increase over the August level of $30.20 billion.
>U.S. goods exports to the still strongly growing Chinese economy fell on month in September from $9.63 billion to $9.33 billion (3.12 percent). U.S. merchandise imports from China jumped by 12.70 percent over August levels, from $39.83 billion to $44.89 billion – itself an all-time high.
>The U.S. goods deficit with China this year is now so far running 5.62 percent ahead of 2014’s record pace.
>The longstanding U.S. manufacturing trade shortfall shot up from $59.10 billion in August to $69.16 billion in September. This 17.02 percent jump resulted in a beat of the old record of $67.33 billion, also set in July, by 2.72 percent.
And it isn’t just cheap plastic trinkets that China is selling to us.
In fact, their number one export to us is computer equipment.
Meanwhile, one of our main exports to them is “scrap and trash”.
Sadly, there are a couple of factors that will probably make our trade deficit with the rest of the world even worse in the months ahead.
Number one, the currency war that I wrote about earlier this week will probably push the U.S. dollar even higher against the yen and the euro.
You might think that a rising dollar sounds good, but the truth is that it will make our exports less competitive in the global marketplace.
Nations such as Japan devalue their currencies so that they can sell more stuff to us. But that hurts our own domestic industries. And when our own domestic industries suffer, that means less jobs for American workers.
Secondly, the collapse in the price of oil could have very serious implications for the shale oil industry.
In recent years, the shale oil revolution has caused local economic booms in states such as Texas and North Dakota. But shale oil tends to be quite expensive to extract. As I write this, the price of U.S. oil has fallen to about 77 dollars a barrel. If it stays at that level or keeps going down, shale oil production in the United States will slow down dramatically.
In other words, a lot of these shale oil “boom towns” could go “bust” very rapidly.
If that happens, the amount of oil that we import will rise substantially and that will add to our overall trade deficit.
But of course the biggest factor fueling our trade deficit is that the vast majority of Americans simply do not care that we are committing national economic suicide.
When we buy products made in America, we support American businesses and American workers.
When we buy products made overseas, we hurt American businesses, we kill American jobs and we make ourselves poorer as a nation.
Of course there is nothing wrong with buying a foreign-made product once in a while. But this holiday season, most people will fill their shopping carts to the brim with foreign-made goods without even thinking twice about it.
The next time that you go into a huge retail establishment such as Wal-Mart, start picking up products and look to see where they were made.
I think that you will be shocked at how few of them are actually made inside the United States.
When are Americans going to get sick and tired of making China wealthier at our expense?
We are willing participants in the destruction of the U.S. economy, and yet only a small minority of people seem to care.
What is it going to take for people to finally wake up?
Is Detroit destined to become a Chinese city? Chinese homebuyers and Chinese businesses are starting to flood into the Motor City, and the governor of Michigan is greatly encouraging this. In fact, he has formally asked the Obama administration for 50,000 special federal immigration visas to encourage even more immigration from China and elsewhere. So will Detroit be the first major city in the United States to be dominated by China? It could happen. Once upon a time, Detroit was the greatest manufacturing city in the history of the world and it had the highest per capita income in the entire country. But now it is a rotting, decaying, bankrupt hellhole that is in desperate need of a savior, and Michigan Governor Rick Snyder appears to be fully convinced that China can be that savior.
To Snyder, encouraging foreigners to invest money and buy up properties won’t cost the state government much, but it could potentially have great benefits…
Under a plan to be unveiled Thursday, Gov. Rick Snyder will request 50,000 special federal immigration visas over the next five years to attract foreign professionals who are willing to work and live in the city.
Mr. Snyder, in an interview Wednesday, said that “this is one way for the federal government to step up to provide significant value without cost that could have a huge impact on the city’s future.”
“Let’s send a message to the entire world: Detroit, Michigan, is open to the world.“
In other words, Snyder wants China to save Detroit since nobody in this country is going to.
Snyder has also taken a couple of additional steps to encourage immigration and foreign investment, including opening up something called “an Office for New Americans”…
Opening an Office for New Americans to attract and help immigrants better adjust to life in Michigan, and designating the state as an Employer Based or EB-5 center to expedite visas and permits for immigrants who want to open business in the state with investments of at least $500,000 and 10 employees.
In essence, Snyder has done just about everything except roll out the welcome mat for the Chinese.
But this is nothing new for Governor Snyder. In fact, he has been making overtures to China for years…
Snyder, who was a businessman before starting his political career, believes that automobiles can no longer change the fate of Detroit. He said that he has learned from the history of the United States that what has made the nation great is immigrants.
In the early 1990s, Snyder went to China to develop the automobile market. After he was elected as the governor of Michigan, he made at least one trip to China every year, with the aim of recruiting talent.
He hopes that well-educated Chinese people can revitalize the Motor City in the new era. And as he desired, after Detroit announced its bankruptcy in 2013, the Chinese began to take the dying city by storm.
Rich Chinese men see Detroit as a rare opportunity for investment outside their home country.
In 2013, without any field investigation, Dongdu International Group of Shanghai — whose assets total 5 billion yuan (US$800 million) — spent US$13.6 million to buy the David Stott building and the Detroit Free Press building at auctions in September.
And when we talk about the Chinese domination of Detroit, this is not something that is just future tense. This is something that is already happening right now. For example, the following is an excerpt from a CNBC article that discussed how Chinese companies are already aggressively “putting down roots in Detroit”…
Dozens of companies from China are putting down roots in Detroit, part of the country’s steady push into the American auto industry.
Chinese-owned companies are investing in American businesses and new vehicle technology, selling everything from seat belts to shock absorbers in retail stores, and hiring experienced engineers and designers in an effort to soak up the talent and expertise of domestic automakers and their suppliers.
The transformation that has taken place in that region of the country is absolutely remarkable.
And now we are relying on China to come in and salvage the ruins of our gutted economic infrastructure.
Not only that, but the Chinese are also eagerly buying up homes at extremely depressed prices all over Detroit.
According to CNN, Detroit is already number four on the list of the top 10 destinations for Chinese homebuyers. In many cases, Chinese buyers are scooping up properties without even looking at them first. Just check out what one Detroit real estate broker told Quartz last July…
“I have people calling and saying, ‘I’m serious—I wanna buy 100, 200 properties,’” she tells Quartz, noting that one of her colleagues recently sold 30 properties to a Chinese buyer. “They say ‘We don’t need to see them. Just pick the good ones.’”
And they aren’t just interested in Detroit. As I have written about previously, one Chinese company known as “Sino-Michigan Properties LLC” actually had plans to buy 200 acres of land near the little town of Milan, Michigan and turn it into a “China City” with artificial lakes, a Chinese cultural center and hundreds of housing units for Chinese citizens. For much more on how Chinese buyers are gobbling up real estate all over the nation, please see my previous article entitled “The Chinese Are Acquiring Large Chunks Of Land In Communities All Over America“.
All of this is just another indication of how rapidly the global economic landscape is changing.
Since the late 19th Century, the United States has been the most dominant economic power in the world.
When it comes to reckless money creation, it turns out that China is the king. Over the past five years, Chinese bank assets have grown from about 9 trillion dollars to more than 24 trillion dollars. This has been fueled by the greatest private debt binge that the world has ever seen. According to a recent World Bank report, the level of private domestic debt in China has grown from about 9 trillion dollars in 2008 to more than 23 trillion dollars today. In other words, in just five years the amount of money that has been loaned out by banks in China is roughly equivalent to the amount of debt that the U.S. government has accumulated since the end of the Reagan administration. And Chinese bank assets now absolutely dwarf the assets of the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England combined. You can see an amazing chart which shows this right here. A lot of this “hot money” has been flowing out of China and into U.S. companies, U.S. stocks and U.S. real estate. Unfortunately for China (and for the rest of us), there are lots of signs that the gigantic debt bubble in China is about to burst, and when that does happen the entire world is going to feel the pain.
You read that right: in the past five years the total assets on US bank books have risen by a paltry $2.1 trillion while over the same period, Chinese bank assets have exploded by an unprecedented $15.4 trillion hitting a gargantuan CNY147 trillion or an epic $24 trillion – some two and a half times the GDP of China!
Putting the rate of change in perspective, while the Fed was actively pumping $85 billion per month into US banks for a total of $1 trillion each year, in just the trailing 12 months ended September 30, Chinese bank assets grew by a mind-blowing $3.6 trillion!
I was curious to see what all of this debt creation was doing to the money supply in China. So I looked it up, and I discovered that M2 in China has grown by about 1000% since 1999…
So what has China been doing with all of that money?
Well, they have been on a buying spree unlike anything the world has ever seen before. For example, according to Reuters China has essentially bought the entire oil industry of Ecuador…
China’s aggressive quest for foreign oil has reached a new milestone, according to records reviewed by Reuters: near monopoly control of crude exports from an OPEC nation, Ecuador.
Last November, Marco Calvopiña, the general manager of Ecuador’s state oil company PetroEcuador, was dispatched to China to help secure $2 billion in financing for his government. Negotiations, which included committing to sell millions of barrels of Ecuador’s oil to Chinese state-run firms through 2020, dragged on for days.
And the Chinese have been doing lots of shopping in the United States as well. The following is an excerpt from a recent CNBC article entitled “Chinese buying up California housing“…
At a brand new housing development in Irvine, Calif., some of America’s largest home builders are back at work after a crippling housing crash. Lennar, Pulte, K Hovnanian, Ryland to name a few. It’s a rebirth for U.S. construction, but the customers are largely Chinese.
“They see the market here still has room for appreciation,” said Irvine-area real estate agent Kinney Yong, of RE/MAX Premier Realty. “What’s driving them over here is that they have this cash, and they want to park it somewhere or invest somewhere.”
Apparently a lot of these buyers have so much cash that they are willing to outbid anyone if they like the house…
The homes range from the mid-$700,000s to well over $1 million. Cash is king, and there is a seemingly limitless amount.
“The price doesn’t matter, 800,000, 1 million, 1.5. If they like it they will purchase it,” said Helen Zhang of Tarbell Realtors.
So when you hear that housing prices are “going up”, you might want to double check the numbers. Much of this is being caused by foreign buyers that are gobbling up properties in certain “hot” markets.
Chinese conglomerate Fosun International Ltd. (0656.HK) will buy office building One Chase Manhattan Plaza for $725 million, adding to a growing list of property purchases by Chinese buyers in New York city.
The Hong Kong-listed firm said it will buy the property from JP Morgan Chase Bank, according to a release on the Hong Kong Stock Exchange website.
Chinese firms, in particular local developers, have looked overseas to diversify their property holdings as the economy at home slows. Chinese individuals also have been investing in property abroad amid tight policy measures in the mainland residential market.
Earlier this month, Chinese state-owned developer Greenland Holdings Group agreed to buy a 70% stake in an apartment project next to the Barclays Center in Brooklyn, N.Y., in what is the largest commercial-real-estate development in the U.S. to get direct backing from a Chinese firm.
And in a previous article, I discussed how the Chinese have just bought up the largest pork producer in the entire country…
Just think about what the Smithfield Foods acquisition alone will mean. Smithfield Foods is the largest pork producer and processor in the world. It has facilities in 26 U.S. states and it employs tens of thousands of Americans. It directly owns 460 farms and has contracts with approximately 2,100 others. But now a Chinese company has bought it for $4.7 billion, and that means that the Chinese will now be the most important employer in dozens of rural communities all over America.
But more than anything else, the Chinese seem particularly interested in acquiring real money.
And by that, I mean gold and silver.
In recent years, the Chinese have been buying up thousands of tons of gold at very depressed prices. Meanwhile, the western world has been unloading gold at a staggering pace. By the time this is all over, the western world is going to end up bitterly regretting this massive transfer of real wealth.
Unfortunately for the Chinese, it appears that the unsustainable credit bubble that they have created is starting to burst. According to Bloomberg, the amount of bad loans that the five largest banks in China wrote off during the first half of this year was three times larger than last year…
China’s biggest banks are already affected, tripling the amount of bad loans they wrote off in the first half of this year and cleaning up their books ahead of what may be a fresh wave of defaults. Industrial & Commercial Bank of China Ltd. and its four largest competitors expunged 22.1 billion yuan of debt that couldn’t be collected through June, up from 7.65 billion yuan a year earlier, regulatory filings show.
And Goldman Sachs is projecting that China may be facing 3 trillion dollars in credit losses as this bubble implodes…
Interest owed by borrowers rose to an estimated 12.5 percent of China’s economy from 7 percent in 2008, Fitch Ratings estimated in September. By the end of 2017, it may climb to as much as 22 percent and “ultimately overwhelm borrowers.”
Meanwhile, China’s total credit will be pushed to almost 250 percent of gross domestic product by then, almost double the 130 percent of 2008, according to Fitch.
The nation might face credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years, particularly by non-bank lenders such as trusts, exceeding that seen prior to other credit crises, Goldman Sachs Group Inc. estimated in August.
The Chinese are trying to get this debt spiral under control by tightening the money supply. That may sound wise, but the truth is that it is going to create a substantial credit crunch and the entire globe will end up sharing in the pain…
Yields on Chinese government debt have soared to their highest levels in nearly nine years amid Beijing’s relentless drive to tighten the monetary spigots in the world’s second-largest economy.
The higher yields on government debt have pushed up borrowing costs broadly, creating obstacles for companies and government agencies looking to tap bond markets. Several Chinese development banks, which have mandates to encourage growth through targeted investments, have had to either scale back borrowing plans or postpone bond sales.
This could ultimately be a much bigger story than whether or not the Fed decides to “taper” or not.
It has been the Chinese that have been the greatest source of fresh liquidity since the last financial crisis, and now it appears that source of liquidity is tightening up.
So as the flow of “hot money” out of China starts to slow down, what is that going to mean for the rest of the planet?
Are you ready for a future where China will employ millions of American workers and dominate thousands of small communities all over the United States? Such a future would be unimaginable to many Americans, but the truth is that it is already starting to happen. Chinese acquisition of U.S. businesses set a new all-time record last year, and it is on pace to absolutely shatter that record this year. Meanwhile, China is voraciously gobbling up real estate and is establishing economic beachheads all over America. If China continues to build economic power inside the United States, it will eventually become the dominant economic force in thousands of small communities all over the nation. Just think about what the Smithfield Foods acquisition alone will mean. Smithfield Foods is the largest pork producer and processor in the world. It has facilities in 26 U.S. states and it employs tens of thousands of Americans. It directly owns 460 farms and has contracts with approximately 2,100 others. But now a Chinese company has bought it for $4.7 billion, and that means that the Chinese will now be the most important employer in dozens of rural communities all over America. If you don’t think that this is important, you haven’t been paying much attention to what has been going on in the world. Thanks in part to our massively bloated trade deficit with China, the Chinese have trillions of dollars to spend. They are only just starting to exercise their economic muscles.
And it is important to keep in mind that there is often not much of a difference between “the Chinese government” and “Chinese corporations”. In 2011, 43 percent of all profits in China were produced by companies that the Chinese government had a controlling interest in. Americans are accustomed to thinking of “government” and “business” as being separate things, but in China they are often one and the same. Even when there is a separation in ownership, the reality is that no major Chinese corporation is going to go against the authority and guidance of the Chinese government. The relationship between government and business in China is much different than it is in the United States.
Over the past several years, Chinese companies have become increasingly aggressive. Last year a Chinese company spent $2.6 billion to purchase AMC entertainment – one of the largest movie theater chains in the United States. Now that Chinese company controls more movie ticket sales than anyone else in the world. At the time, that was the largest acquisition of a U.S. firm by a Chinese company, but now the Smithfield Foods deal has greatly surpassed that.
But China is not just relying on acquisitions to expand its economic power. The truth is that “economic beachheads” are being established all over America. For example, Golden Dragon Precise Copper Tube Group, Inc. recently broke ground on a $100 million plant in Thomasville, Alabama. I am sure that many of the residents of Thomasville, Alabama will be glad to have jobs, but it will also become yet another community that will now be heavily dependent on communist China.
And guess where else Chinese companies are putting down roots?
Dozens of companies from China are putting down roots in Detroit, part of the country’s steady push into the American auto industry.
Chinese-owned companies are investing in American businesses and new vehicle technology, selling everything from seat belts to shock absorbers in retail stores, and hiring experienced engineers and designers in an effort to soak up the talent and expertise of domestic automakers and their suppliers.
If you recently purchased an “American-made vehicle”, there is a really good chance that it has Chinese parts in it.
In fact, it is becoming harder and harder to get auto parts that are actually made in America by American companies. A lot of those companies are dying off. One example of this is a battery maker that had received $132 million from the federal government that was recently gobbled up by a huge Chinese corporation…
Industry analysts are hard-pressed to put a number on the Chinese suppliers operating in the United States. “We simply don’t know how many there are,” said David Andrea, an official with the Original Equipment Suppliers Association, a trade organization for auto parts makers.
In one of the more prominent deals, the Wanxiang Group bought most of the assets of the battery maker A123 Systems, which filed for bankruptcy last year despite receiving $132 million of $249 million in federal grants to build two factories in Michigan.
Congressional Republicans criticized the deal, saying A123’s technology could support military applications in China. Still, the buyout was approved this year by the Committee on Foreign Investment in the United States, a federal government panel.
China seems particularly interested in acquiring energy resources in the United States. For example, did you know that China is actually mining for coal in the mountains of Tennessee?
Guizhou Gouchuang Energy Holdings Group spent 616 million dollars to acquire Triple H Coal Co. in Jacksboro, Tennessee. At the time, that acquisition really didn’t make much news, but now a group of conservatives in Tennessee is trying to stop the Chinese from blowing up their mountains and taking their coal. The following is from a Wall Street Journal article back in March…
The Tennessee Conservative Union began airing an ad Tuesday that says lawmakers have failed to protect the state’s scenic mountains and are allowing the “Chinese to destroy our mountains and take our coal…the same folks who hold our debt.”
But when it comes to our energy resources, China has been most interested in our oil and natural gas. It is a complete and total mystery why the federal government would allow China to buy up our precious domestic sources of energy, but it is happening. The following is a list of some of the oil and natural gas deals that China has been involved in during the last few years that was compiled by the Wall Street Journal…
Colorado: Cnooc gained a one-third stake in 800,000 acres in northeast Colorado and southeast Wyoming in a $1.27 billion pact with Chesapeake Energy Corp.
Louisiana: Sinopec has a one-third interest in 265,000 acres in the Tuscaloosa Marine Shale after a broader $2.5-billion deal with Devon Energy.
Michigan: Sinopec gained a one-third interest in 350,000 acres in a larger $2.5 billion deal with Devon Energy.
Ohio: Sinopec acquired a one-third stake in Devon Energy’s 235,000 Utica Shale acres in a larger $2.5 billion deal.
Oklahoma: Sinopec has a one-third interest in 215,000 acres in a broader $2.5 billion deal with Devon Energy.
Texas: Cnooc acquired a one-third interest in Chesapeake Energy’s 600,000 acres in the Eagle Ford Shale in a $2.16-billion deal.
Wyoming: Cnooc has a one-third stake in 800,000 acres in northeast Colorado and southeast Wyoming after a $1.27 billion pact with Chesapeake Energy. Sinopec gained a one-third interest in Devon Energy’s 320,000 acres as part of a larger $2.5 billion deal.
Gulf of Mexico: Cnooc Ltd. separately acquired minority stakes in some of Statoil ASA’s leases as well as six of Nexen Inc.’s deep-water wells.
How could we be so stupid?
Sadly, as our politicians endlessly bicker China just continues to aggressively push ahead.
And pretty soon China may want to build entire cities in the United States just like they have been doing in other countries. According to Bloomberg, right now China is actually building a city larger than Manhattan just outside of the capital of Belarus…
China is building an entire city in the forests near the Belarusian capital Minsk to create a manufacturing springboard between the European Union and Russia.
Belarusian President Aleksandr Lukashenko allotted an area 40 percent larger than Manhattan around Minsk’s international airport for the $5 billion development, which will include enough housing to accommodate 155,000 people, according to Chinese and Belarusian officials.
And this is actually already happening on a much smaller scale in this country. For example, as I have written about previously, a Chinese company known as “Sino-Michigan Properties LLC” has purchased 200 acres of land near the little town of Milan, Michigan. Their stated goal is to construct a “China City” that has artificial lakes, a Chinese cultural center and hundreds of housing units for Chinese citizens.
In other cases, large chunks of real estate in the middle of major U.S. cities are being gobbled up by Chinese “investors”. Just check out what a Fortune article from a while back says has been happening in Toledo, Ohio…
In March 2011, Chinese investors paid $2.15 million cash for a restaurant complex on the Maumee River in Toledo, Ohio. Soon they put down another $3.8 million on 69 acres of newly decontaminated land in the city’s Marina District, promising to invest $200 million in a new residential-commercial development. That September, another Chinese firm spent $3 million for an aging hotel across a nearby bridge with a view of the minor league ballpark.
#2 During 2012, we sold about 110 billion dollars worth of stuff to the Chinese, but they sold about 425 billion dollars worth of stuff to us. That was the largest trade deficit that one nation has had with another nation in the history of the world.
#12 One of the reasons it is so hard to export stuff to China is because of their tariffs. According to the New York Times, a Jeep Grand Cherokee that costs $27,490 in the United States costs about $85,000 in China thanks to all the tariffs.
#13 The Chinese economy has grown 7 times faster than the U.S. economy has over the past decade.
#19 Since the auto industry bailout, approximately 70 percent of all GM vehicles have been built outside the United States.
#20 After being bailed out by U.S. taxpayers, General Motors is currently involved in 11 joint ventures with companies owned by the Chinese government. The price for entering into many of these “joint ventures” was a transfer of “state of the art technology” from General Motors to the communist Chinese.
#21 Back in 1998, the United States had 25 percent of the world’s high-tech export market and China had just 10 percent. Ten years later, the United States had less than 15 percent and China’s share had soared to 20 percent.
#22 The United States has lost more than a quarter of all of its high-tech manufacturing jobs over the past ten years.
#39 The average household debt load in the United States is 136% of average household income. In China, the average household debt load is 17% of average household income.
#40 The Chinese have begun to buy up huge amounts of U.S. real estate. In fact, Chinese citizens purchased one out of every ten homes that were sold in the state of California in 2011.
And what we have seen so far may just be the tip of the iceberg as far as Chinese “investment” in U.S. real estate is concerned. The following is a brief excerpt from a Bloomberg article that was posted just last week…
China is studying the possibility of investing a portion of its $3.4 trillion in foreign-exchange reserves in U.S. real estate, said two people with direct knowledge of the situation.
The State Administration of Foreign Exchange began the study after seeing signs of a recovery in the U.S. property market, said the people, who asked not to be identified as they weren’t authorized to speak publicly about the matter. China may acquire properties, invest in real estate funds or buy stakes in property companies, they said. The safety of the investments will be the top priority, said the people, who didn’t elaborate on a timetable or other details.
So what can we do about all of this?
Unfortunately, not a whole lot. Both major political parties seem to be fully convinced that merging our economy with the economy of communist China is a great idea. I would not expect major changes in our policies regarding China any time soon.
For now, I will just leave you with one piece of advice…
Learn to speak Chinese. You might need it someday.
What in the world is China up to? Why are the Chinese hoarding so much gold? Does China plan to back the yuan with gold and turn it into a global reserve currency? Could it be possible that China actually intends for the yuan to eventually replace the U.S. dollar as the primary reserve currency of the planet? Most people in the western world assume that China just wants a “seat at the table” and is content to let the United States run the show. But that isn’t the case at all. The truth is that China doesn’t just want to compete with the United States. Rather, China actually plans to replace the United States as the dominant economic power on the planet. In fact, China already accounts for more global trade than the United States does. So what would happen one day if China announced that it was backing the yuan with gold and that it would no longer be using the U.S. dollar in international trade? It would cause a financial shift so cataclysmic that it is hard to even imagine. Most of those that write about the “death of the U.S. dollar” usually fail to point out that China is holding a lot of the cards as far as the fate of the dollar is concerned. China owns about a trillion dollars of our debt, China is the second largest economy on the planet, and nobody uses the dollar in international trade more than China does except for the United States. Up until now, China has had to use the U.S. dollar in international trade because there has not been an attractive alternative. But a gold-backed yuan would change all of that very rapidly.
And without a doubt, the Chinese government has already been very busy promoting the use of the yuan in international trade. In a recent note, John McCormick of RBS Group stated the following…
Financial crises in the US and Europe mean the world needs a new, more stable global reserve currency, and trade in RMB is growing rapidly. In the FX market, for example, our figures show that volumes are now worth around USD 5-6 billion daily – double what they were a year ago.
A number of factors suggest that the Chinese authorities want to make RMB internationalisation happen by 2015.
For China, having a global reserve currency is not just about economics. It is also about power.
McCormick ended his recent note this way…
China’s new leadership faces a number of problems. The country’s economy is slowing and, although we would expect the rate of GDP growth to pick up a little, it is unlikely to be a steep rebound.
But promoting RMB as a global reserve currency, with all the economic benefits that will bring in addition to exerting more political influence on the global stage, clearly remains high on their agenda.
Beijing is undertaking a long, gradual campaign to establish the yuan as a more market-oriented, international currency. China’s State Council, or cabinet, said in a statement this month that the country would draft a plan to allow the yuan to become fully convertible. Meanwhile, the People’s Bank of China is guiding the currency higher and set the median point of its permitted daily trading band last week at the strongest level ever.
We don’t hear much about these sorts of things in the western media, but the convertibility of the Chinese yuan is a very big deal. Up until recently, the yuan was only directly convertible into dollars and yen. But now that is rapidly changing. So far this year, the Chinese government has entered into currency convertibility agreements with Australia and New Zealand.
So instead of having to change yuan into U.S. dollars to trade with Australia and New Zealand, now China can cut U.S. dollars completely out of the process.
But right now there is nothing that really gives the Chinese yuan a significant competitive edge over the U.S. dollar. If Chinese authorities truly want the yuan to end up replacing the U.S. dollar as the primary reserve currency of the planet, they need to do something that will make the rest of the world want to use it.
And they could do that by backing the yuan with gold. In fact, there are persistent rumors that China has been busily preparing for that.
For example, the Economic Policy Journal recently pointed out that Dr. Pippa Malmgren, the President and founder of Principalis Asset Management who once worked in the White House as an adviser to President Bush, is claiming that China has plans to turn the yuan into “a hard, gold-backed currency” that will have a distinct competitive edge over the rapidly depreciating paper currencies that the rest of the globe is currently using…
The most interesting piece of the puzzle is that the Chinese have emerged as the biggest buyers of gold, mainly off-market. They want the yuan to emerge as a hard, gold-backed currency in a world where everyone else has chosen to inflate and devalue.
The recent bilateral currency deals with Australia, France, Russia and Singapore, and many others, reflect this desire to displace the USD as the world’s reserve currency.
It may be an interesting and long race between the Chinese reaching for convertibility and the Western central banks straining credibility.
Other analysts are also fully convinced that the goal of the Chinese is a gold-backed yuan. The following is what money manager Stephen Leeb told King World News recently…
Countries have been battling each other in order to cheapen their currencies. The problem with a cheaper currency is that commodities cost more. So China has decided to opt for a higher currency.
The move in the yuan overnight was one of the most significant upticks I have seen. Like I said, the yuan moved to an all-time high. The yuan has advanced roughly 5% against the US dollar in just nine months. China also imported over 200 tons of gold for the most recent month. That is an extraordinary number. At that rate that’s over 2,400 tons of gold per year on an annualized basis.
This simply speeds up the point at which China will be the largest gold holder in the world. China saw gold come down and they didn’t just buy on the dip, instead they bought as much as the market would give them. And, again, you see the yuan going up so that is making the price of gold even cheaper for the Chinese.
It’s only a matter of time before the Chinese back the yuan with gold. This will push the yuan front and center as a key element in terms of being part of the world’s reserve currency basket. China gets the message. They are doing whatever it takes to establish their dominance in the world, particularly in the commodity arena. Their currency is flying and they are importing as much gold as they possibly can.
And without a doubt, China has been hoarding massive amounts of gold. Everyone agrees on that. But what nobody knows is exactly how much gold China currently has stockpiled, because China is not telling anybody.
One recent estimate put China’s gold reserves at more than 7,000 tons of gold, but it could potentially be far higher than that. When China does finally tell the rest of us how much gold they have, they will probably be just a move or two away from checkmate.
What we do know is that China is importing absolutely enormous amounts of gold right now even though China is also the number one gold producer on the planet.
According to Reuters, more than 223 tons of gold was imported into China from Hong Kong in March. That smashed the previous record of 114 tons in December.
Overall, Chinese imports of gold from Hong Kong tripled in 2012, and the final number for 2013 is going to absolutely smash what we saw in 2012.
Obviously something is happening.
China is massively hoarding gold at the same time that it is trying to substantially raise the international influence of the yuan.
It doesn’t take a genius to see where all of this is headed.
If China does decide to back the yuan with gold and no longer use the U.S. dollar in international trade, it will have devastating effects on the U.S. economy. Demand for the U.S. dollar and U.S. debt would drop like a rock, and prices on the things that we buy every day would soar. At that point you could forget about cheap gasoline or cheap Chinese imports. Our entire way of life depends on the U.S. dollar being the primary reserve currency of the world and being able to import things very inexpensively. If the rest of the world (led by China) starts to reject the U.S. dollar, it would result in a massive tsunami of currency coming back to our shores and a very painful adjustment in our standard of living. Today, most U.S. currency is actually used outside of the United States. If someday that changes and we are no longer able to export our inflation that is going to mean big trouble for us.
So keep an eye on China, and look out for any news about the yuan.
It won’t happen next week or next month, but eventually we could see China back the yuan with gold.
When that happens, it is going to be a complete and utter financial disaster for the United States.