International Forecaster Weekly

Fake Numbers From China

... perhaps most revealing of all are the startling new estimates of capital outflow that show that China is hemorrhaging capital at an unprecedented rate and selling its US treasuries at an equally furious pace to buoy up the yuan.

James Corbett | July 25, 2015

When the People's Bank of China added 604 tons of gold to its official gold holdings last month, no one was particularly surprised. Even mainstream pundits have been expecting such a move this year as Beijing continues its campaign to be included in the IMF's Special Drawing Rights reserve currency basket.

In short, everyone and their dog knows that China has been quietly (and furiously) adding to their gold reserves for the last six years, despite the fact that there has been no change in their reported gold holdings since 2009. But now that they're angling to make the renminbi the world's de facto fifth reserve currency, they have to show that they have some hard assets on their balance sheet to back it up. Hence, the gold update.

    Nor is it particularly surprising that this newest reported figure (1658 metric tons) is almost undoubtedly itself a fake number, at least 2000 (and perhaps as much as 18000) tons below the PBOC's real gold reserves.

    What is potentially much more revealing is the fact that at the same time China's June GDP numbers came in and (wouldn't you know it?) the country hit its mythical 7% growth target right on the button for the second quarter in a row! What are the odds of that?

    And perhaps most revealing of all are the startling new estimates of capital outflow that show that China is hemorrhaging capital at an unprecedented rate and selling its US treasuries at an equally furious pace to buoy up the yuan. But we'll get to that in a moment.

    First, let's put the gold reserve update in perspective. In 2009 China updated its official gold holdings with the IMF from the 600 metric tons that they had been claiming to have since 2002 to 1054 metric tons. And that's where the number has sat for the past six years.

    Of course, that's not where the PBOC's actual gold holdings have sat for the past six years (assuming the 1054 tons was even an accurate number at the time), unless we are truly expected to believe that the bank acquired 600 tons of gold holdings in one month. Here's what we do know:

    -In 2009 the American Embassy in Beijing reported back to the State Department on a Chinese report that "the U.S. and Europe have always suppressed the rising price of gold" in order to maintain the U.S. dollar's world reserve hegemony, and that China was increasing its gold reserves in an effort to internationalize the RMB.

    -China's gold imports began surging in 2011 and quickly surpassed perennial world gold import champion India. Although this was passed off as a sudden jump in consumer demand, even the World Gold Council (via the Financial Times) noted a huge discrepancy between the import numbers and consumer demand estimates, noting that “The obvious inference is that the central bank is buying.”

    -There is a special division of the People's Liberation Army called the "Gold Command Division" that has been acknowledged and reported on for at least two decades. According to Ambrose Evans-Pritchard at the Telegraph this division "mines gold and transfers the metal to the Chinese finance ministry, acting outside normal commercial channels. The government also buys gold directly from Chinese producers. This is an internal transaction and is therefore not necessarily recorded in China’s external reserves."

    -China is by far the world's largest gold producer, producing nearly double that of the second-largest producer, Australia. And as Porter Stansberry notes: "Every single ounce produced in China – whether it's dug out of the ground by the government or a foreign company – must, by law, be sold directly back to the government."

    In short, virtually everyone is in agreement that the PBOC has much more than its officially declared 1658 tons of gold sitting in its vaults; the only question is how much. Even mainline outlets like Bloomberg estimate the real number is 3510 tons. Alternative researchers have offered a variety of other estimates, with some even claiming that Beijing is hoarding as much as 20000 tons or even 30000 tons of the yellow metal.

    Whatever the case, we can be certain that the latest official gold holding numbers are artificially low. The only question is why? There are at least two major reasons why China might want to take a very slow, gradual approach toward revealing the true extent of their gold stash.

    Firstly, if Beijing is still interested in hoarding gold then it's in their interest to insure that the price remains as low as possible. If they suddenly revealed that there gold holdings actually rivaled that of the US (or at least the 8500 tons that the US claims to have in reserve) then gold prices would undoubtedly skyrocket on the news. And if that happened, the days of China buying up physical gold cheaply would come to a swift end.

    Secondly, some are speculating that the timing of this gold reserve adjustment, coming as it does in the midst of the Chinese stock market meltdown, is no coincidence. Instead, the sudden 57% jump in official gold holdings might be another way to assure jittery Chinese investors that the country does have the economic firepower to backstop the market. By this theory, this month's announcement may just be the first of many more to come, and it may be that we will see similar "jumps" in China's reported gold reserves whenever the market heads south.

    Whatever the case, two things are certain: China is in possession of a much larger amount of gold than they admitted to even a month ago, and this latest admission does put them one step closer to inclusion in the SDR basket.
    Now, from the strategically manipulated gold numbers let's move to the clumsily manipulated GDP figure.

    It is no secret that the Chinese GDP figure is an entirely fictitious number. In fact, Chinese Premier Li Keqiang said as much back when he was head of the Communist Party in Liaoning province. According to a leaked cable from the American ambassador, Keqiang admitted in 2007 that the nation's GDP figures are "man-made" and unreliable. Instead, he focused on three key figures to work out his own, more accurate picture of the state of the economy: electricity consumption, rail cargo volume and loan disbursements.

    This fraud has been embarrassingly obvious to even the most casual observers for a very long time. Even a mainstream Reuters report last year noted in its typically understated way that "The combined economic output of China's provinces has long exceeded that of the national level compiled by the National Bureau of Statistics, raising suspicion that some growth-obsessed local officials have cooked the books." Indeed.
    Add to that list of embarrassments the latest magic 7.0% GDP growth rate from the aforementioned National Bureau of Statistics. This time the lie is exposed by Singapore, whose more reliable figures show a 4.6% drop in GDP last quarter, led by a massive 14% drop in manufacturing. Signapore's economy is joined at the hip with China, its largest trading partner. There's no way that Singapore has slowed down so much without a similar slowdown in China. Unless...

    Unless of course China includes the credit created by margin lenders in its phoney baloney stock market in its GDP numbers. Which of course they do. As a result of the ridiculous (and, as we now know, completely artificial) bull run in the Chinese stock market this year, the financial sector alone likely contributed a full 0.5% of GDP growth to the country. This helped offset sluggish growth in real estate and transport and logistics which have previously contributed much to China's growth.

    But then again, arguing about precisely how much the funny money margin lending of brokerages have contributed to the "man-made" and unreliable 7% growth in GDP is like arguing about how many angels can dance on the head of a pin. A more fruitful endeavor might be to ask what in blazes is going on with China's capital outflows.
    By Q1 of this year, the situation looked dire: $300 billion of capital outflows from China in the last year. Now the situation looks to be completely out of control. Our good friends at the Vampire Squid (aka Goldman Sachs) are now estimating a $224 billion outflow in Q2 alone, which, needless to say is a level "beyond anything seen historically." Just to put that in perspective, that would be a whopping trillion dollar outflow if annualized.

    Given how secretive Beijing is with its real economic data, the nature and proceeding of this massive outflow is still but dimly understood. But we do know that China's actual manufacturing activity has completely stalled this year. And how do we know that? By precisely the same measures as Keqiang uses to estimate China's actual economic activity. As Evans-Pritchard in the Telegraph puts it: "Chinese industry ground to a halt earlier this year. Electricity use fell. Rail freight dropped at near double-digit rates. What had begun as a deliberate policy by Beijing to rein in excess credit escaped control, escalating into a vicious balance-sheet purge." Falling electricity consumption? Check. Low rail volume? Check. Plummeting loan disbursements? Check. Gulp.

    The only question is what China is doing about it. It seems that they are doing the only thing they can do: selling their US treasuries to shore up the yuan. Or, more accurately, selling "Begium's" US Treasuries to shore up the yuan. The mystery of several months ago of Belgium's curious build-up in US Treasury holdings through Euroclear has since been resolved: Belgium was being used as a front by the PBOC (or other Chinese government arm) as a proxy for Chinese purchases of US Treasuries, and as a result the small European nation's Treasury holdings ballooned from a historical figure in the $170 billion range to $381 billion last year. But in the last several months those purchases have been unwound and in the last three months alone China has dumped $143 billion of those Treasuries.

    This Treasury dump has yet to eat in to China's official holding of $1.3 trillion in 10 Year T-bills, but given that they are hemorrhaging capital at an annual rate of $1 trillion, it really is just a question of when China will start liquidating their reserves.

    The irony is that pundits have been speculating for years about what would happen if China started selling its US debt holding as a type of economic "nuclear option" against the US, but now it seems that the worldwide economic slowdown and their own stalled economy might force them to do it against their will.

    If this continues, needless to say, the results will not be pretty for anyone. When China starts hitting the panic button and officially joins the ZIRP and QE club, the "currency wars" of the last several years will seem like a quaint relic of a bygone age, and the real currency wars will begin in earnest. Devaluations, more and more frantic money printing, and central banks acting increasingly aggressively will be the order of the day. And when and if that happens, the gears of world trade will start to grind to a halt and the "currency war" will turn into a real war, exactly as the trade wars of the 30s led to WWII.

    Perhaps it's fitting to end with a Chinese proverb. Not the old familiar "May you live in interesting times" (an apocryphal saying that doesn't exist in Chinese), but an actual one that seems even more appropriate: "It's better to be a dog in a peaceful time than be a man in a chaotic period." Let's hope we don't have to test the veracity of that any time soon.