– China’s banks use gold as legal currency (PressTV, Nov. 20, 2011):
An exclusive interview with Dan Collins, founder of thechinamoneyreport.com
A prominent economist says that China’s economic importance is growing strong and steady that the ailing US and EU economies will exchange their gold reserves for Beijing’s financial bailouts.
G-20 leaders are facing growing pressure at home over the economic woes of their countries, where protests are being held in some nations on a daily basis.
There are fears that more delays in resolving the eurozone debt crisis could push not only Europe but much of the rest of the developed world back into recession.
Analysts say that the recent hike in the price of gold will add fuel to the flames caused by concerns over the United States’ economic outlook, rising inflation, worries over the euro zone debt crisis, and the lowest-ever interest rates in the US.
Meanwhile, the International Monetary Fund expects China’s economy to expand by 9 percent in 2012, while an increase in domestic product should account for a full quarter of total global growth.
Press TV has conducted an exclusive interview with Dan Collins from thechinamoneyreport.com to further discuss the issue.
The following is a transcript of the interview.
Press TV: The big news coming from China in the past few weeks is that investment demand for gold and silver is up. Give us the numbers.
Collins: Yeah, real big news, Max. Shanghai Gold Exchange reported last week, starting with silver, silver demand’s up 750 percent for silver forward contracts. The major buyers here are the large commercial banks of China.
First of all, I’ll talk a little bit about silver. They’re following the gold pattern here in China which is average Chinese citizens here now can buy silver in their bank account. So, you don’t need to keep cash in your bank, you can go online and move your cash into silver or you can move it into gold. And that’s really what’s driving the increase in gold and silver prices here.
They started the gold trade in the major commercial banks about three years ago. Silver started last year in August, 2010. But what was really shocking is the numbers that have come out. I mentioned the year over year increases.
But if we look at just one Chinese bank, the ICBC, Industrial and Commercial Bank of China, first half of this year they sold over 300 tons of silver. 300 tons is roughly about 10 million ounces. So, this year they’ll do roughly 20 million ounces of silver which is roughly 2 percent of all the silver mined in one year.
So, we look at the Chinese banking system just starting these new products in China, this year they could take nine or ten percent of all the silver mined in the world. And these products are just getting started. Two, three, four years from now, the Chinese banks could be selling 20, 30, 40 percent of all the silver mined globally. And that’s really why we’re seeing huge increases in silver.
Press TV: I got to tell you, Dan, these are blockbuster numbers. And the banks are effectively allowing Chinese people to have bank accounts that are based in precious metals.
I know Eric Sprott in Canada is trying to introduce a new banking facility that would give people in Canada a similar option to have their reserves or savings held in bullion. But, apparently, the Chinese are beating Eric Sprott to the punch. That’s what it sounds like.
Effectively, it’s becoming a bi-metal reserve currency in China, is that right?
Collins: Absolutely. It’s a really innovative product and you wonder why Western banks — that are tough to make money – haven’t thought of this earlier?
Gold trading has been very successful in China. The penetration, though, in China has been very small. Probably, I would say, less than 5 percent of the people keep gold or silver in accounts. But it’s growing rapidly every year in the hundreds of percentile, the new people coming in, opening gold accounts and silver accounts.
Press TV: Right. And in the case of silver, as you mentioned, two percent of the silver coming out of the mines are going into the savings accounts. That’s a very big number. Plus you’ve got increased demand for silver in solar energy. You’ve got it in electronics, of course. And there’s only about a billion ounces of silver above ground. Unlike gold, of course, silver is used industrially.
So, there’s not very much silver out there. The price on silver, of course, with that kind of demand would have to rocket over the many hundreds of dollars per ounce level that we’re looking for over the next few years.
Now, I see that you were reporting that a family of fund managers has been sentenced to death after defrauding investors of a billion dollars. Dan Collins, tell us more about this. I like the sound of this.
Collins: I knew you would, Max. I knew you would.
Basically, Hangzhou, a city here from about two hours away from where I’m at, a very Madoff-type scenario – a typical ponzi scheme – they paid off the old investors with the new money. Long story short, they lost about one billion US dollars, defrauded around 15,000 investors. But it only consisted of a father and two sons, at this fund.
The only difference between these guys and [Bernie] Madoff is that they were quickly all sentenced to death.
Press TV: I like that, it has a nice finality to it. Of course, in the history of jurisprudence, this would be called a “deterrent”. If you commit a crime, there would be some kind of penalty. And I’ve often argued that there should be capital punishment for crimes against capital. So, the Chinese have decided that, yes, capital punishment is a good idea for crimes against capital when people commit frauds at this level.
Going back to this bi-metal reserve currency option for Chinese investors and savers, if I’m in the West, let’s say I had an account at MF Global, this was a bank that was in business for more than 200 years, then Jon Corzine, former Goldman Sachs guy took it over, committed massive fraud, he started [combing] accounts. And now JP Morgan has a claim as a creditor over actual segregated deposits at that facility.
Trust in Western banks is now crashing.
Why wouldn’t I want to have an account at a Chinese bank? Because I know the Chinese, at least, would have a deterrent in place. John Corzine would be put to death in China and, of course, that would be a suitable punishment for him.
Why wouldn’t I want to be in China rather than the US? Isn’t that going to suck in a lot of money from around the world?
Collins: Absolutely. Chinese banks are much smaller, conservatively run. You know, they’re not into these derivative products. They’re old school banks. Obviously, they have some loan issues but they’re working through these issues. A Chinese CEO of a bank might make 150 thousand dollars a year, with no bonus.
You know, you look at Bank of America; they paid 35 percent of their revenue in bonuses in February. And then this month, we find out they’re transferring trillions of dollars in toxic debt from [Merril Lynch] into the Bank of America which is FDIC insured. I mean, it’s total fraud.
I personally don’t invest in any American banks because I will invest in no companies that pay themselves 35 percent of their revenues in bonuses. That’s not sustainable in any industry.
Press TV: OK, I know that reports in Chinatown and New York City, there are lines of Americans everyday when the bank opens to put money into Chinese banks. And I guess we’re going to see more of that trend expand in the US.
Of course, America hates competition. They’re no longer competitive in the sense that they’re growing the economy by innovating and competing. They’re just growing their economy through foreign invasions and larceny.
So, they can’t be happy about the Chinese, basically, emerging as the safe hands that one would have their savings. And combine that with the bi-metal reserve option, this is going to further destabilize huge ponzi schemes like the JP Morgan, for example, with 90 trillion dollars of derivatives on their balance sheet now caught in a co-mingling scandal with MF Global. “Jamie” Dimon, the CEO, now implicated in a number of scandals and frauds.
So, when a bank like JP Morgan goes down, 160 billion dollar company, when that goes in the way of Enron, and we see it disappear in a puff of smoke one day, I would imagine that even more money would be flowing into these Chinese deposit accounts and taking advantage of this bi-metal situation.
In terms of geo-economics, Dan Collins, the IMF and European nations are pressuring China to up their contribution to bail out Europe. Very interesting dynamic here, what do you see happening?
Collins: They will get some money but there’s going to be a lot of strings attached, and it’s not going to be a lot of money. It’s not going to be nearly enough to move the needle on any type of European debt situation.
Over here they say, yeah, China we’d like to give a little money so we have face, it looks like we have big power; but, at the end of the day, how can we justify a country that has such a low level of GDP per capita bailing out nations with very high levels of GDP per capita, and people retiring at 50, 55 years old?
So, they’ll get a little bit of money but it won’t be nearly enough of what they need to move any kind of needle in terms of their debt issues.
Press TV: I’m making a prediction that China makes a play for Italy’s gold because Italy has 2,500 tons of gold. It’s the biggest position in Europe. Why wouldn’t China, who’s starving for gold bullion with 1,000 tons – they’re looking to acquire 5,000 tons to be competitive with the US – why wouldn’t China, because they were rumored to be bailing out Greece at some point but, of course, Greece only has 110 tons of Gold, why wouldn’t China make a play for Italy’s gold and say ‘we want that 2,500 tons of gold and in exchange we’ll float some kind of lending facility to you’? What are your thoughts on that?
Collins: If we look at history, that’s happened many, many times. You know, right before the Lend-Lease Act in World War II, the first thing the US did was have the British send all their gold over. So we could easily see that happen today. I don’t know if we’ll ever hear about it in the press but it could easily happen.
And you could easily make the case that America will have to send gold reserves over to China at some point as well.
Press TV: OK, so clearly gold is now back in play after many decades of being off the table considering the “barbarous relic” by John Keynes. Now it’s suddenly in vogue, once again, as people realize that these trillions of dollars of debts that can’t be paid won’t be paid, and we’re going to recalibrate the global currency grid. In a recalibration of the global currency grid, how do countries like China, Russia and Iran come out of that?
Collins: Well, I think they’re all different. I like China’s position because when the global financial system eventually reboots, they have the factories. They have the engineers. They have the productive capabilities. They have the relationships with the developing world of import-to-commodities. They won’t need to export so much – you know, loaning money to a country that can’t afford it to buy their goods. But I think, eventually, they’ll be ok.
Russia, I’m not an expert in but they are very highly dependent on gas and they need to diversify their economy.
And I like China’s chances, eventually, when the global financial system reboots.
Press TV: Alright, let’s talk about the Chinese rating agency. We hear a lot about Moody’s, Fitch & S&P. Occasionally, we hear from Dagong which is the Chinese rating agency – they downgraded US debt, and now they’re threatening to downgrade US debt again if Ben Bernanke officially begins quantitative easing 3. Do you see this debt and currency war heating up, Dan?
Collins: Yeah. Dagong has downgraded the US currency twice. There will, no doubt, be a third time. I believe not only will Dagong do this but, globally, rating agencies will also, eventually, continue to downgrade US as well.
If anyone just takes the time to do the math behind the debts the US has run, it’s absolutely inescapable. And I imagine at some point, the US debt will, once we get past these European issues, however that works out, the focus will turn to places like the United States and Japan.
Press TV: Alright. Let’s go back to Europe for a second. There is a lot of hostility from the German population toward bailing out debtor nations. The Chinese population, you touched on this briefly about the GDP ratio on outputs and comparison. So, the Chinese population, I would imagine, is not so keen on bailing out the big nation of them all, the biggest debtor of them all, the United States. Or, is that not the case?
Collins: No, that is the case. The Chinese population is definitely against bailing out countries. Some of the op-ed pieces I’ve read in the media here, they actually say these countries aren’t poor. They cry “we’re poor, we’re poor; we need money”. But in reality, all they have to do is collect their taxes and cut back on spending.
Their living standards are much higher than the average Chinese living standards. So it’s absolutely insane to think that China could actually bail out people.
Press TV: Right, but China has never-the-less funded the American economy now for more than a decade as part of the “vendor-financing scheme” that’s gone on between China and the US. China lends America money which keeps interests rates low enough for American consumers to buy Chinese made goods, and that money ends up going back to China.
At some point, that relationship is going to break because the US simply can’t sustain itself any longer. China loses its biggest export market, what happens then? Do they allow the UN to appreciate? Do they focus on internal demand from its own consumers? How does the breakup of that symbiotic relationship between US and China, once it’s broken, what happens in China?
Collins: You know, the US is actually their second largest trading partner, now only the EU. Exports out of China consist of about four percent of their GDP. So, obviously, if we have a complete dollar collapse and the US goes down, they can’t buy anything, everyone’s going to suffer. There’s no way you can escape that.
As I mentioned, at that time, if the financial system does reboot, China will focus here on the domestic market. The domestic market here is much, much larger than people give it credit for. The Chinese vehicle market is twice as large as the American market. These aren’t exports. These are vehicles sold here domestically in China.
Over the short-medium timeline, we will see China continue to increase the Renminbi. I think it’s been bad policy on their part to keep it too low for too long. It’s encouraged over investment in factories, and it’s discouraged the service sector.
In my opinion, the increase in the Renminbi will only help China. China is very reliant on imported commodities. The main cost of production in its Chinese factory is the raw materials most of which are imported. I believe China has only to gain when the Renminbi increases. And as time goes on, they’ll realize that more and they’ll let the Renminbi appreciate.
Press TV: The cost of the imports, the raw materials, will be more beneficial for the factories, if you let the Renminbi appreciate. But they have delayed doing this for some time. Why have they waited for so long to do this, Dan?
Collins: If you go to the highest circles in Beijing, there’s this conspiracy theory up there. They look at Japan’s example.
A lot of people in Japan will tell you that we made a big mistake in the Japanese currency. We also kept it too long and created a huge bubble. Twenty years later, we’re still not out of it. China’s almost in a very same situation.
So, in Beijing, there’s a lot of people saying look what happened to Japan, they increased their currency over 200, 300 percent over 20, 30 years, and now they’re in such a big problem. That’s been the consensus.
There’s also a lot of vested interest in exporting. There are a lot of capitalist people here [who are] very focused on exporting. But I think over time, if you look at the cost of goods production in a factory, 50 percent is raw materials. Most of that’s imported. Your labor, other things, that’s 10 percent or less.
Eventually, they’ll catch on to raising the local living standards here. And I think we’ll see it higher next year. But raising the local living standards here is priority number one. And the best way to do that is to let the Renminbi appreciate.
Press TV: Now, what you’ve just described there, Dan, is they’ve seen the way it happened in Japan, they realize the problem of financing a bubble and then the burst that comes after it, so, that’s not a reason why they would not let the Renminbi appreciate. What you’re saying, that at the top of the People’s Bank of China, at the top of the cadre of management there, are they in the pocket of foreign interests? I mean, why are they acting against their own interests? I don’t understand.
Collins: I think there’s been two groups. You’ve seen the Central Bank of China come out very positively on revaluing the currency. Now, it’s never going to happen one time over night, they don’t work that way. But there’s a group that wants faster appreciation, and there’s a group that wants slower appreciation. The slower appreciation group really has on their mind they want jobs. Jobs are number one.
But the reality today, China is almost near full employment. You go to several manufacturing regions of China, you can literally not find workers. And wages here have literally doubled in three years.
I believe the Renminbi’s been relatively stable this year because they’ve taken into a lot of costs in terms of inflation – worker’s, salaries, electricity, everything’s gone up.
And I think next year, now that we’ve seen inflation stabilize here, we’re going to see some more credit loosening happening, loan quotas are going to go up, and I think we’re going to see the Renminbi appreciate more next year.
But there’s really been a tug-of-war between two thought groups up in Beijing.
Press TV: It sounds like the government has extended this window, this arbitrage as a way to build this trust in terms of jobs which people can understand readily. Whereas, the service industry is a bit more abstract and, maybe, that transition will have to be managed at some point, but it’s not as obvious to the average person who has a “job” in a factory, that’s what that’s all about.
Now, Secretary of State Hillary Clinton is saber rattling against China in the past week. 1,000 marines are going to be sent to a new permanent base in Australia, on China’s doorstep. What’s this all about, Dan?
Collins: Hillary came to Vietnam last year and signed a technical agreement where the US will help Vietnam enrich uranium. When I saw that, I think the strategy became very clear to me on US foreign policy in Asia.
You know, China’s a continent in itself and there’s a lot of small countries surrounding it, and a lot of them are nervous about Chinese power in the region. And they’re going to look to the US to be a kind of consolidator of power as a hedge against the Chinese. They don’t want to see China rise up and take over the region.
And I think the US, what they’ve announced this week with these new people going into Australia, is just a part to increase their Pacific power base.
Press TV: There’s huge hedge fund bets being made on both long-China and short-China. There’s a lot of talk about some of the more visible hedge fund managers out there who have a very large negative bet on China. They point to the “ghost cities”, the over building, etc.
Over the next five years, how is this going to play out, Dan Collins? Is there going to be a soft landing and the shorts are going to lose out on this particular bet? Or, is there something brewing that we should be worried about?
Collins: In my opinion, the shorts will absolutely lose. Many of them have been short two, three years already. If you go to individual companies, especially the reverse merger market in the US, an absolute place to play short.
But, if you’re looking at the total macroeconomic situation in China, there’s really not much reason to be bearish. And I’ll give you reasons. People talk housing bubble; yet 50 percent of the homes in China have been purchased cash up front. The other 50 percent have paid 30 percent down.
So, people look at a slight slowdown in China this year and they come up with all these doomsday scenarios. They forget last year we were growing 10 or 11 percent a year with inflation getting nearly out of control.
China put industrial loans here from five percent last year all the way up to 9 percent this year. So, you’re bound to get a slowdown, and it’s good that we got a slowdown in China this year.
But as we talk, you know, “ghost cities” is another topic which I find interesting. Americans like to comment on “ghost cities”. But in America, we haven’t built infrastructure in two generations. What do we know about infrastructure in China? These “ghost cities” really aren’t ghost cities.
Obviously, local governments in some areas like Ordos [City] up in the north may have built too much, but what happens is that these cities are all overcrowded. You have massive urbanization in China now.
In fact, the area where I’m in is an area called the New City. In 18 months, they’ve built 35 apartment blocks, office buildings, 10 skyscrapers, shopping malls, everything. And it’s done in 18 months. So, if you were to look at it, yeah, it looks like a ghost city. But if you wait a year and a half, two years, it’s filled up. And all the properties have been sold and there’s really no credit bubble to these properties in China. It’s very difficult to get loans in China.
Press TV: Why’s that?
Collins: Well, I’ll give you an example. On an industrial loan for your business, you have to sign over your deed to get a loan. And even that, they will come in and they will analyze your plans, assets, equipment, everything. They will only give you a loan up to 30 percent of what they value it at. So, China is not a credit heavy nation. It’s very conservative in terms of lending.
As I mentioned, the housing market is another good example. The housing market has basically stopped in terms of transactions. But the prices aren’t really dropping. The reason why transactions stopped is they literally tell people they’re not allowed to buy more than one house now. And if you’re not from Shanghai, you can’t buy a Shanghai apartment.
When you put in these kinds of draconian rules to stop people from buying houses, I don’t see this as a bear signal.
Press TV: Alright, well, we’re just about out of time. I just want to reiterate the highlight of this interview which is that a “fund manager in China caught defrauding investors of a billion dollars was put to death”. Bravo, China!