STAFF NEWS & ANALYSIS
China's Central Bank Warns of Risks in Illegal Gold Futures Speculation
By - October 27, 2008

The People's Bank of China said on Thursday that "underground gold futures speculation" was "typical illegal trading on gold futures" and was not protected by law. The central bank warned Chinese investors of the extremely high risks in illegal futures trading. Illegal gold futures trading is reported to have cost Chinese investors at least 100 billion yuan (14.6 billion U.S. dollars). The illegal gold futures trading operates in two main ways: local companies working as agents for domestic institutions and individuals to help them invest in overseas gold futures; companies providing services in gold trading and demanding investors deposit money in designated accounts in a variant of margin trading. The central bank said Chinese investors could conduct real gold trading through domestic commercial banks, or invest in gold futures through the Shanghai Gold Futures Exchange. The central bank said it would improve supervision of gold trading and enhance education among investors to raise awareness of the risks. – China View

Dominant Social Theme: China looks out for its own.

Free-Market Analysis: But this time the old men who run the place may be feeling a tad snookered. Yes, it would seem the dragon is stirring. (See next article as well.) It could be that China's leaders see a chance to flex their muscles, or it could be that they feel that they have truly been hung out to dry by the American money elite. The result? Quiet, but dangerous articles like the one above. Here's an excerpt from one analysis that circulated about this odd and seemingly innocuous article.

This is an interesting bit of news-speak from China as the gold market gets hammered even as the US Treasury and Europe issue debt and print money like there's no tomorrow. This manner of speaking strikes me as China's way of indirectly telling the Western entities that are working the manipulation in the paper gold market to knock it off. They won't come out and speak to this directly; they'll make these cryptic remarks about some oddball thing they say is going on in their own domestic market. "Extremely high risk of illegal futures trading…" That's sounds to me like Sino-speak for we will slam you if you keep up the coordinated attacks on gold via London. The rest about the local players is their way of saying to anyone in their own yard who's part of it that they need to watch themselves as well (I'd say Hong Kong in the mix that way). China opened its markets to outside exchanges this summer. Chinese institutions and individuals can buy into ETFs and gold funds like anyone else now, if I recall correctly, so whatever this local thing they're talking about is, it seems to be some smoke they've blown in there. That's how they operate. You can pretty much guarantee that the westerners won't pick up on it and the next "message" will be sterner.

The writer of the above interesting analysis then mentions Korea and how the Chinese mentioned to the United States in a low-key way that if the US advanced further that they would be unhappy. US forces didn't get the polite message and not much later they got hit with a Chinese invasion. By itself, perhaps, the above article might not seem to mean much, but taken in conjunction with much stronger words by the Chinese leadership – no hint at all – that the world should seek an anchor currency besides the dollar, the impression is that some resentment is starting to creep in.

Indeed, why not? It is true that they are stuck with about US$1 trillion in debt paper that they cannot sell, cannot even give away without doing considerable damage to their portfolio. While they had begun to sell off US paper in this past year, the market turmoil has probably put paid to at least some of those plans. Though the US dollar is up, they doubtless see it as the fragile thing it is. If they sell big, they may well manage to destabilize what is left of the world economy, and their own economy as well.

That's actually what the leadership apparently lives in fear of. After Tiananmen Square, the leadership knows that it can't afford to seem backward or overtly oppressive, not without a lot of PR damage anyway. They need the economy to keep growing so that the approximately 400 million Chinese who have not seen much of an improvement in their living standards can start to get a sense of the transformation that has taken place elsewhere in China. The old leaders are trying desperately to move these people into the cities where they can find more lucrative jobs than farming, but what if the city jobs dry up? That's the Chinese nightmare – well over one billion people and a shrinking job pool.

The old men are nervous. They can't get rid of enough US paper (maybe they will still try but it wouldn't make much sense) and on top of that, they are seeing, apparently, what many others are seeing, that Western central banks are ever-more boldly manipulating the price of gold and silver.

Now all this may change if the Chinese really decide to throw their weight around. It is another indication that the money elite made a bit of a mistake in their endless central banking manipulations of Everything. Surely China received assurances that if it bought American paper, the American consumer would provide an energetic export market. Now the Chinese bureaucracy is starting to figure out that market is going to wither and die in the upcoming recession. They will still have the paper, but they won't have the market. And that wasn't part of the deal.

After Thoughts

Did the money elite expect the great unraveling anymore than the rest of us? The Chinese are opening up more and more to the Western fiat money system, and this may put paid to easy dealings with America and the UK. Already, the Chinese are doing more and more business with Russia, with Venezuela, with certain Middle Eastern countries, even with Mexico. One can hardly blame them for rebuilding cold war alliances. Warming up to the West has proven, again, to be an expensive proposition.

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