China: Financial Activity, Renminbi Mobilization
& Gold Discounting

January 30, 2011
By “Cuban Pete”

I’ve recently caught up with and enjoyed several interesting conversations with an international entrepreneur who is quite active in Asia.  Not so coincidentally, our conversations turned to China. Below I’ll relate part of the context of our discussions and pass on some of the information he sent my way which may be of interest to Ovadya, and associates.
To begin with, below are a couple of links to stories I’m sure you’re at least somewhat familiar with by now. Chinese ambassadors are on what is being termed a “charm offensive”, pledging support and promising to purchase substantial amounts of bond offerings throughout the world. In this case, they are specifically focusing on Western Europe. The timing of the Chinese President’s recent visit to the White House is seems related of course.
Here is a link to a recent story in the Washington Post and then a follow-up to it a few days later in the L.A. Times.
Washington Post article on “China’s Financial Clout being felt in Europe through their purchase of Euro Bonds”
and then a L.A. Times article as an update to the previous article…

Below I am going to summarize part of the conversations I had with the international entrepreneur I mentioned above and focus on a few trends I feel may be pertinent to your operations in China and relevant to Ovadya’s internalization efforts. They include;

1)  Will the Chinese Renminbi (RMB) threaten the U.S. dollar’s status as the world’s NEXT RESERVE CURRENCY?
2)   New Renminbi (RMB)-denominated Gold Contracts & Bonds.

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3)   China has a deadline for SHANGHAI
to become a
Leading Global Financial Center

4)     How to Open a U.S. based Renminbi (RMB) Bank Account
5)   “Dirt Cheap” Gold in HONG KONG

Without a doubt, the existing global financial system depends on the widespread use of fiat currencies issued by insolvent governments. The wealth of the world’s large financial institutions requires that there be currencies with sufficient size and circulation to absorb massive capital flows.
The current system is based primarily on the dollar. With a $14 trillion economy, the United States was for years the only country in the world with a sufficient money supply and financial infrastructure to take in the preponderance of the world’s wealth.

It is for this reason commercial loans, commodities contracts, international reserves, and cross border settlements have traditionally been denominated in US dollars.
IS THE RENMINBI AS THE WORLD’S NEXT RESERVE CURRENCY?

Competing reserve currencies arose with the advent of the euro and Japan’s post-war rise. Meanwhile, the dollar has continued to remain dominant. These three are the only currencies which have the necessary supply and credit rating to currently receive world currency reserve consideration.
With trillions of dollars floating around the global financial system, managers are constantly making capital allocation decisions and moving funds in and out of various instruments. The reserve currencies play a big role in this because unallocated capital is frequently parked in their bond markets.
For example, large corporations or banks that are sitting on billions of dollars in cash typically purchase       short-term US or European government bonds because of the low default risk.

The dollar, euro, and yen have bond markets of such size that getting liquid is never a problem, even for billions of dollars. There is always a market for treasury securities; hence they are considered ‘cash equivalents’.
You couldn’t do the same thing in a smaller country and economy where if you tried to move $100 million its currency would spike. In the US, Europe, and Japan, $100 million barely registers a blip.
Over the last few years, though, the confidence has begun to fade quickly and the reserve currency issuing governments are starting to be viewed with increasing skepticism.
The thing that’s missing right now is an acceptable alternative. There’s really nothing out there in large enough scale to withstand massive capital flows. The game now is really one of judging the ‘least worst’ of these three major currencies.
In what seems to be a 6-month cycle, the dollar and euro have been jockeying for the ‘worst of the worst’ title. Markets focus on Greek woes for a few months and then turn their attention back to California and Obamanomics. I’m all too familiar with the latter, two abominable train wrecks with regard to irresponsible fiscal policy, non-business friendly environments, out of control spending, corruption, increased taxation and fees.
With Bernanke’s “100% certainty” and nonsensical economic numbers coming out of the America’s Ministry of Truth (Newspeak: USMiniTruth), we seem to be back in a period where the markets are more concerned with Europe. I think that Japan will be called to the carpet before too long as well.
As such, in an almost ritualistic cycle, financial markets are shifting funds around these currencies. The analogy I like to think of is like a series of buckets.
Imagine three buckets and an increasing volume of water. Capital allocators are essentially dumping the contents of one pail into another. The water spills from the dollar bucket into the euro and yen bucket and then from the euro bucket back into the dollar bucket.
Each time this happens, though, a little bit of water spills out into smaller buckets– gold, silver, Switzerland, Norway, Canada, Chile, Australia, etc…
All throughout, central bankers are standing there keeping the spigot at full blast, pumping more water into the system while bankers desperately try to find the least leaky balance.
What’s required is a new bucket that bankers view as strong, sturdy, and large enough to handle the volume. The most likely candidate is the Chinese renminbi… but not yet.
China’s economy is set to be the largest in the world in a matter of years, and it has the money supply to match. While its economic and monetary fundamentals are far, far from perfect, China is arguably in a much better financial position than the West. Indeed, it is now the preferred source for capital infusion and Cash (Bind purchases) worldwide.
It’s going to take several years for the Renminbi to overtake the dollar, euro, and yen as a serious contender for the world’s main reserve currency… but it can happen. The major roadblock is that China’s Renminbi is not free-floating– the government has imposed severe exchange controls. However, I will describe further below how this is beginning to change.
We are seeing the early signs of relaxing certain controls. China doesn’t do anything overnight but I think there is a long-term plan in the works.
We have already seen China agree with other sovereign nations to introduce currency swap arrangements, so there are now several countries holding Renminbi.  Furthermore, the Hong Kong gold exchange recently announced its plans to launch a new gold contract denominated in Renminbi.

To be clear, China already has its own gold exchange, but having one in Hong Kong opens up               Renminbi-denominated gold contracts to the entire world since Hong Kong has no exchange controls.
On that note, the mainland authorized Hong Kong’s banks to establish cross-border settlement accounts in renminbi last year, effectively providing a way for people to open a Renminbi bank account. In fact, my associate in Asia has one.
Each of these measures to reduce exchange controls is one step closer to the Renminbi being introduced as a global reserve currency.
Perhaps the most obvious step, though, came just this month. Beijing has already allowed several multinational companies like McDonald’s and Caterpillar to issue Renminbi denominated bonds.  Now the World Bank, that unfortunate staple of the financial system, is issuing its own two-year Renminbi bond.
This is a BIG DEAL and I think that we’re going to continue to see bigger and bigger steps like this taken throughout 2011 and within the coming years.

China’s government has been very clear that by 2020, it wants SHANGHAI TO BE a LEADING GLOBAL FINANCIAL CENTER … and Chinese policymakers know that for Shanghai to be a financial center, the renminbi must be freely convertible.
Make no mistake, my friend, the deadline has been set and it’s time to start making decisions to preserve your capital.
We also spoke about how this all plays into holding currency in the Chinese Renminbi.
The news is…

Bank of China (BOC) account holders can now open accounts in Renminbi within the U.S.
My associate informed me that in its latest step to make the Renminbi a competing global reserve currency, China’s predominantly state-owned Bank of China will now let individuals open renminbi savings accounts… in the United States.
It is my understanding that effective immediately, BOC’s US individual customers can now open a Renminbi denominated savings accounts with a $500 equivalent minimum balance. The bank also offers certificates of deposit in 6-month and 1-year terms with a minimum of $1,000 equivalent.
The account opening procedures are simple;

- There is an application form
- a W-9 tax form
- and a signature card.

Applicants are required to provide a government-issued ID and one other form of identification such as a credit card, employee ID card, insurance card, etc… You do even have to show up in person.
Businesses can also open Renminbi accounts with a $5,000 equivalent minimum and requisite entity paperwork like Articles of Organization, etc…
At this time, Renminbi cash cannot be withdrawn from the account, though we would expect this to change eventually.

The bank does provide currency exchange services between dollars and Renminbi at its Chinatown branch in New York. Current limits are up to $4,000 per day and $20,000 per year.
China doesn’t do anything overnight. Once again, he maintains that the Chinese government is executing its long-term plan to make Shanghai a leading world financial center. Part of that plan, of course, is for the Renminbi (or some derivative) to become a fully-convertible competing global reserve currency.
As I mentioned above we’re already seeing significant signs of this as many sovereign nations are holding Renminbi in reserve instead of just dollars. Chinese cross border settlement is now frequently being transacted in renminbi instead of dollars because of new clearing and settlement platforms that have been established in Hong Kong.
The recent establishment of a Renminbi denominated gold contract will that will trade in Hong Kong plus the World Bank transacting a Renminbi bond issuance serves as further proof.
Bank of China’s move in the United States seems like just the latest step in a long-term process to loosen exchange controls and achieve full convertibility of the renminbi. I think we’ll see even more steps like this in the coming months and years.
More specifically, I imagine that a similar exchange platform will be unveiled in Europe for euro and pound conversion into Renminbi; that further Renminbi-denominated contracts in Asian staple commodities like rice will hit the Hong Kong exchange; and that many of these contracts will move beyond Hong Kong to other exchanges.
Singapore is the most likely candidate to absorb Renminbi contracts. The Singapore exchange (SGX) already operates global depository share trading of mainland Chinese companies and it always does its best to stay on the cutting edge of finance.
After Singapore, I think we’ll see renminbi contracts spreading across the region into places like Australia (which has strong economic ties to China) and Thailand (an agricultural commodities powerhouse).
It’s not difficult to imagine that several years from now the entire world may find that the baton has been passed on the day that the US Treasury Department holds a bond auction denominated in Renminbi or the day when a bank wire transfer from Bangkok to Boston passes through a corresponding bank in Shanghai.
And lastly, here’s an interesting tidbit for all you GOLD BUGS…

CURIOUS AS TO WHERE IS THE CHEAPEST PLACE IN THE WORLD TO BUY GOLD COINS?

Anyone looking to hold gold as a store of value or even medium of exchange can find that major gold coin mintages like the Eagle, Maple Leaf, and Krugerrand are advantageous because they’re recognizable worldwide.
You can do business in a coin shop anywhere in the world
from Vancouver to Vanuatu with one of these coins. Bulk bullion, on the other hand, needs to be specially weighed and assayed by experts before being traded.
For this reason, the premiums for which gold coins sell tend to rise substantially in crisis periods when demand for physical metal is high. In the initial days of the 2008 financial crisis, premiums shot up from 4% to well over 10%, even though the price of gold was simultaneously falling sharply.
Today, with gold routinely taking out its all-time highs, gold coin premiums around the world have remained fairly high.

An associate of mine in Asia was recently traveling in Hong Kong. While conducting his normal rounds of the various banks in the Central Business District that sell gold bullion coins over the counter to walk-in customers (the usual suspects like Hang Seng Bank, Bank of China, and Wing Lung Bank) he came upon a startling revelation.

At Hang Seng Bank, Canadian 1 Oz. Maple Leaf coins in pure 24 karat gold were available for cash purchase in Hong Kong dollars at just 0.5% above the prevailing spot price of gold.

This is DIRT-CHEAP and it certainly presents an interesting arbitrage opportunity.

Depending on your objectives, however, there may be even better gold coin buys in Hong Kong at the moment.

Over at the Bank of China, for example, the Chinese Panda coins were quoted at 4.9% above spot gold.

The Panda is one of the most beautiful gold coins of all and in North America they typically sell for much greater mark-ups above the spot price of gold than most other coins, often over 20%. In the UK it’s even more.

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Many collectors value the Pandas simply for their aesthetic beauty and it probably doesn’t hurt that the dealers authorized by the People’s Bank of China to sell Pandas in the US have a virtual monopoly on the market.

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This situation can be exploited to your advantage. The difference between the buy price in Hong Kong and the sell price in North America is roughly $275 per 1-ounce coin.
If you and/or Grant happen to be in the area it might be worth the effort and expense to fly to Hong Kong and buy some coins. If you sold a few it would be enough pay for the trip and afford yourself a nice adventure and mini vacation while pocketing the difference.

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Offering a fee-based service for gold coin investors by purchasing coins cheaply on their behalf in Hong Kong may not be a bad idea for the right entrepreneur. Not a bad mini business model if you have the means to purchase, transport and transact large volume purchases and sales of gold coins.
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