A Day for the History Books

One For the Books:
If you traded through today, Thursday May 6, 2011, you will have done so through a day that will go down in financial history: the biggest 1-day drop in the history of the Dow-Jones index; the day that the Euro zone truly started its future slow disintegration or at least transformation; the day that gold began its return from Keynes' "archaic relic of the past" to an active component of sovereign (and mainstream) wealth and a change in the underpinning of some currencies; and the day that disclosed the true impact - and the danger of that impact - of the rise of machine-driven "high frequency" trading if it is left totally uncontrolled.

Gold, Chinese Real Estate and the Renminbi:
Here are set of developments that I think have profound relationships. The US had been increasing public pressure on China for months to abandon the tie that has existed for the last couple of years between the USD and the Chinese yuan, or renminbi. A few weeks ago, the pressure suddenly relented as China announced a weakening in its latest trade figures and stated in effect that whatever changes might occur may be seen by June, the date of the US Treasury Department's decision to delay. Eventually we will see the actual figures.

Within that short span of time, the Greece crisis, the outcome of which had been visible for some time beforehand to those who looked carefully, caused its now well-known panic and and ongoing damage to the Euro as a prospective credible alternative to the USD as a reserve currrency. China has never been observed to be supportive of the Euro as a reserve concept.

Also in this time Enoch Fung, chief Asia economist for Goldman Sachs, held a conference outlining a vision to internationalise the RMB through allowing Hong Kong to initiate international financial transactions in RMB in addition to the Hong Kong dollar. This would be consistent with the way the former British colony has been the medium for other far-reaching changes in mainland Chinese economic policy. Hong Kong is an important center for, among other things, Asian IPO's. If this occurs, it will be the start of the RMB alternative. China has already established numerous non-USD bi-national trade deals with countries as distant as Brazil.

Many western analysts have lately been calling for a watch on the imminent collapse of the Chinese real estate market. Fundamental differences in land ownership (as distinct from the ownership of properties) which is an important peculiarity of the Chinese market, are rarely noted. This week the important Shanghai-based funds consultancy, Z-Ben Advisors, has written that the international global crisis actually had little effect on Chinese markets - they had already declined by 20% - and proposes the contrarian view they could begin a rebound within weeks. In the absence of comprehensive social security, most Chinese mainland individuals rely on stocks and property for their future income.

The bond market is as yet inadequately developed at the retail level. Investors have few alternative outlets. Chinese national stockpiling or source control of many key industrial materials such as copper - a standing policy - have long put pressure on international commodities pricing. To allow investable Chinese domestic funds to freely expand its trade in these markets would not be helpful in controlling internal inflation.

However, China has also become the largest gold producer in the world. Allowing, in fact encouraging stock investment in go;ld producers (which often produce other industrial metals in addition) would be an outlet for savings that would not have that particular negative effect. In fact, an individual savings aspect would be maintained while at the same time, since the government purchases all output, adds to the strength of the Chinese currency and minimizes the degree to which currency relationships need to be renegotiated, by allowing the marketplace itself to discover value.

In view of these powerful long-term forces, it would seem reasonable to expect that an internationally-traded, Chinese-controlled equity vehicle of this type would meet good reception by both international, as well as a potentially wider domestic Chinese participation. We could see the beginning of this process during 2010.