How China's Rehypothecated "Ghost" Steel Just Vaporized, And What This Means For The World Economy

Zero Hedge ^ | 9-17-2012 | Tyler Durden

[grey_whiskers]

One of the key stories of 2011 was the revelation, courtesy of MF Global, that no asset in the financial system is "as is", and instead is merely a copy of a copy of a copy- rehypothecated up to an infinite number of times (if domiciled in the UK) for one simple reason: there are not enough money-good, credible assets in existence, even if there are more than enough 'secured' liabilities that claim said assets as collateral. And while the status quo is marching on, the Ponzi is rising, and new liabilities are created, all is well; however, the second the system experiences a violent deleveraging and the liabilities have to be matched to their respective assets as they are unwound, all hell breaks loose once the reality sets in that each asset has been diluted exponentially.

[grey_whiskers]

Read the whole thing.

1) If China has fake collateral to go along with their fake cities, what will this mean for their Communist central committee?

2) Does this affect other commodities in China?

3) What about the mining concerns in places like Australia which have an export economy of raw goods TO China?

4) Does this have anything to do with Xi Jinping or with Gu Kailai / Bo Xilai (murder of British bag man)? (Longer term, of course -- the party royalty may have known of the vapor-collateral and been trying to move money to safe havens).

5) See also Ann Barnhardt on rehypothecation.

6) What does this have to do with increasing tensions between China and Japan?

7) Oh yes. What if China implodes and stops buying our bonds?

Cheers!

[grey_whiskers]

Not an article of mine, but *deeply* disturbing / alarming.

[freedomfiter2]

What do you know? Chinese corporations are run by crooks just like ours. How do you say Corzine in chinese?

[knarf]

beddy big cheating mahn

[himno hero]

... but they are prepared to go to war to mask the frauds and unify the people to mask the reality.

Makes me think of our useless leader in the White hut, sideshow obama and what he is going to pull for a october surprise.

[cripplecreek]

I think the “stolen” syrup in Canada was a similar situation. Lots of money was at stake and the commodity never existed. It and the Chinese steel pale in comparison to the nonexistent $16 trillion the feds loaned to foreign and domestic banks.

http://www.scribd.com/doc/60553686/GAO-Fed-Investigation#outer_page_144

We’re in deep doo doo boys and girls and the only way out is through a total collapse. Personally it couldn’t come too soon. The longer we wait the worse it will be.

[Kenny Bunk]

The Moo Goo Gai Pan has been predicted to hit the ventilator blades within 5 for sure, say several well known Domesday Guys.

The financial wizards of the Celestial Kingdom have done pretty much all they can do to manipulate the world from within their tightly disciplined ... and completely corrupt ... economic system. If we can't keep up the loan payments ...not to mention the Wal-Mart/Target/Sears/Ace/Harbor Freight Imports with their 1200%+ markups* ...they are just SOL. Boo-Frickin'-Who, except we're going to suffer with them for a while. All bets are off if we let them run OPEC, or steal "OUR" oil from Brazil, Cuba, and Venezuela.

The awful truth, IMNSVHO: even IF we send the Marxist Maricón Mombasa MF packing, it will take brave and good men tried and true to turn this mess around in 5-8 years at minimum, with that 47+ percent who think Kid Kenya is Our Saviour always ready to backstab effective, i.e. Cheap, government that takes any perceived "entitlement" off their already loaded table.

Pal of mine just bought a pair of running shoes in a Shanghai shoe store for the equivalent of $2.50. Same exact EXACT pair in Target" $39.99 ... reduced on sale from $59.99! That ain't right, what with millions of Americans out of work and factories closed tight. Newsflash, Wong. We can make sneakers right here in Maine.

[Calusa]

For us in Rio Linda:

Rehypothecation is a practice that occurs principally in the financial markets, where a bank or other broker-dealer reuses the collateral pledged by its clients as collateral for its own borrowing.

[LucyT]

*

Article.

Also check out # 1 through # 6.

Thanks, grey_whiskers.

[SunkenCiv]

Thanks.

[Mike Darancette]

1) If China has fake collateral to go along with their fake cities, what will this mean for their Communist central committee?

They will have to move to Monterey Park.

[GeronL]

Much of their vaunted economic growth and growth rates were FICTION

[Mike Darancette]

We’re in deep doo doo boys and girls and the only way out is through a total collapse. Personally it couldn’t come too soon. The longer we wait the worse it will be.

And a reelected Obama is just the man to get 'er done.

[GeronL]

We can make sneakers right here in Maine.

For $2.50 a pair?

[GeronL]

It simply means China goes back to the bamboo curtain

[2ndDivisionVet]

Everyone is worried about China. What repo company would they use to get back their stuff from us? And who will buy their goods if we don’t? We’re the largest consumer market in the world.

[PGalt]

I like zh poster Ralph Spoilsport’s comment yesterday, “Sum ting wong?”

Thanks for posting. Very, very interesting. I read it and the comments yesterday at zh. Thanks to all of the great posters at zh.

“Everything about socialism is sham and affectation.” - Bastiat 1801-1850

[Mike Darancette]

It simply means China goes back to the bamboo curtain

If the rich ones do not leave with their profits they will be eaten.

[little jeremiah]

Thanks for the ping. Will try to force my brain into submission and understand this.

[Boogieman]

Well of course. The whole system of continually inflating currency is based on the idea that you can outgrow the inflation and beat the consequences. Of course, that’s a fantasy and could never continue forever. So, rather than face the music, they just came up with another con game to make it look like constant growth was not only a possibility, but a reality. That way, even though their original con was collapsing, they could keep it from being revealed a little while longer while they continued to rob us blind.

[Kenny Bunk]

We can make sneakers right here in Maine.
For $2.50 a pair?

That's the trouble with Maine. People from away always trying to outwit us ... and succeeding. No way José am I sellin' you them sneaks for $2.50. You're just going to have to give me more of the $39.99 you're goin' to sell'em for. In fact, I don't give a hoot what you sell'em for, longs I get somethin' like $6.50 a pair for'em.

BTW, if they was sellin' retail in Shanghai for $2.50, those wily ex-laundrymen musta been makin'em for about 35 cents!

I once did a job for an outfit that was importing bikes from China. With 20 American employees and 1 small warehouse, they were creaming about $15 Million a year ... and growing. Drop ship to major retailers and pick up the check. They were buying themselves expensive ($1,000 and up frames) Euro bikes, taking pictures of'em and sending digitized isometrics to China, where they could make a reasonable (sorta) facsimile for next to nothing, ship it all the way here, and retail it in WM for O say, $239.95 and make a $70 profit! Their turn around time on a new model was astoundingly short.

One Chinese bike factory was also a prison. "Good news for You! You make 10 bike today Wong, you get two bowl rice, and best of all, you are no longer a kidney donor!"

Point is, maybe this outsourcing will have to stop when none of us can buy anything ... no matter how cheap. Remember Henry Ford and his $5 a day? Maybe we ought to try a little of that.

[neverdem]

Thanks for the ping.

[GeronL]

bump

[thecodont]

Thanks for the ping.

This sounds like kiting checks, but on a grander scale.

[Sequoyah101]

OK, see if you can explain to me, if you will please, how having less of something than originally thought makes it worth less?

Isn’t the fall in prices due to over supply and finite demand?

http://www.businessinsider.com/by-2015-hard-commodity-prices-will-have-collapsed-2012-9

The rest of this ponzi scheme is fractional banking come to its logical conclusion when all the loans default at the same time. When you make too many loans (too low a reserve ratio) you only increase that risk and hasten the day when one or more default totally. They played the odds that only some acceptable portion of their loans would go bad and not all at the same time and only after they had made enough to cover the losses. They lost. Just as they lost the bets on CDS where a statistical failure is a total failure.

[American Constitutionalist]

" Much of their vaunted economic growth and growth rates were FICTION " ..... propagandized and perpetrated by our own main stream media.

How many stories did we see in the main stream media in the last 10 years in how America's manufacturing base is dead and the miracle of China with main stream media's " Tingle up their leg " like Crissy Matthews seeing America's demise ?

[GeronL]

too many

[grey_whiskers]

There's a difference between the actual item "in hand" being worth less (two words), and the item "on paper" --a claim that one has such and such quantity on hand -- being worthless (one word).

But by mass psychology, if people are distrustful of the supply, or, there are so many claimants of limited stocks of steel (for financial reasons) over those few who really need it (for production) the loss of confidence may cause people to turn *elsewhere* (say to Mittal Steel in India, or Australia, or the US) because they are reliably delivering physical steel, causing the price for local "steel" (which may or may not be there) to drop.

Once a few creditors have been burned by non-existent collateral, they will start insisting on rigorous (and, if they are smart, repeated, as stocks can be moved) verification of any claimed stores of steel.

This will present a problem in the following cases:

1) Massive rehypothecation (customer stocks which were used as collateral by the customer, then being used as collateral by the supplier as well)

2) Multiple pledges based upon the same physical quantity (one type of fraud)

3) Pledges made upon entirely fictitious stocks (another type of fraud).

Depending on how much of this has been going on for with steel, and (by extension) throughout the Chinese economy, this could spell the beginning of *really* bad things for China and then the rest of the world (dictatorships start wars to distract attention from their failings; Chinese authorities have *already* barely been keeping the lid on massive unrest from the peasants -- if the nascent middle classes have their temporary prosperity taken from then due to fraud, whether by loss of jobs or accumulated savings by systemic fraud, then the moo goo gai pan will REALLY hit the fan).

Which is another way of restating what you yourself posted. Cheers!

[familyop]

"Will try to force my brain into submission and understand this."

As you do so, remember that there are some intentional omissions and misconstructions in the stories. Our merchants are getting loans for every shipment. Others through the chain of distribution toward the West are also running on debts. They stop paying, China stops shipping to countries of our former western culture. But China won't stop shipping completely. There's more to the world than Europe and the USA.

He who hordes resources will have physical, useful things. He who hordes funny money,...well, plans to con his elite way into buying useful things from those he robbed before by artificially propping up his funny money: a currency without a cause (without real products manufactured at home for trade).

It's similar to the debacle with layers of derivatives from our western mortgages (some of which were put into Chinese manufacturing/construction by our fellow westerners). I can find a link to an old but very clear explanation of that, if you like. Good place to start.

There's no intention of paying China back or to allow technically inclined westerners to go back to work (see the effete, earth-worship, coveting).

Obviously, China's been preparing for decades to extract payments by force or through dirty deals with foreign traitors to their own kind (maybe natural resources).

IMO, part of the noisy business with Japan now is only a ruse kind of demonstration (except for the issue about the islands, which China wants). The nationalist/historical part (about Japanese being Chinese) of the show might be a probe. Probes provoke reactions to see--movements and costs (oil, for one, which sucking sound is being smothered in propaganda to the contrary, of course). Costs big oil to move many big planes and ships--common knowledge.