There are several other “disturbing” news coming out of China, beside inflation and SHIBOR spiking rates, that we have written about. What about the Chinese small and mid size companies? Some insight, not having reached the mainstream media, yet. Courtesey of Stratfor.

Reports of failing small- to medium-sized enterprises (SME) have trickled out of China in recent months. An official from the association for those enterprises in Wenzhou, Zhejiang province, said that if the central government’s economic tightening policy does not change, or if the government does not give special support for struggling businesses, then 40 percent of the SMEs in the area may at least partially halt operations. Also, some may suffer bankruptcy soon, the association said. This statement comes after reports of three high-profile bankruptcies of SMEs in Wenzhou in April and claims in the Chinese media that profits for 35 export-oriented small- and medium-sized businesses in Wenzhou have fallen by 30 percent. Other reports suggest a high number of businesses are on the verge of failure elsewhere in the manufacturing hubs of the Yangtze and Pearl river deltas.

Growing financial troubles among small- and medium-sized businesses pose an immediate challenge to China’s economic tightening policy, and reveal a fundamental challenge to its economic model.

Continue reading →

Throughout history, sovereign debt defaults tend to be precipitated by decisions of the body politic of the debtor nation who refuse indentured servitude to their creditors. Debt default tends to come from within. Over the past week there has arisen growing opposition in Greece to another round of austerity that will be a condition of any new needed round of bailout financing. This has swung some members of the Greek parliament against more austerity tied to further bailout financing.

Yes, Greece could well “solve” its problems today and the markets might well rally if and when the government wins its no-confidence vote. But everyone now knows a Greek bailout will simply be a case of “kicking the can down the road”. The odds of default and future contagion are sky high because the underlying monetary union contains a dangerous design flaw that strips member nations of their power to safely expand their deficits in times of economic crises and continues to place the resultant burden of adjustment on everybody but bank bondholders. This is being exacerbated by a financial sector run amok. As my friend Chris Whalen has noted, “the refusal of the political class to imposes losses on large bank creditors since the collapse of Lehman Brothers and Washington Mutual in 2008 illustrates the extent to which the financialization of the western industrial economies has turned into a gradual coup d’etat by the banks and the global speculators who dominate their client base.”

Until the EU, ECB, and IMF grasp this particular, we remain at risk of a major new economic and political crisis.

Full article,

Trojan Horse Rescue in Greece

Fed leaving rates.

Basically same same as last time.

We have been writing about the spike in SHIBOR rates over the last days. The liquidity seems to be totally drying up. If this is because of mid year financing needs, or something else going on, we can only speculate about at present time. Last time we saw similar spikes was close to Chinese New Year.

As we know, China has been diversifing into European debt lately, and is seen as the white knight, that will save Europe from it’s debt problems. What if the spike in SHIBOR rates, puts constraint on the Chinese domestic liquidity? Could this spark a sell off in Europe, as the white knight will be providing liquidity domestically, instead of supporting the PIIGS? Bloomberg reports;

China’s money-market rate climbed to the highest level in more than three years as a worsening cash crunch prompted the central bank to suspend a bill sale.

The seven-day repurchase rate, which measures interbank funding availability, has more than doubled since June 14, when the People’s Bank of China ordered lenders to set aside more money as reserves for a sixth time this year. The central bank suspended a sale of bills tomorrow, according to a statement on its website today.

“Banks have to hoard cash to meet the regulator’s capital or loan-to-deposit requirements by the end of every quarter,” said Liu Junyu, a bond analyst at China Merchants Bank Co., the nation’s sixth-largest lender. “So we won’t see the shortage easing.”

The seven-day repo rate gained 47 basis points, or 0.47 percentage point, to 8.81 percent as of the 4:30 p.m. close in Shanghai, according to a weighted average rate compiled by the National Interbank Funding Center. It touched 8.93 percent, the highest level since October 2007.

The 14-day repo rate declined 125 basis points to 7.34 percent, the biggest drop since Feb. 1. The slump in longer-term rates shows the cash shortage will probably ease from the start of next month, said Liu. A total of 372 billion yuan ($57.6 billion) of central bank bills and repurchase agreements will mature next month, compared with 601 billion yuan in June, he said.

One-year interest-rate swaps, the fixed cost needed to receive the floating seven-day repurchase rate, rose eight basis points to 3.94 percent, according to data compiled by Bloomberg. They touched 3.97 percent, the highest level since Feb. 22.

The yield on the 2.77 percent government bond due May 2012 gained two basis points to 3.63 percent, according to the Interbank Funding Center.

No action day on light volumes, while we wait for Bernanke later tonight. European trading has been rather boring with no trends. Below Stoxx and Dax levels to watch. Dax could break above the resistance, as it is trading relatively strong.

Gold is lower in dollars but higher in euros and has reached new record highs in pounds sterling at £958.25/oz. Gold is being supported by strong and increasing demand internationally.

Sterling has fallen after the BoE minutes raised concerns of further quantitative easing and currency debasement. The Bank of England looks increasingly likely to maintain its ultra accommodative monetary policies. Interest rates may continue to remain at multi century lows and the BoE is again considering more printing of money to buy government debt.

UK Interest Rates – 1700 to Today

Despite Papandreou winning yesterday’s vote, the Greek parliament must now approve the austerity measures and this is leading to continuing nervousness in markets.

European equities have been sold this morning and Italian, Portuguese and particularly Irish debt are under pressure showing that the risk of contagion remains real. There remain many possible impediments to a solution to Greece’s and the Eurozone’s sovereign and banking debt crisis. That is, if indeed, a solution is possible given the scale of the crisis and the fact that it is systemic.

Gold in British Pounds – 30 Days (Tick)

Gold and silver’s increasing safe haven status is seen in news from the Financial Times (front page) and from Bloomberg today (see news).

The Financial Times reports that “Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks.”

Sales of gold coins have soared as savers seek a safer and fungible source of value, says the FT.

“When the global financial crisis started, our sales of coins to investors overtook bullion for the first time,” said Harry Krinakis, at Sepheriades, a Greek precious metals trader. “Now the sales ratio has reached five to one.”

Tomas, a computer technician, has exchanged his euro savings for gold coins: “I keep them at home just like my grandmother did in the second world war.”

Athens Stock Exchange General Index – 10 Years (Weekly)

Gold is again being seen in Greece as an essential store of wealth, hedge against inflation and safe haven asset.

This is not surprising given the scale of the crisis and the sharp falls seen in Greek property and equity markets (see chart above).

The fact that gold cannot default or go bankrupt unlike every single corporation, bank and government in the world is making it the safe haven of choice again.

There is also the important fact that it cannot be debased by bankers and central bankers unlike currencies and bonds.

Greece is the canary in the coalmine and the likelihood is that what is happening in Greece today, people using their cash deposits in banks to buy gold bullion, will be seen in many other countries in the coming months.

Indeed, news from the Perth Mint of record sales of silver coins is indicative that this trend has already begun.

Bloomberg reports that “Silver-coin sales from Australia’s Perth Mint, which was founded in 1899 and processes all of the country’s bullion, have surged to a record as buyers seek to protect their wealth with the metal known as poor man’s gold.

The mint sold 10.7 million 1-ounce silver coins since July 1 last year, according to Sales and Marketing Director Ron Currie. That’s 66 percent higher than the previous full fiscal year and about 10-fold more than five years earlier. Sales of 1- ounce gold coins will be close to a record, he said.

Confirming robust demand internationally, UBS said that its gold sales to India have increased significantly and that sales of gold coins and bars in Europe have also accelerated in recent days.

GoldCore has seen a marked increase in sales last week and this. Silver in particular had seen a sharp drop in sales since late April but buying renewed again last week. Renewed buying comes after a long period of hesitancy on behalf of many clients since the sell off at the end of April led to heightened concerns that the “bubble” had burst.

Yet another indication, if one were needed, that gold is anything but a bubble comes in the news that the People’s Bank of China is planning to double its issuance of gold bullion Chinese gold coins.

Both the FT and Bloomberg report that the People’s Bank of China plans to issue about 1 million ounces of its 2011 panda gold bullion coins compared with plans at the end of last year for 500,000 ounces of the coins.

Gold is far from being a bubble. Bubbles witness investors and speculators greedily piling in in expectation of making quick profits. It is quite the opposite today as risk and concern is leading to diversification into gold and buying of gold bullion as a long term store of wealth internationally.

Today, those buying gold and silver are increasingly protected due to the floor being put under precious metal prices due to Indian, Chinese and Asian public and central bank buying of gold.

Court, Gold Core

We have been busy following the situation in Greece, preparing for another (sell the news) Fed (non) event, watching SHIBOR rates surge in China, but what about the gasoline prices. With summer vacations around the corner, people will feel the Gas Pain. Gallup reports;

In the U.S., the average price of a gallon of gas is $3.78 — down 12 cents from early May, but up $1.06 from a year ago. And Americans are feeling it: 53% say they’ve made “major changes,” and 67% say increases in the price of gas have caused them financial hardship, according to a May 18 Gallup Poll.

This may sound familiar. Americans have been down this road before. Gas prices have fluctuated for years, and many Americans and businesses suffer each time the price of gas reaches a new high — and so does the U.S. economy.

But according to Dennis Jacobe, Ph.D., Gallup’s chief economist, it doesn’t have to be this way. In the following conversation, Dr. Jacobe explains why gas prices are so high, why they fluctuate, and why it’s not an accident. The situation is controllable, though — but only if Americans agree to a rational, though surely controversial, compromise.

GMJ: Gas is at $4 a gallon. Who’s to blame?

Dennis Jacobe, Ph.D.: That’s a complicated story. There are several forces involved. The unrest in the Middle East, the falling value of the dollar, Europe’s financial problems, and sharply increased demand from China and India all tend to play a role. That’s because oil is now more than a commodity; it’s an investment vehicle. That in turn creates speculation, which is not necessarily related to oil’s short-term supply or demand. And some of this affects the way gas and oil is priced internationally and the condition of the global economy.

Gas prices tend to respond to international oil prices. And those prices, in turn, tend to reflect the health of the global economy and speculation around the world about future supplies of gasoline and oil and how willing Americans may be to tolerate higher prices.

GMJ: Is that a sign that the global economy is getting stronger?

Dr. Jacobe: Normally, that’s what you would think, and it’s one of the major issues we face: Do gas prices automatically go higher when the global economy strengthens? And does that effectively create an automatic brake on the ability of the international economy — and particularly, the U.S. economy — to grow? It’s a possibility, and it’s a big concern. We know that there’s a point at which prices at the pump cause a shock effect.

Full article, Solution to High Gas Prices

Merkel talking her book;

German Chancellor Angela Merkel on Wednesday hailed a confidence vote victory by the Greek government as an «important step» in resolving a perilous debt crisis.

“It is an important step and we will see the next step next week,» she told deputies from parliament’s foreign affairs committee, referring to a debate on budget reforms imposed by Athens’s European and International Monetary Fund creditors.

She added that she had spoken to Prime Minister George Papandreou by telephone earlier Wednesday.

The Greek government pulled through a confidence vote early Wednesday, with Papandreou having called for support «to avoid bankruptcy and keep Greece in the euro core.”

Germany is the biggest single contributor among eurozone countries to Greece’s rescue but polls indicate most voters oppose further aid for Greece. [AFP]

Merkel ruining the bulls party. Like we suggested last night, time to take chips off the table. We are seeing risk off, although the Dax is resilient. Many beta markets are turning lower and trading poorly, like the OMX.

Just out;

Merkel says EU summit won’t make final decisions on Greece