Just like out of a Tom Clancy novel, it looks like the head of China's Central Bank, Gov. Zhou Xiaochuan has fled the country? The reason? A $430 billion dollar loss on treasuries. Could this be the first leak in the dam? We think it just might. Why would such a high profile guy be on the run? Consider that Madoff is spending the rest of his life in jail for a ponzi scheme. We don't think the Chinese justice system will be sofriendly to Mr. Xiaochuan. Consider a few things:
China's U.S. debt holdings is at about $843.7 billion, and according to the latest reports by the Treasury department, they have lightened up in June (by 24 billion) and then May (by 32.5 billion).
That is over a 50% haircut.
What happens when (not if) the Chinese start to dump? As famed investor Jim Rogers recently stated, "Head for the hills!" What exactly would it look like? Hard to say. But we will take a stab.
Watch interest rates hit double digits, really, really fast. As interest rates climb, whatever borrowing is left will cease. Business will crumble, unemployment will explode. Not a pretty picture.
Rumors have circulated in China that People’s Bank of China Gov. Zhou Xiaochuan has left the country. The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBOC, including Zhou. Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China.
STRATFOR has received no confirmation of the rumor, and reports by state-run Chinese media appeared to send strong indications that Zhou is in no trouble at the moment. However, the release of this rumor and its dispersion throughout the public is significant, particularly as the Communist Party of China is preparing for a leadership transition in 2012.
Chinese state-run media and official government websites have run several high-profile reports about Zhou, which should be seen as a move to refute the rumors. The PBOC website published two articles on its homepage reporting on Zhou’s meeting with visiting Japanese Financial Services Minister Shozaburo Jimi during the third China-Japan high-level economic dialogue as well as a meeting with an Italian delegation. Xinhua news agency reported that Zhou told the PBOC Party Committee Enlargement Meeting on Aug. 30 it should “continue to implement justice, and strengthen legislative work in financial system.” Prior to this news, Zhou appeared at the 2nd annual conference of the heads of the Chinese, Japanese and Korean central banks held on Aug. 3, and his most recent public appearance was Aug. 10 for China’s Financial System Anti-corruption Construction Exhibition.