Putin Speaks to Reporters About Ukraine

Vladimir Putin Talks To Reporters About Ukraine

Video Link

March 08, 2014 "Information Clearing House - March 04, 2014 - The President of Russia met with media representatives to answer a number of their questions, in particular with regard to the situation in Ukraine.

PRESIDENT OF RUSSIA VLADIMIR PUTIN: Good afternoon, colleagues,

How shall we do this? This is what I’d like to suggest: let’s have a conversation, rather than an interview. Therefore, I would ask you to begin by stating all your questions, I will jot them down and try to answer them, and then we will have a more detailed discussion of the specifics that interest you most.

Let’s begin.

QUESTION: Mr President, I would like to ask (you took a lengthy pause, so we have quite a few questions by now) how you assess the events in Kiev? Do you think that the Government and the Acting President, who are currently in power in Kiev, are legitimate? Are you ready to communicate with them, and on what terms? Do you yourself think it possible now to return to the agreements of February 21, which we all talk about so often?

QUESTION: Mr President, Russia has promised financial aid to Crimea and instructions were issued to the Finance Ministry yesterday. Is there a clear understanding of how much we are giving, where the money is coming from, on what terms and when? The situation there is very difficult.

QUESTION: When, on what terms and in what scope can military force be used in Ukraine? To what extent does this comply with Russia’s international agreements? Did the military exercises that have just finished have anything to do with the possible use of force?

QUESTION: We would like to know more about Crimea. Do you think that the provocations are over or that there remains a threat to the Russian citizens who are now in Crimea and to the Russian-speaking population? What are the general dynamics there – is the situation changing for the better or for the worse? We are hearing different reports from there.

QUESTION: If you do decide to use force, have you thought through all the possible risks for yourself, for the country and for the world: economic sanctions, weakened global security, a possible visa ban or greater isolation for Russia, as western politicians are demanding?

QUESTION: Yesterday the Russian stock market fell sharply in response to the Federation Council’s vote, and the ruble exchange rates hit record lows. Did you expect such a reaction? What do you think are the possible consequences for the economy? Is there a need for any special measures now, and of what kind? For instance, do you think the Central Bank’s decision to shift to a floating ruble exchange rate may have been premature? Do you think it should be revoked?

VLADIMIR PUTIN: Fine, let us stop here for now. I will begin, and then we will continue. Don’t worry; I will try to answer as many questions as possible.

First of all, my assessment of what happened in Kiev and in Ukraine in general. There can only be one assessment: this was an anti-constitutional takeover, an armed seizure of power. Does anyone question this? Nobody does. There is a question here that neither I, nor my colleagues, with whom I have been discussing the situation in Ukraine a great deal over these past days, as you know – none of us can answer. The question is why was this done?

I would like to draw your attention to the fact that President Yanukovych, through the mediation of the Foreign Ministers of three European countries – Poland, Germany and France – and in the presence of my representative (this was the Russian Human Rights Commissioner Vladimir Lukin) signed an agreement with the opposition on February 21. I would like to stress that under that agreement (I am not saying this was good or bad, just stating the fact) Mr Yanukovych actually handed over power. He agreed to all the opposition’s demands: he agreed to early parliamentary elections, to early presidential elections, and to return to the 2004 Constitution, as demanded by the opposition. He gave a positive response to our request, the request of western countries and, first of all, of the opposition not to use force. He did not issue a single illegal order to shoot at the poor demonstrators. Moreover, he issued orders to withdraw all police forces from the capital, and they complied. He went to Kharkov to attend an event, and as soon as he left, instead of releasing the occupied administrative buildings, they immediately occupied the President’s residence and the Government building – all that instead of acting on the agreement.

I ask myself, what was the purpose of all this? I want to understand why this was done. He had in fact given up his power already, and as I believe, as I told him, he had no chance of being re-elected. Everybody agrees on this, everyone I have been speaking to on the telephone these past few days. What was the purpose of all those illegal, unconstitutional actions, why did they have to create this chaos in the country? Armed and masked militants are still roaming the streets of Kiev. This is a question to which there is no answer. Did they wish to humiliate someone and show their power? I think these actions are absolutely foolish. The result is the absolute opposite of what they expected, because their actions have significantly destabilised the east and southeast of Ukraine.

Now over to how this situation came about.

In my opinion, this revolutionary situation has been brewing for a long time, since the first days of Ukraine’s independence. The ordinary Ukrainian citizen, the ordinary guy suffered during the rule of Nicholas II, during the reign of Kuchma, and Yushchenko, and Yanukovych. Nothing or almost nothing has changed for the better. Corruption has reached dimensions that are unheard of here in Russia. Accumulation of wealth and social stratification – problems that are also acute in this country – are much worse in Ukraine, radically worse. Out there, they are beyond anything we can imagine. Generally, people wanted change, but one should not support illegal change.

Only constitutional means should be used on the post-Soviet space, where political structures are still very fragile, and economies are still weak. Going beyond the constitutional field would always be a cardinal mistake in such a situation. Incidentally, I understand those people on Maidan, though I do not support this kind of turnover. I understand the people on Maidan who are calling for radical change rather than some cosmetic remodelling of power. Why are they demanding this? Because they have grown used to seeing one set of thieves being replaced by another. Moreover, the people in the regions do not even participate in forming their own regional governments. There was a period in this country when the President appointed regional leaders, but then the local legislative authorities had to approve them, while in Ukraine they are appointed directly. We have now moved on to elections, while they are nowhere near this. And they began appointing all sorts of oligarchs and billionaires to govern the eastern regions of the country. No wonder the people do not accept this, no wonder they think that as a result of dishonest privatisation (just as many people think here as well) people have become rich and now they also have been brought to power.

For example, Mr Kolomoisky was appointed Governor of Dnepropetrovsk. This is a unique crook. He even managed to cheat our oligarch Roman Abramovich two or three years ago. Scammed him, as our intellectuals like to say. They signed some deal, Abramovich transferred several billion dollars, while this guy never delivered and pocketed the money. When I asked him [Abramovich]: “Why did you do it?” he said: “I never thought this was possible.” I do not know, by the way, if he ever got his money back and if the deal was closed. But this really did happen a couple of years ago. And now this crook is appointed Governor of Dnepropetrovsk. No wonder the people are dissatisfied. They were dissatisfied and will remain so if those who refer to themselves as the legitimate authorities continue in the same fashion.

Most importantly, people should have the right to determine their own future, that of their families and of their region, and to have equal participation in it. I would like to stress this: wherever a person lives, whatever part of the country, he or she should have the right to equal participation in determining the future of the country.

Are the current authorities legitimate? The Parliament is partially, but all the others are not. The current Acting President is definitely not legitimate. There is only one legitimate President, from a legal standpoint. Clearly, he has no power. However, as I have already said, and will repeat: Yanukovych is the only undoubtedly legitimate President.

There are three ways of removing a President under Ukrainian law: one is his death, the other is when he personally steps down, and the third is impeachment. The latter is a well-deliberated constitutional norm. It has to involve the Constitutional Court, the Supreme Court and the Rada. This is a complicated and lengthy procedure. It was not carried out. Therefore, from a legal perspective this is an undisputed fact.

Moreover, I think this may be why they disbanded the Constitutional Court, which runs counter to all legal norms of both Ukraine and Europe. They not only disbanded the Constitutional Court in an illegitimate fashion, but they also – just think about it – instructed the Prosecutor General’s Office to launch criminal proceedings against members of the Constitutional Court. What is that all about? Is this what they call free justice? How can you instruct anyone to start criminal proceedings? If a crime, a criminal offence, has been committed, the law enforcement agencies see this and react. But instructing them to file criminal charges is nonsense, it’s monkey business.

Now about financial aid to Crimea. As you may know, we have decided to organise work in the Russian regions to aid Crimea, which has turned to us for humanitarian support. We will provide it, of course. I cannot say how much, when or how – the Government is working on this, by bringing together the regions bordering on Crimea, by providing additional support to our regions so they could help the people in Crimea. We will do it, of course.

Regarding the deployment of troops, the use of armed forces. So far, there is no need for it, but the possibility remains. I would like to say here that the military exercises we recently held had nothing to do with the events in Ukraine. This was pre-planned, but we did not disclose these plans, naturally, because this was a snap inspection of the forces’ combat readiness. We planned this a long time ago, the Defence Minister reported to me and I had the order ready to begin the exercise. As you may know, the exercises are over; I gave the order for the troops to return to their regular dislocations yesterday.

What can serve as a reason to use the Armed Forces? Such a measure would certainly be the very last resort.

First, the issue of legitimacy. As you may know, we have a direct appeal from the incumbent and, as I said, legitimate President of Ukraine, Mr Yanukovych, asking us to use the Armed Forces to protect the lives, freedom and health of the citizens of Ukraine.

What is our biggest concern? We see the rampage of reactionary forces, nationalist and anti-Semitic forces going on in certain parts of Ukraine, including Kiev. I am sure you, members of the media, saw how one of the governors was chained and handcuffed to something and they poured water over him, in the cold of winter. After that, by the way, he was locked up in a cellar and tortured. What is all this about? Is this democracy? Is this some manifestation of democracy? He was actually only recently appointed to this position, in December, I believe. Even if we accept that they are all corrupt there, he had barely had time to steal anything.

And do you know what happened when they seized the Party of Regions building? There were no party members there at all at the time. Some two-three employees came out, one was an engineer, and he said to the attackers: “Could you let us go, and let the women out, please. I’m an engineer, I have nothing to do with politics.” He was shot right there in front of the crowd. Another employee was led to a cellar and then they threw Molotov cocktails at him and burned him alive. Is this also a manifestation of democracy?

When we see this we understand what worries the citizens of Ukraine, both Russian and Ukrainian, and the Russian-speaking population in the eastern and southern regions of Ukraine. It is this uncontrolled crime that worries them. Therefore, if we see such uncontrolled crime spreading to the eastern regions of the country, and if the people ask us for help, while we already have the official request from the legitimate President, we retain the right to use all available means to protect those people. We believe this would be absolutely legitimate. This is our last resort.

Moreover, here is what I would like to say: we have always considered Ukraine not only a neighbour, but also a brotherly neighbouring republic, and will continue to do so. Our Armed Forces are comrades in arms, friends, many of whom know each other personally. I am certain, and I stress, I am certain that the Ukrainian military and the Russian military will not be facing each other, they will be on the same side in a fight.

Incidentally, the things I am talking about – this unity – is what is happening in Crimea. You should note that, thank God, not a single gunshot has been fired there; there are no casualties, except for that crush on the square about a week ago. What was going on there? People came, surrounded units of the armed forces and talked to them, convincing them to follow the demands and the will of the people living in that area. There was not a single armed conflict, not a single gunshot.

Thus the tension in Crimea that was linked to the possibility of using our Armed Forces simply died down and there was no need to use them. The only thing we had to do, and we did it, was to enhance the defence of our military facilities because they were constantly receiving threats and we were aware of the armed nationalists moving in. We did this, it was the right thing to do and very timely. Therefore, I proceed from the idea that we will not have to do anything of the kind in eastern Ukraine.

There is something I would like to stress, however. Obviously, what I am going to say now is not within my authority and we do not intend to interfere. However, we firmly believe that all citizens of Ukraine, I repeat, wherever they live, should be given the same equal right to participate in the life of their country and in determining its future.

If I were in the shoes of those who consider themselves the legitimate authorities, I would not waste time and go through all the necessary procedures, because they do not have a national mandate to conduct the domestic, foreign and economic policy of Ukraine, and especially to determine its future.

Now, the stock market. As you may know, the stock market was jumpy even before the situation in Ukraine deteriorated. This is primarily linked to the policy of the US Federal Reserve, whose recent decisions enhanced the attractiveness of investing in the US economy and investors began moving their funds from the developing markets to the American market. This is a general trend and it has nothing to do with Ukraine. I believe it was India that suffered most, as well as the other BRICS states. Russia was hit as well, not as hard as India, but it was. This is the fundamental reason.

As for the events in Ukraine, politics always influence the stock market in one way or another. Money likes quiet, stability and calm. However, I think this is a tactical, temporary development and a temporary influence.

Your questions, please.

QUESTION: Mr President, can you tell us if you expected such a harsh reaction to Russia’s actions from your western partners? Could you give us any details of your conversations with your western partners? All we’ve heard was a report from the press service. And what do you think about the G8 summit in Sochi – will it take place?

VLADIMIR PUTIN: Regarding the expected reaction, whether the G8 will meet and about the conversations. Our conversations are confidential, some are even held over secure lines. Therefore, I am not authorised to disclose what I discussed with my partners. I will, however, refer to some public statements made by my colleagues from the west; without giving any names, I will comment on them in a general sense.

What do we pay attention to? We are often told our actions are illegitimate, but when I ask, “Do you think everything you do is legitimate?” they say “yes”. Then, I have to recall the actions of the United States in Afghanistan, Iraq and Libya, where they either acted without any UN sanctions or completely distorted the content of such resolutions, as was the case with Libya. There, as you may know, the resolution only spoke of closing the airspace for government aircraft, while it all ended with bomb attacks and special forces land operations.

Our partners, especially in the United Sates, always clearly formulate their own geopolitical and state interests and follow them with persistence. Then, using the principle “You’re either with us or against us” they draw the whole world in. And those who do not join in get ‘beaten’ until they do.

Our approach is different. We proceed from the conviction that we always act legitimately. I have personally always been an advocate of acting in compliance with international law. I would like to stress yet again that if we do make the decision, if I do decide to use the Armed Forces, this will be a legitimate decision in full compliance with both general norms of international law, since we have the appeal of the legitimate President, and with our commitments, which in this case coincide with our interests to protect the people with whom we have close historical, cultural and economic ties. Protecting these people is in our national interests. This is a humanitarian mission. We do not intend to subjugate anyone or to dictate to anyone. However, we cannot remain indifferent if we see that they are being persecuted, destroyed and humiliated. However, I sincerely hope it never gets to that.

QUESTION: How do you asses the reaction of the west to the events in Ukraine and their threats regarding Russia: are we facing the possibility of sanctions or withdrawal from the G8?

VLADIMIR PUTIN: Regarding sanctions. It is primarily those who intend to apply them that need to consider their consequences. I believe that in the modern world, where everything is interconnected and interdependent, it is possible to cause damage to another country, but this will be mutual damage and one should bear this in mind. This is one thing.

The second and the most important thing. I have already told you what motivates us. And what motivates our partners? They supported an unconstitutional armed take-over, declared these people legitimate and are trying to support them. By the way, despite all of this we have been patient and even ready to cooperate; we do not want to disrupt our cooperation. As you may know, a few days ago I instructed the Government to consider how we can maintain contacts even with those powers in Kiev that we do not consider legitimate in order to retain our ties in the economy and industry. We think our actions have been absolutely reasonable, while any threat against Russia is counterproductive and harmful.

As for the G8, I do not know. We will be ready to host the summit with our colleagues. If they do not want to come – so be it.

QUESTION: Can I add about contacts? The way I see it, you consider the Prime Minister of Crimea Mr Aksyonov to be a legitimate representative of government authorities. Are you ready to have any contacts with those who consider themselves the legitimate authorities in Kiev?

VLADIMIR PUTIN: I have just spoken about it. You must have missed it.

QUESTION: I mean, at the top level for a political solution.

VLADIMIR PUTIN: I do not have a partner at the top level there. There is no president there, and there cannot be one until the general elections.

As for Crimea, the Parliament there was formed in 2010, in December 2010 if I remember correctly. There are 100 MPs representing six political parties. After the previous Prime Minister resigned, the Crimean Parliament, in compliance with the existing legislation and procedures elected a new Prime Minister at a session of the Crimean Supreme Council. He is definitely legitimate. They have complied with all the procedures envisaged by the law; there is not a single violation. However, when a few days ago a group of armed men tried to occupy the building of the Crimean Supreme Soviet, this caused the concern of the local residents. It seemed as though someone wanted to apply the Kiev scenario in Crimea and to launch a series of terrorist attacks and cause chaos. Naturally, this causes grave concern among the local residents. That is why they set up self-defence committees and took control over all the armed forces.

Incidentally, I was studying the brief yesterday to see what they took over – it is like a fortified zone. There are several dozen C-300 units, several dozen air-defence missile systems, 22,000 service members and a lot more. However, as I said, this is all in the hands of the people of Crimea and without a single gunshot.

QUESTION: Mr President, a clarification if I may. The people who were blocking the Ukrainian Army units in Crimea were wearing uniforms that strongly resembled the Russian Army uniform. Were those Russian soldiers, Russian military?

VLADIMIR PUTIN: Why don’t you take a look at the post-Soviet states. There are many uniforms there that are similar. You can go to a store and buy any kind of uniform.

QUESTION: But were they Russian soldiers or not?

VLADIMIR PUTIN: Those were local self-defence units.

QUESTION: How well trained are they? If we compare them to the self-defence units in Kiev…

VLADIMIR PUTIN: My dear colleague, look how well trained the people who operated in Kiev were. As we all know they were trained at special bases in neighbouring states: in Lithuania, Poland and in Ukraine itself too. They were trained by instructors for extended periods. They were divided into dozens and hundreds, their actions were coordinated, they had good communication systems. It was all like clockwork. Did you see them in action? They looked very professional, like special forces. Why do you think those in Crimea should be any worse?

QUESTION: In that case, can I specify: did we take part in training Crimean self-defence forces?

VLADIMIR PUTIN: No, we did not.

QUESTION: How do you see the future of Crimea? Do you consider the possibility of it joining Russia?

VLADIMIR PUTIN: No, we do not. Generally, I believe that only residents of a given country who have the freedom of will and are in complete safety can and should determine their future. If this right was granted to the Albanians in Kosovo, if this was made possible in many different parts of the world, then nobody has ruled out the right of nations to self-determination, which, as far as I know, is fixed by several UN documents. However, we will in no way provoke any such decision and will not breed such sentiments.

I would like to stress that I believe only the people living in a given territory have the right to determine their own future.

QUESTION: Two questions. You said that sending troops into Ukraine is an extreme measure, but you are nevertheless not ruling it out. Still, if Russian troops enter Ukraine, it could start a war. Doesn’t that bother you?

And a second question. You say that Yanukovych did not give the order to shoot people. But somebody shot at the protestors. And clearly, these were snipers, trained snipers.

VLADIMIR PUTIN: You know, some people, including those who were recently among the protestors, have expressed the opinion that these were provocateurs from one of the opposition parties. Have you heard this?

REPLY: No, I have not heard this.

VLADIMIR PUTIN: Look at these materials – they are freely available. That is why it is very difficult to get to the bottom of the situation. But you and I saw for ourselves when the Berkut fighters stood there with their shields and were shot at – and those were not air weapons that were used against them but assault weapons that pierced their shields. That is something we saw for certain. As for who gave the orders – that I do not know. I only know what Mr Yanukovych told me. And he told me that he did not give any orders, and moreover, he gave instructions – after signing a corresponding agreement – to even withdraw all militia units from the capital.

If you want, I can tell you even more. He called me on the phone and I told him not to do it. I said, “You will have anarchy, you will have chaos in the capital. Think about the people.” But he did it anyway. And as soon as he did it, his office was seized, and that of the government, and the chaos I had warned him about and which continues to this day, erupted.

QUESTION: What about the first question? Are you concerned that a war could break out?

VLADIMIR PUTIN: I am not concerned, because we do not plan and we will not fight with the Ukrainian people.

QUESTION: But there are Ukrainian troops, there is the Ukrainian army.

VLADIMIR PUTIN: Listen carefully. I want you to understand me clearly: if we make that decision, it will only be to protect Ukrainian citizens. And let’s see those troops try to shoot their own people, with us behind them – not in the front, but behind. Let them just try to shoot at women and children! I would like to see those who would give that order in Ukraine.

QUESTION: Can I ask a question, Mr President? Our colleagues, my colleagues, who are currently working in Ukraine, are saying practically every day that the situation for the Berkut fighters is only getting worse (perhaps with the exception of Crimea). In particular, in Kiev, there are injured Berkut officers who are in hospitals now, where nobody is treating them and they are not even getting fed. And their families, including elderly family members, they simply cannot leave the house, because they are not being allowed; there are barricades all around, they are being humiliated. Can you comment on this? And can Russia help these families and colleagues?

VLADIMIR PUTIN: Yes, this issue is of great concern to us. After all, these are not Russia’s Interior Ministry officers, and we were not managing the situation there. But out of humanitarian considerations, it would be good if our human rights organisations got involved in this as well; we might ask Vladimir Lukin, either alone or together with his colleagues, representatives from France, Germany and Poland, with whom he participated in developing the well-known document of February 21, 2014, to go on location and see what is happening there with these Berkut officers, who have not broken any laws and acted in accordance with their orders. They are military service members, they stood there facing bullets, they were doused with fire and had Molotov cocktails thrown at them. They have been wounded and injured and are now in a hospital. It is even hard to imagine – even prisoners of war are being fed and treated. But they not only stopped treating them, they even stopped feeding them. And they have surrounded the building where these fighters’ families live and are bullying them. I think that human rights organisations must pay attention to this. And we, for our part, are ready to provide them with medical care here in Russia.

QUESTION: Mr President, getting back to the West’s reaction. Following the US Secretary of State’s harsh statement, the Federation Council suggested that we recall our ambassador to the United States. Do you support this idea?

VLADIMIR PUTIN: The US Secretary of State is certainly an important person, but he is not the ultimate authority that determines the United States’ foreign policy. We hear statements from various politicians and representatives of various political forces. This would be an extreme measure. If necessary, it will be used. But I really don’t want to use it, because I think Russia is not the only one interested in cooperation with its partners on an international level and in such areas as economy, politics and foreign security; our partners are just as interested in this cooperation. It is very easy to destroy these instruments of cooperation and it would be very difficult to rebuild them.

QUESTION: Russia got involved in Yanukovych’s fate. How do you see his future role and his future destiny?

VLADIMIR PUTIN: You know, it is very hard for me to say; I have not analysed it carefully. I think he has no political future, and I have told him so. As for “getting involved in his fate” – we did this on purely humanitarian grounds. Death is the easiest way for getting rid of a legitimate president, and I think that is what would have happened. I think they would have simply killed him. Incidentally, the question arises: what for?

After all, look at how it all began, what triggered these events. The formal reason was that he did not sign the European Union Association Agreement. Today, this seems like nonsense; it is ridiculous to even talk about. But I want to point out that he did not refuse to sign the association agreement. He said: “We have carefully analysed it, and its content does not correspond with our national interests. We cannot sharply increase energy prices for our people, because our people are already in a rather difficult position. We cannot do this, and that, and that. We cannot immediately break our economic ties with Russia, because our cooperation is very extensive.”

I have already presented these figures: out of approximately 14 billion [dollars] in export, approximately 5 billion represents second and third technological processing level products exported to Russia. In other words, just about all engineering products are exported to Russia; the West is not buying any Ukrainian products. And to take all this and break it apart, to introduce European technical standards in the Ukrainian economy, which, thankfully or unfortunately, we are not using at the moment. We will adopt those standards at some point, but currently, we do not have those standards in Russia. This means the next day, our relations and cooperation ties will be broken, enterprises will come to a standstill and unemployment will increase. And what did Yanukovych say? He said, “I cannot do this so suddenly, let’s discuss this further.” He did not refuse to sign it, he asked for a chance to discuss this document some more, and then all this craziness began.

And why? Did he do something outside the scope of his authority? He acted absolutely within the scope of his authority; he did not infringe on anything. It was simply an excuse to support the forces opposing him in a fight for power. Overall, this is nothing special. But did it really need to be taken to this level of anarchy, to an unconstitutional overthrow and armed seizure of power, subsequently plunging the nation into the chaos where it finds itself today? I think this is unacceptable. And it is not the first time our Western partners are doing this in Ukraine. I sometimes get the feeling that somewhere across that huge puddle, in America, people sit in a lab and conduct experiments, as if with rats, without actually understanding the consequences of what they are doing. Why did they need to do this? Who can explain this? There is no explanation at all for it.

The same thing happened during the first Maidan uprising, when Yanukovych was blocked from power. Why did we need that third round of elections? In other words, it was turned into a farce – Ukraine’s political life was turned into a farce. There was no compliance with the Constitution at all. You see, we are now teaching people that if one person can violate any law, anyone else can do the same, and that’s what causes chaos. That is the danger. Instead, we need to teach our society to follow other traditions: traditions of respecting the main law of the nation, the Constitution, and all other laws. Of course, we will not always succeed, but I think acting like this – like a bull in a china shop is counterproductive and very dangerous.

Please.

QUESTION: Mr President, Turchynov is illegitimate, from your point of view.

VLADIMIR PUTIN: As President, yes.

QUESTION: But the Rada is partially legitimate.

VLADIMIR PUTIN: Yes.

QUESTION: Are Yatsenyuk and the Cabinet legitimate? And if Russia is concerned about the growing strength of radical elements, they grow stronger every time they find themselves facing a hypothetical enemy, which in their view, they currently consider Russia and Russia’s position of being ready to send in troops. Question: does it make sense and is it possible to hold talks with moderate forces in the Ukrainian government, with Yatsenyuk, and is he legitimate?

VLADIMIR PUTIN: Listen, it seems like you didn’t hear what I have said. I already said that three days ago, I gave instructions to the Government to renew contacts at the government level with their colleagues in the corresponding ministries and departments in Ukraine, in order not to disrupt economic ties, to support them in their attempts to reconstruct the economy. Those were my direct instructions to the Russian Government. Moreover, Mr Medvedev is in contact with [Arseniy] Yatsenyuk. And I know that Sergei Naryshkin, as speaker of the Russian parliament, is in contact with [Oleksandr] Turchynov. But, I repeat, all our trade and economic and other ties, our humanitarian ties, can be developed in full only after the situation is normalised and presidential elections are held.

QUESTION: Gazprom has already said that it is reverting to its old gas prices beginning in April.

VLADIMIR PUTIN: Gazprom could not have said that; you were not listening carefully or it did not express itself clearly. Gazprom is not reverting to the old prices. It simply does not want to extend the current discounts, which it had agreed to apply or not apply on a quarterly basis. Even before all these events, even before they hit the crisis point. I know about the negotiations between Gazprom and its partners. Gazprom and the Government of the Russian Federation agreed that Gazprom would introduce a discount by reducing gas prices to $268.50 per 1,000 cubic metres. The Government of Russia provides the first tranche of the loan, which is formally not a loan but a bond purchase – a quasi-loan, $3 billion dollars in the first stage. And the Ukrainian side undertakes to fully repay its debt that arose in the second half of last year and to make regular payments for what they are consuming – for the gas. The debt has not been repaid, regular payments are not being made in full.

Moreover, if the Ukrainian partners fail to make the February payment, the debt will grow even bigger. Today it is around $1.5-1.6 billion. And if they do not fully pay for February, it will be nearly $2 billion. Naturally, in these circumstances, Gazprom says, “Listen guys, since you don’t pay us anyway, and we are only seeing an increase in your debt, let’s lock into the regular price, which is still reduced.” This is a purely commercial component of Gazprom’s activities, which plans for revenues and expenditures in its investment plans like any other major company. If they do not receive the money from their Ukrainian partners on time, then they are undercutting their own investment programmes; this is a real problem for them. And incidentally, this does not have to do with the events in Ukraine or any politics. There was an agreement: “We give you money and reduced gas rates, and you give us regular payments.” They gave them money and reduced gas rates, but the payments are not being made. So naturally, Gazprom says, “Guys, that won’t work.”

QUESTION: Mr President, [German Federal Chancellor] Merkel’s Press Service said after your telephone conversation that you had agreed to send an international fact-finding mission to Ukraine and set up a contact group.

VLADIMIR PUTIN: I said that we have people who have the training and skills needed to be able to examine this issue and discuss it with our German colleagues. This is all possible. I gave the instruction accordingly to our Foreign Minister, who was to or will meet with the German Foreign Minister, Mr Steinmeier, yesterday or today to discuss this matter.

QUESTION: All eyes are on Crimea at the moment of course, but we see what is happening in other parts of Ukraine too, in the east and south. We see what is happening in Kharkov, Donetsk, Lugansk and Odessa. People are raising the Russian flag over government buildings and appealing to Russia for aid and support. Will Russia respond to these events?

VLADIMIR PUTIN: Do you think we have not made any response? I think we’ve just spent the last hour discussing this response. In some cases though, the developments taking place are unexpected in my view. I will not go into the specific details of what I am referring to here, but the reaction that we are seeing from people is understandable, in principle. Did our partners in the West and those who call themselves the government in Kiev now not foresee that events would take this turn? I said to them over and over: Why are you whipping the country into a frenzy like this? What are you doing? But they keep on pushing forward. Of course people in the eastern part of the country realise that they have been left out of the decision-making process.

Essentially, what is needed now is to adopt a new constitution and put it to a referendum so that all of Ukraine’s citizens can take part in the process and influence the choice of basic principles that will form the foundations of their country’s government. But this is not our affair of course. This is something for the Ukrainian people and the Ukrainian authorities to decided one way or another. I think that once a legitimate government is in place and a new president and parliament are elected, which is what is planned, this will probably go ahead. If I were them, I would return to the matter of adopting a constitution and, as I said, putting it to a referendum so that everyone can have their say on it, cast their vote, and then everyone will have to respect it. If people feel they are left out of this process, they will never agree with it and will keep on fighting it. Who needs this kind of thing? But as I said, this is all not our affair.

QUESTION: Will Russia recognise the planned presidential election that will take place in Ukraine?

VLADIMIR PUTIN: Let’s see how it goes. If it is accompanied by the same kind of terror that we are seeing now in Kiev, we will not recognise it.

QUESTION: I want to come back to the West’s reaction. As all this tough talk continues, we have the Paralympics opening in a few days’ time in Sochi. Are these Games at risk of ending up on the brink of disruption, at least as far as international media coverage goes?

VLADIMIR PUTIN: I don’t know, I think it would be the height of cynicism to put the Paralympics at risk. We all know that this is an international sports event at which people with disabilities can show their capabilities, prove to themselves and the entire world that they are not people with limitations, but on the contrary, people with unlimited possibilities, and demonstrate their achievements in sport. If there are people ready to try to disrupt this event, it would show that these are people for whom there really is nothing sacred.

QUESTION: I want to ask about the hypothetical possibility of using the military. People in the West have said that if Russia makes such a decision, it would violate the Budapest Memorandum, under which the United States and some NATO partners consecrated territorial integrity of Ukraine in exchange for its promise to give up nuclear weapons. If developments take this turn, could global players intervene in this local conflict and turn it into a global conflict? Have you taken these risks into account?

VLADIMIR PUTIN: Before making public statements, and all the more so before taking practical steps, we give issues due thought and attention and try to foresee the consequences and reactions that the various potential players could have.

As for the Memorandum that you mentioned, you said you are from Reuters, is that right?

RESPONSE: Yes.

VLADIMIR PUTIN: How do the public and political circles in your country view these events that have taken place? It is clear after all that this was an armed seizure of power. That is a clear and evident fact. And it is clear too that this goes against the Constitution. That is also a clear fact, is it not?

RESPONSE: I live in Russia.

VLADIMIR PUTIN: Good on you! You should join the diplomatic service; you’d make a good diplomat. Diplomats’ tongues, as we know, are there to hide their thoughts. So, we say that what we are seeing is an anti-constitutional coup, and we get told, no, it isn’t. You have probably heard plenty of times now that this was not an anti-constitutional coup and not an armed seizure of power, but a revolution. Have you heard this?

RESPONSE: Yes.

VLADIMIR PUTIN: Yes, but if this is revolution, what does this mean? In such a case it is hard not to agree with some of our experts who say that a new state is now emerging in this territory. This is just like what happened when the Russian Empire collapsed after the 1917 revolution and a new state emerged. And this would be a new state with which we have signed no binding agreements.

QUESTION: I want to clarify a point. You said that if the USA imposes sanctions, this would deal a blow to both economies. Does this imply that Russia might impose counter-sanctions of its own, and if so, would they be a symmetrical response?

You spoke about gas discounts too. But there was also the agreement to buy $15 billion worth of Ukrainian bonds. Ukraine received the first tranche at the end of last year. Has payment of the remaining money been suspended? If Russia provides aid, on what specific economic and political terms will this be done? And what political and economic risks are you taking into consideration in this case?

VLADIMIR PUTIN: To answer your question, we are in principle ready to look at taking the steps needed to make the other tranches available with regard to the purchase of bonds. But our Western partners have asked us not to do this. They have asked us to work together through the IMF to encourage the Ukrainian authorities to carry out the reforms needed to bring about recovery in the Ukrainian economy. We will continue working in this direction. But given that Naftogaz of Ukraine is not paying Gazprom now, the Government is considering various options.

QUESTION: Mr President, is the dynamic of events in Ukraine changing for the better or for the worse?

VLADIMIR PUTIN: Overall, I think it is gradually starting to level out. We absolutely must send the signal to people in Ukraine’s southeast that they can feel safe, and know that they will be able to take part in the general political process of stabilising the country.

QUESTION: You have made several mentions now of future legitimate elections in Ukraine. Who do you see as compromise candidate? Of course you will say that this for the Ukrainian people to decide, but I ask you all the same.

VLADIMIR PUTIN: To be honest, I really don’t know.

RESPONSE: It seems that the people also don’t know, because no matter who you talk to, everyone seems to be at a loss.

VLADIMIR PUTIN: I really can’t say. You know, it’s hard to make predictions after events of this kind. I have already said that I do not agree with this method of taking power and removing the incumbent authorities and president, and I strongly oppose this kind of method in Ukraine and in the post-Soviet area in general. I oppose this because this kind of method does not inculcate legal culture, respect for the law. If one person can get away with doing this, it means that everyone is allowed to try, and this only means chaos. You have to understand that this kind of chaos is the worst possible thing for countries with a shaky economy and unstable political system. In this kind of situation you never know what kind of people events will bring to the fore. Just recall, for example, the role that [Ernst] Roehm’s storm troopers played during Hitler’s rise to power. Later, these storm troopers were liquidated, but they played their part in bringing Hitler to power. Events can take all kinds of unexpected turns.

Let me say again that in situations when people call for fundamental political reform and new faces at the top, and with full justification too – and in this I agree with the Maidan – there is a risk too that you’ll suddenly get some upstart nationalist or semi-fascist lot sprout up, like the genie suddenly let out of the bottle – and we see them today, people wearing armbands with something resembling swastikas, still roaming around Kiev at this moment – or some anti-Semite or other. This danger is there too.

QUESTION: Just today, incidentally, the Ukrainian envoy to the UN said that the crimes committed by Bandera’s followers were falsified by the Soviet Union. With May 9 coming closer, we can see now who is in power there today. Should we even have any contacts with them at all?

VLADIMIR PUTIN: We need to have contact with everyone except for obvious criminals, but as I said, in this kind of situation, there is always the risk that events of this kind will bring people with extreme views to the fore, and this of course has serious consequences for the country.

QUESTION: You said that we should make contact with everyone. Yulia Tymoshenko was planning it seems, to come to Moscow.

VLADIMIR PUTIN: As you know, we always worked quite productively with all of the different Ukrainian governments, no matter what their political colour. We worked with Leonid Kuchma, and with [Viktor] Yushchenko. When I was Prime Minister, I worked with Tymoshenko. I visited her in Ukraine and she came here to Russia. We had to deal with all kinds of different situations in our work to manage our countries’ economies. We had our differences, but we also reached agreements. Overall it was constructive work. If she wants to come to Russia, let her come. It’s another matter that she is no longer prime minister now. In what capacity will she come? But I personally have no intention of stopping her from coming to Russia.

QUESTION: Just a brief question: who do you think is behind this coup, as you called it, in Ukraine?

VLADIMIR PUTIN: As I said before, I think this was a well-prepared action. Of course there were combat detachments. They are still there, and we all saw how efficiently they worked. Their Western instructors tried hard of course. But this is not the real problem. If the Ukrainian government had been strong, confident, and had built a stable system, no nationalists would have been able to carry out those programs and achieve the results that we see now.

The real problem is that none of the previous Ukrainian governments gave proper attention to people’s needs. Here in Russia we have many problems, and many of them are similar to those in Ukraine, but they are not as serious as in Ukraine. Average per capita [monthly] income in Russia, for example, is 29,700 rubles, but in Ukraine, if we convert it into rubles, it is 11,900 rubles, I think – almost three times lower than in Russia. The average pension in Russia is 10,700 rubles, but in Ukraine it is 5,500 rubles – twice lower than in Russia. Great Patriotic War veterans in Russia receive almost as much as the average worker each month. In other words, there is a substantial difference in living standards. This was what the various governments should have been focusing on right from the start. Of course they needed to fight crime, nepotism, clans and so on, especially in the economy. People see what is going on, and this creates lack of confidence in the authorities.

This has continued as several generations of modern Ukrainian politicians have come and gone, and the ultimate result is that people are disappointed and want to see a new system and new people in power. This was the main source of fuel for the events that took place. But let me say again: a change of power, judging by the whole situation, was probably necessary in Ukraine, but it should have taken place only through legitimate means, in respect for and not in violation of the current Constitution.

QUESTION: Mr President, if Crimea holds a referendum and the people there vote to secede from Ukraine, that is, if the majority of the region’s residents vote for secession, would you support it?

VLADIMIR PUTIN: You can never use the conditional mood in politics. I will stick to that rule.

QUESTION: Is Yanukovych even still alive? There have been rumours that he died.

VLADIMIR PUTIN: I have seen him once since he arrived in Russia. That was just two days ago. He was alive and well and wishes you the same. He’ll still have a chance of catching a cold at the funeral of those who are spreading these rumours of his demise.

QUESTION: Mr President, what mistakes do you think Yanukovych made over these last months as the situation intensified in Ukraine?

VLADIMIR PUTIN: I would rather not answer this question, not because I do not have an opinion to express, but because I do not think it would be proper on my part. You have to understand, after all…

QUESTION: Do you sympathise with him?

VLADIMIR PUTIN: No, I have completely different feelings. Anyone in this office bears an enormous responsibility on their shoulders as head of state, and they have rights and also obligations. But the biggest obligation of all is to carry out the will of the people who have entrusted you with the country, acting within the law. And so we need to analyse, did he do everything that the law and the voters’ mandate empowered him to do? You can analyse this yourselves and draw your own conclusions.

QUESTION: But what feelings do you have for him? You said “not sympathy, but other feelings”. What feelings exactly?

VLADIMIR PUTIN: Let’s talk later.

QUESTION: You said just two questions back that we must above all send a clear signal to people in the south and southeast of Ukraine. The southeast, that’s understandable, but…

VLADIMIR PUTIN: We need to make our position clear to everyone, really.

We need to be heard by all of Ukraine’s people. We have no enemies in Ukraine. Let me say again that Ukraine is a friendly country. Do you know how many people came from Ukraine to Russia last year? 3.3 million came, and of that number almost 3 million people came to Russia for work. These people are working here – around 3 million people. Do you know how much money they send back home to Ukraine to support their families? Count up the average wage of 3 million people. This comes to billions of dollars and makes a big contribution to Ukraine’s GDP. This is no joking matter. We welcome all of them, and among the people coming here to work are also many from western Ukraine. They are all equal in our eyes, all brothers to us.

QUESTION: This is just what I wanted to ask about. We are hearing above all about the southeast of Ukraine at the moment, which is understandable, but there are ethnic Russians and Russian-speaking people living in western Ukraine too, and their situation is probably even worse. They probably cannot raise their heads at all and are a downtrodden minority there. What can Russia do to help them?

VLADIMIR PUTIN: Our position is that if the people who call themselves the government now hope to be considered a civilised government, they must ensure the safety of all of their citizens, no matter in which part of the country, and we of course will follow this situation closely.

Thank you.

Mortgage Rates Rise in China; Hong Kong Housing Market in Trouble

The unfolding property bust in Hong Kong is related to the slowdown in Mainland China. Cities such an Vancouver, Sydney and Palo Alto will be next.

Dark clouds over Hong Kong's property market as 'perfect storm' looms

Hong Kong's housing market faces being caught in the middle of a perfect storm, with government curbs having crimped demand at a time of increasing supply and an imminent interest rate rise threatening to set off a severe price correction.

Home prices in the second-hand market peaked at 18 per cent above the previous 1997 high in March last year after doubling since 2008, but have since fallen 5 per cent in a sign the government's tough stance on reining in an overheated market is having the effect desired by Chief Executive Leung Chun-ying.

A collapse in demand that saw overall property sales plunge to a 23-year low of 70,501 deals last year has fuelled fears of a repetition of major downward trends of the past.

Banks underprepared for HK property slide risks

For local banks facing the risks of a bubble bursting, the great saving grace is that there are quite strict limits on the loan-to-value ratios allowed for mortgage lending. Even with a heavy drop in prices – some are predicting up to 30 per cent falls this year – losses should be limited. However, in combination with rising interest rates and the ebbing of both the Chinese economy and US liquidity, small property price declines will be painful for the island’s most sophisticated banks.

The money flooding into Hong Kong, much of it from China, has been eye-popping in the past couple of years. Home prices are 20 per cent higher than the previous record set in 1997, just ahead of the Asian financial crisis, according to the Centaline Index, from the city’s largest estate agency.

Losses are always supposed to be limited. First of all, the economy relies on property speculation. When the bubble bursts, it isn't going to only hit home prices, it will hit incomes. Debt servicing will rise as a percent of total income. Second, a lot of debt is hidden. For example, in the cities such as Beijing and Shanghai, there are property rich people. Their income comes from mortgage equity withdrawals. Sometimes this is also used to fund speculation or a down payment on a home for a child. If you look at each individual transaction it looks good, but there may be more risk than people realize.

China banks raise mortgage rates on funding squeeze

Nearly 90 percent of 69 bank branches in 22 Chinese cities have stopped offering preferential mortgage rates to first-home buyers, with some increasing the rates 5 to 10 percent above the benchmark rate, according to a survey by CRIC, a unit of real estate services firm E-House China.

Less than 3 percent of the respondents still offer preferential mortgage rates, the survey showed.

That compared with 21 percent of bank branches offering discount mortgage rates to first-time home buyers in the previous survey conducted in December 2013.

"The increasing home mortgage rates will likely weaken the purchasing power of first-home buyers and curb home buying demand," said Yang Kewei, a property analyst at CRIC in Shanghai, adding that liquidity conditions have tightened this year as banks turn to more profitable loans.

However, this article in Chinese (住房按揭利率上浮 房屋销售市场却“涨声依旧”) refutes the slowdown thesis, at least so far and in Beijing, where the sellers are still in control of the market.

Repost From March 2010: Liu Junluo: RMB will fall to 20 per dollar within 3 years

刘军洛: 2010年美元时代的开启——三年内英镑跌至1 欧元跌至0.8 人民币跌至20 日元跌至150
Lui Junluo: 2010 Dollar Era Begins— Within 3 Years, the Dollar Index will be at 130, the pound will be at $1, the euro will be at $0.80, the renminbi will be at 20, and the yen will be at 150.

Liu Jinluo explains his experience in the 327 bond scandal, or 327 incident. Here is some background from an Asia Times article:

The bond-futures market that operated in China from 1993-95 is a good case in point. It was originally introduced to improve liquidity in the spot market and make bonds more attractive to financial institutions by allowing them to hedge their exposure. But there were two serious problems. First, because most of the bond issuance up until that time had been directed toward individuals, institutional investors did not have large positions to hedge. And second, most interest rates were set by the government and adjusted only infrequently so there was also not much risk against which to hedge.

There was thus relatively little demand for bond futures as a hedging tool and the market quickly became dominated by speculators trading on insider information, with positions often far in excess of the limits set by the exchanges. (Bond futures traded on the Shanghai and Shenzhen stock exchanges and also on a number of "securities trading centers" set up by local governments throughout the country.)

The regulators finally stepped in after massive losses at Shanghai International Securities Co (SISCO), at that time China's biggest broker, which had unsuccessfully attempted to push down prices by taking a short position with a notional value more than eight times the total issuance of the underlying bond. After this scandal, known as the "327 incident" after the series number of the futures contract SISCO was shorting, all bond-futures trading was indefinitely suspended in May 1995.

Liu Junluo is able to make profits due to his "trader's instinct" and he gives some examples of how people were reacting, which I interpreted as due to there being asymmetrical information in the market.

He believes China and Japan will face economic collapse. He goes on to explain how a multinational could use a large loss in China to its advantage, by shorting large amounts of Japanese bonds or Japanese yen, since this event would be very bullish for the U.S. dollar. I think in this regard, he sounds very much like Martin Armstrong, where finance and derivatives can earn very large profits and can affect economic events, but most economists, politicians, etc. have no clue as to how this world works.

In the end, he believes the U.S. will make great profit from the $600 trillion in derivatives, and goes so far as to say God gave Americans the "derivatives gene", but Chinese got the "Coolie gene"—certainly the opposite of almost every financial critic's opinion.

While I agree that the U.S. could do relatively well in a (non-USD) crisis, I suspect the deflation would be powerful enough to cause losses that exceed those of 2008. Counter-parties would be unable to pay off their derivatives bets, but the futures markets may fail as well, with governments unable to offer any bailouts. One of the only ways to profit would be to hold the safest and most liquid cash and cash equivalents. That is, to lose zero while everyone else loses big.

Translation of the piece follows.

Update 2010-03-23: This needs more work, but I haven't got time. The part where he discusses the day of trading 327 bonds is the area with the most mistakes, take it for what its worth.

The U.S. dollar Era Starts in 2010- Within three years, the dollar index will be 130

The U.S. dollar Era Starts in 2010 - within three years, the pound will fall to $1, the € will fall to $0.80, the yuan will fall to 20, and the yen will fall to 150

Before a country goes bankrupt, there will always be a strange scene-the upper class usually has ostrich-like blind optimism; the middle-class has serious mental and physical exhaustion; the lower class is resigned to its fate and give up on themselves.

In 1995, I had the honor of participating in the sensational "327 treasury bond" transactions. China's financial hegemon at that time, Shanghai International Securities, collapsed due to large short positions in 327 treasury bonds. That era was a seriously chaotic decade for the exchange systems. At that time, the SSE opened about 3 minutes later than the Beijing Exchange. I entered the war in the Shanghai Stock Exchange. At that time, my short bonds were "317 T-bonds." On that day, after the Beijing Exchange opened, my Beijing friend informed of the situation on a big brick mobile phone. I did not rush to the Stock Exchange, after hearing the first reaction was that my position was completed at the open. My instinctive reaction was to appropriate the phone and call the trade declaration young lady immediately and demand an overdraft of more than ten times the money "call market" to buy many "327 bonds". I put down this phone, crazily dialed several futures traders who were short t-bonds while running and ask them to make more "327 bonds." After calling these futures traders by telephone, I was very uncomfortable, because of the numbeness of the general reaction of these traders. And this was the opposite of the excited reaction I heard after calling Beijing "friends". At the moment of the open, I just burst into the trading room, the computer displayed the opening price and I immediately let me into a kind of "gallows" feeling.

At that time, "327 bonds" opening price was over 148 yuan. And my "call market" panic buying price was 150 yuan. Moreover, the first price position short-selling reached several hundred million yuan.And this is only 2 or 3 seconds, wiping out the first madly entered "327 bonds" thrown into the influx of orders, "327 bonds" rose rapidly to 151 yuan, 152 yuan, 153 yuan. [I did not translate this next part.-Ed]Then I commanded the young lady, display on the computer how much the price must rise higher deficit to unwind serious "317 bond" short contracts. She immediately warned that this will bring "317 bond" contracts more serious losses.[End untranslated portion] I smiled at a higher price to close a position of small plates of "317 bond", the platter of "327 bonds" was also driven up about 10 points, I immediately liquidated "327 bonds" with a large profit.

At lunch break, I already closed all my positions. At noon, I left the exchange. Afterwards, in afternoon trading the "327 bonds" staged a farce. When I left the exchange my heart was very heavy. At that time everything I did was a "trading animal's" instinctual reaction. In reality many people do not have these traders' instincts. However, these people will instinctively oppose the thinking of traders' instincts. Like the French army in World War II, its tanks, artillery, aircraft, the number of troops several other areas were better than the German army, but the French military commanders were originally infantry officers. In early 1937, the father of German tanks, Guderian, in his book "Achtung! Panzer" critcized the systematic ignorance of the infantry officers.

Within two years, China's home prices will have fallen 70%, that is until the end of 2011. A few days ago in Beijing gave a mini-lecture. A Beijing lady told me that at the end of November 2009 she read my book, "Chinese Home Prices in a Multi-Polar World" and immediately sold her house, and now rents. I said to her: "Two years later you're bound to thank me."

I'm very happy that this book saved this lady in Beijing.Because the Japanese economy will soon collapse, and the Chinese economy and the Japanese economy will collapse simultaneously. Now, there are many multinational companies' assets allocated to China. If China and Japan simultaneously collapse, these multinational companies will get rich.

Assume that a multinational in China has $5 billion worth of real estate.In theory, it is difficult for this multinational company to realize these assets while the Chinese and Japanese economies simultaneously collapse. In fact it will take the initiative at a very low price, such as $1 billion or $500 million U.S. dollars to close out China assets. By then, Chinese economists will say that the multinational would be crazy to sell at bankruptcy prices. Therefore, Chinese mainstream economists are only a group of "globalization's fools." The reason is that this multinational company will have scaled up a large short position in the Japanese foreign exchange or Japanese debt market. Presently, the global foreign exchange market leverage is up to 200 or 400 times, just a $1 billion deposit could conservatively short $100 billion worth of Japanese currency or debt. This multinational company by way of underselling its China assets will trigger a market panic, but the short-yen or short positions in Japanese government bonds will make huge profits, this is a type of crisis arbitrage.

This is a "trading animal's" world. Today's global derivatives market is $600 trillion and China's economy is only $5 trillion, by underselling real estate in China, while profiting in global capital markets, the American Age can begin.

Today, any mainstream Chinese economist's criticism says the U.S. empire will fall into a serious debt crisis, the same as the Netherlands and the former British Empire, but have no way to explain that the previous Dutch Empire and the British Empire were only trading in general merchandise. All it takes is imitation and hard work to make the Netherlands and the British Empire decline.

And today is a world of innovation and derivatives, it's a knowledge society. It's through the elimination of a nearly $5 trillion country, that there's $600 trillion profit in the derivatives market. Unfortunately I'm a Chinese, so in May-June 2007 I proposed the U.S. strategic goal is to have China's stock market crash to 2000 points in 2008; then let the Chinese property market skyrocket at the end of 2008. With a $600 trillion fortune in the derivatives market, China's property market will fall 70%, this is common sense. With a $600 trillion fortune in the derivatives market facing the victors, in the next three years, U.S. dollars will undergo, since the beginning of world history, the most spectacular and the greatest—and perhaps the creative human vocabulary cannot describe— rise, a soaring rise.

Now, the biggest problem is that this is simple common sense. Chinese people are keen to debate simple common sense. It can only be that God gave derivatives genes to the Americans; and gave Coolie genes to the Chinese. In the face of God's arrangement, the future will be beautiful, that's only the beauty of American dollars. [The Chinese word for America is Beautiful country, so this is a play on words. It could also be read as the future will be very American. -Ed]


Liu Jun Luo
2010-3-18

2010年美元时代的开启——三年内美元指数130
2010年美元时代的开启——三年内英镑跌至1 欧元跌至0.8 人民币跌至20 日元跌至150
一个国家倒闭前，总会是这么一个奇怪的场面——上层社会通常会鸵鸟政策式的盲目乐观；中层社会精神与体力方面严重疲惫；下层社会则听天由命、自暴自弃。

1995年，本人有幸参与了轰动一时的“327国债”交易。中国当时的证券霸主“万国证券”因大量沽空“327国债”而倒闭。在那个时代，是一个交易体制严重混乱的年代。那时，上交所比北交所晚开3分钟左右。我的参战地在上交所。当时，我沽空的国债品种是“317国债”。那天，北交所开盘后，我北京的朋友给我那台砖头大的大哥大通报了情况。我当时还未赶到交易所，听后第一反应是，一开盘我的仓位就全部完蛋。我本能的反应，迅速拨电话给交易所报单小姐，要求报单小姐立刻透支十倍以上的资金 “集合竞价”高位购买“327国债”多单。放下这个电话，奔跑中我疯狂拨打几个大户室做空当时国债“期友”的电话，让他们巨额透支做多“327国债”。与这些“期友”通过电话后，我的心情很不舒服，因为这些“期友”的普遍反应是麻木。而非本人听到北京“期友”通报后的一种亢奋。开盘刹那，我正好冲进交易室，电脑上显示的开盘价，立刻让我陷入了一种上“绞架”的感觉。当时，“327国债”开盘价是148元多一点。而我“集合竞价”抢购的价格是150元。并且第一价位抛空单高达几亿人民币。也就是2秒或3秒，“327国债”上的抛单被疯狂涌进的做多者消灭，“327国债”迅猛向151元、152元、153元价格上冲。这时我向下单小姐指挥，要求比电脑上显示价格高出许多平掉手上亏空严重的“317国债”空头合约。报单小姐立刻提醒这会带来“317国债”合约上更严重损失。我笑笑在更高价位平仓小盘子的“317国债”时，大盘子的“327国债”也被带动了十几点，我即刻平仓“327国债”上大量获利多单。上午快收盘时，已全部结清所有头寸。中午时分，我离开了交易所。后来“327国债”在下午交易时上演了一场闹剧。我离开交易所时心情很沉重。当时我所做的一切就是一种“交易动物”本能的反应。现实中许多人是没有“交易动物” 本能的。但这些人会本能反对“交易动物” 本能的人的想法。如同二战中法国军团在坦克、火炮、飞机、军队人数等几个方面都优于德国军团，但法国军队统帅是步兵军官出身。而在早1937年德国坦克之父——古德里安，就在其《注意！坦克》一书中批评步兵军官的思想体系愚昧。

两年内中国房价要跌去70%，也就是到2011年底。前几天，在北京举行了一场小型讲课。一位北京女士对我说，她于2009年11月底，看到本人写的《多角世界下的中国房价》一书立刻把自己居住的房子卖了，现在租房住。我对她说：“你两年后必定会谢谢我。”我很高兴这本书救了北京这位女士。因为日本经济很快会崩盘，而中国经济和日本经济一样会陷入同步崩盘。现在，有许多跨国公司资产在中国配置。如果中国和日本陷入同步崩盘时，这些跨国公司会发大财。假设，一个跨国公司在中国现有50亿美元价值房产。理论上，这家跨国公司很难在中国市场与日本市场同步不景气时变现资产。而实际上他却会主动以极低的价格，如10亿美元或5亿美元的价格抛售中国资产。届时，中国经济学家会说这家跨国公司疯了竟然破产抛售。所以，中国主流经济学家们只能是一群“全球化的笨蛋”。因为，这家跨国公司已在日元外汇或日本国债市场大规模布置了巨额空单。现在，全球外汇市场杠杆高达200倍或 400倍，只需10亿美元保证金，保守沽空日元或日本国债，仓位可高达1000亿美元。这家跨国公司只要通过低价抛售中国资产引发市场恐慌，而达到沽空日元或沽空日本国债上巨额仓位的盈利，这是一种危急中的套利交易的模式。这是一个“交易动物”的世界。今天全球衍生品市场是600万亿美元，而中国的经济规模只近5万亿美元，通过低价抛售中国房产，而盈利全球资本市场，美国时代这就可以开启了。

今天，任何批评美国帝国会陷入沉重债务危机，而会向以前的荷兰帝国和大英帝国一样衰落的中国经济学家们，都无法去解释，过去的荷兰帝国和大英帝国只是普通商品的贸易时代。任何一个工业人群，只要模仿和勤劳，都会让荷兰帝国和大英帝国衰落。而今天是创新与衍生品的世界，是一个脑力社会。是通过消灭近5万亿美元国家，而盈利600万亿美元的衍生品市场。所以，不幸的是，作为一个中国人，本人在2007年5、6月份提出的美国战略目标是——让中国股市2008年底崩盘到2000点；让中国楼市在2008年底疯狂上涨。站在全球600万亿美元衍生品市场的财富面前，现在中国楼市未来两年跌去70%，这是个常识。站在全球600万亿美元衍生品财富胜利者的面前，未来3年美元将创造全球有史以来，最壮观与最宏大，或许是无法用人类创作的词汇来形容的——上涨，再腾飞的上涨。

现在最大的问题是——这些是简单的常识。中国人却热衷辩论这些简单的常识。那只能是，上帝把衍生品基因移植给美国人；把苦力基因移植给中国人。在上帝的安排面前，未来还会很美，那只是美元的美。



刘军洛
2010-3-18

Social Mood and Immigration

One theme I continually return to is how social mood changes the public's opinion on issues such as immigration. Most governments respond to the shift by tightening immigration restrictions, but in the United States, the elites carry on as if there has been no shift in social mood.

In the U.S., those opposed to immigration are dubbed xenophobic or racist. However, the news is filled with the same story across the globe. In Socionomics Watch—Hong Kong residents call Mainland Chinese "locusts"; Chinese call HKers "running dogs", it was Chinese vs Chinese. Same in Singapore. There is the extreme case in the Dominican Republic where the Supreme Court stripped long-time citizens of their citizenship and deported them back to Haiti.

More recently in the U.S. was Spike Lee's rant against gentrification.

Now there is this article: West Hollywood's increasing diversity inspires mixed emotions

Councilman John Duran and his gay colleagues on the West Hollywood City Council never expected a backlash when they voted recently to remove the rainbow flag from above City Hall.

For Duran, who is gay, taking down the flag wasn't about slighting gays but sending a message about the city's diversity.

"It's not just a city of gay men. It belongs to heterosexual people as well," he said.

But the flag's removal in a place synonymous with gay life outraged many, and the city this week changed course, raising above City Hall a flag with a rainbow-colored city logo.

The dust-up underscores a larger identity crisis facing the city once known as a "Gay Camelot." When it was founded in 1984, West Hollywood was an oasis for gays, a place where they could be better protected from gay-bashing, find support during the AIDS crisis and fight discrimination.

But both West Hollywood and the rest of society have changed since those days. Gays now feel greater acceptance outside the boundaries of gay neighborhoods.

At the same time, West Hollywood has seen a development boom that has made the city a more hip, but not necessarily more gay, address. While the city's gay population has remained at about 40% for some time, the commercial scene is changing. The city's last lesbian bar, The Palms, was razed last year because the property owners wanted to develop the site, where an upscale supermarket has been proposed.

"The shedding of the LGBT identity is happening slowly with development [and] straight business owners," said resident Larry Block. "There's just a changing environment in West Hollywood."

The same story is repeated over and over. It is the same sentiment expressed as anger at population migration that changes the community. It can be at the neighborhood level in the case of Spike Lee's rant, it can be at the city level for the gays in West Hollywood, it can be at the state level in the U.S. and it can happen at the country level. Sometimes there are additional racial, religious or ethnic tensions, but it is not hard to find people expressing the same exact sentiments towards people of their own race, religion and ethnic group, who happen to have a different culture, ideas about politics, or simply an argument against sheer numbers.

These issues always exist to some degree. It's hard to see how neighborhoods or cities such as West Hollywood could remain unchanged. Still, because something is inevitable in the long-run, does not mean politicians should pursue policies that will exacerbate these tensions in the short-run, at exactly the moment when the potential for violence are at their highest. Furthermore, it risks a greater political backlash than would otherwise be possible.

Newly Issued Trusts Surge, But Newly Established Trusts Plunge; WMPs Investors Continue To Choose Safer, Shorter Maturities

As usual, these are estimated numbers from 金牛理财. Bars represent the value, the blue line is the number of trusts. If the newly issued trusts (top chart) are the future, then the industry could turn the corner here and avoid a crisis. The data looks like an outlier given that the other big spike came on February 16, the week when China opened for business after the Spring Festival. Given everything else going on, I need to see confirmation.

As for WMPs.

First up is a look at the yield spread between short-term (yellow line) and medium to long-term products (orange), which continues to widen.

Here's the spread between guaranteed (yellow) and non-guaranteed (orange) products.

Finally the yields/spread for big/state-owned and small/medium banks.

Ping An Concern Loans Soar 152%

Concern loans grew from 1% of assets to 2.13%, due to rising assets this was a 152% net increase.

NPLs actually declined slightly. Some other bad debt ratios were up sharply, but off of very low bases, such as losses up 82%, with the ratio up from 0.12% to 0.18%.

Below is the year-end report in Chinese. There is no English version yet.

平安银行股份有限公司 2013 年年度报告

Sky City Still Not Under Construction

Given all that is happening in China at the moment, I searched for information on the Sky City project. It is still not under construction, but the "little Sky City" project dubbed J97 is still under development.

Source: 胡润全球富豪榜湖南九人上榜 远大集团张跃上榜

Build it and they will believe, says defiant China tycoon

Zhang Yue is worth an estimated 1.1 billion yuan ($180 million) and has grandiose aspirations, the biggest of them to build an 838 metre tall tower he calls "Sky City" by the year's end.

It is designed to be 10 metres higher than the current title-holder, the Burj Khalifa in Dubai -- which took five years to construct.

But he admits the project has run into fierce opposition. "There are not many people who support us," Zhang told AFP. "There are too many bad people."

Zhang, 53, made a fortune selling air-conditioners and was the first Chinese entrepreneur to own a private helicopter, but has sought to reinvent himself as a green crusader.

......"We have to quickly move out of this mistaken kind of urbanisation," he said, describing Sky City, with energy-saving materials and reduced use of land, as "one such way out".

Why Did the Chinese Yuan Plunge?

There's a potentially fundamental reason why the Chinese yuan declined recently: the foreign exchange reserves declined. There are no official numbers yet, but China had a $23 billion trade deficit in February.

China sees trade deficit in February

Total trade volume dropped by 4.8 percent year on year in February to 251.18 billion U.S. dollars, the General Administration of Customs said in a statement.

Trade deficit stood at 22.98 billion U.S. dollars, compared with a surplus of 14.8 billion U.S. dollars last February, the statement said.

Some "experts" blame Chinese New Year, but Spring Festival fell on February 10 in 2013 versus January 31 this year.

Straight from the government report: 前2个月外贸略有增长　春节因素导致月度增速波动. All of these numbers are totals for 2014 (Jan + Feb).

China's export of electro-mechanical products 1.1 trillion yuan, down 5.7%, accounting for 56.6% of total exports.
Among them, the electrical and electronics exports 457.95 billion yuan, down 10.2%;
machinery and equipment 359.64 billion yuan, down 1.7%.
Apparel exports 151.22 billion yuan, down 7.7%;
textiles 90.18 billion yuan, down 4.7%;
footwear 53.91 billion yuan, down 3.1%;
furniture 47.91 billion yuan, down 13.5%;
plastic products 32.58 billion yuan, an increase of 5.8%;
Bags 24.05 billion yuan, down 13.3%;
toys 9.3 billion yuan, an increase of 4.5%;
the seven categories of labor-intensive products in total exports 409.16 billion yuan, down 6.4%, accounting for 20.8% of total exports. 　

In imports, the main commodity imports increased and there was a general decline in average import price.
China imported 150 million tons of iron ore, an increase of 21.8%, the average import price of 795 yuan per ton, down 3.9%;
crude oil 51.205 million tons, an increase of 11.5%, the average import price of 4832.4 yuan per ton, down 3.8%;
soybeans 10.723 million tons, an increase of 40.1%, the average import price of 3500.8 yuan per ton, down 10.9%;
6.176 million tons of refined oil, decreased by 15.4% and average import price of 4828.2 yuan per ton, down 0.1%;
primary forms Plastic 4,428,000 tons, an increase of 22.6%, the average import price of 12,000 yuan per ton, down 0.5%;
steel 2,339,000 tons, an increase of 16.8%, the average import price of 7596.4 yuan per ton, up 1.2%;
unwrought copper and copper 915,000 tons, an increase of 41.2%, the average import price of 46,000 yuan per ton, down 10.7%;
unwrought aluminum and aluminum 205,000 tons, an increase of 78.8%, the average import price of 21,000 yuan per ton, down 30.8 %.
In addition, imports of machinery and electronic products 733.96 billion yuan, down 0.9%; which 197,000 cars, an increase of 50.3%.

From an article now unaccessible online:

Everbright Securities macroeconomic analyst He Yuanyuan found in the fourth quarter of last year and April this year, the central bank bought yuan and dumped foreign currency (expressed as a reduction in the total of foreign currency assets). This shows that China's central bank is in the market to support the RMB exchange rate, to prevent it from excessive devaluation. This shows from another perspective, the pressure of RMB devaluation.

The time frame in question is the end of 2011 and April 2012.

Here are previous post on yuan weakness, most recent first.

The Logic of Strategy: Yuan Devaluation and the Road to Trade War
Andy Xie Warns of Yuan Devaluation
Andy Xie on China's Cash Crunch
More On Yuan Depreciation, China's Great Depression
Chinese Yuan Could Devalue 50% Or More
Liu Jun Luo predicts 40% devaluation of renminbi in 2013 (He has been off by about 1-2 years on his predictions.)
PBOC can't buy a buck; talk of depleted reserves is not alarmist
Chinese foreign reserves to peak in 2014? What about within the next year?
Yuan collapse goes mainstream as Financial Times discovers the yuan can drop; exchange rate hyperinflation cometh?
Albert Edwards agrees: wider yuan band can allow faster devaluation of renminbi
Chinese yuan depreciation coming soon?

Effects of Credit Problems Start to Hit Industrial Metals; Short Metals ETNs Still Trade At Discount

I noticed selling in copper earlier in the afternoon in China, but the selling hasn't let up.

Copper Collapses Most Since Dec 2011 On China Credit Fears

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China's FX lending and leads to upward pressure on the CNY.

Click through to see a detailed description of how this works. A similar system was used last April with gold when fake exports caused a yuan rally, but that was a short-term phenomena. The copper financing goes back years and is a complex arrangement. It is unknown how much debt is backed by copper, and it is also unknown how many times the same copper has been used to take out loans (rehypothecation). There's enough anecdotal evidence to suggest the debt far exceeds the collateral. Were copper to break $3 and heavy selling to commence, banks may call their loans and find there is no collateral, thus pushing more banks to call their loans. Eventually, what copper there is will come out of financial storage and get dumped on the world market, or at least satisfy Chinese demand internally for some time. Either way, copper could be in for a plunge.

I went short base metals via two ETN products, PowerShares DB Base Metals Double Short (BOM) and the single short product, BOS. The latter fund is very lightly traded and never proved popular with traders. I could only get a very small position, but it traded at a more than 40% discount to NAV, a nice margin of safety. BOM had a smaller, but still significant premium, currently about 17%. BOS is the 20th best performing ETF in 2014 thanks to the discount being cut in half; it's now about a 23% discount. Given the small volume, it doesn't make sense to go with BOS anymore. Even getting shares of BOM at a good price will prove difficult.

That said, there is plenty of evidence that these types of unloved ETNs and ETFs coming to life. Traders ignore them when they're not moving, but if there's a big trend unfolding, I expect volume will pick up enough to close the discount at least partially.

State Owned Banks Reject Yu E Bao Deposits

Three State-Owned Banks Reject Agreement Deposit from Yu'E Bao due to High Price

The headquarters of three giant, state-owned commercial banks claim that they have refused accepting agreement deposit from Tianhong Asset Holdings, the mutual fund owned by e-commerce giant Alibaba and sole partner in the company's online financial platform, Yu'E Bao, reported eeoo.com.cn.

An employee at one of the state-owned banks, both of whom are not named in the article, claimed that their reluctance to take agreement deposit from Tianhong is because the mutual fund wants to negotiate depositing huge amounts of capital in return for an interest rate between three and five percent above the national interest rate.

A staff member of Tianhong, who remained nameless in the report, revealed that the mutual fund hasn't made any deposit agreements with a domestic commercial bank so far, despite daily attempts to contact China's big banks to make a deal.

Chinese banks are raising the deposit rates on their own products in order to fend off the competition, but with NPLs set to rise in a slowing economy, the loss of easy profits comes at the worst possible time.

Alibaba isn't sitting still.

Alibaba may be first to set up Internet bank

Hangzhou-based Alibaba may receive the green light to establish an Internet-based bank, one of the two private banks to be set up in Zhejiang Province. The other private bank will be controlled by more than 10 private companies from Wenzhou, Great Wisdom AAStocks news agency reported yesterday, citing unnamed sources.

Private banks will supplement the banking system as it promotes differentiated competition, said Liao Min, head of the Shanghai Bureau of the China Banking Regulatory Commission.

Private banks will have restricted licenses which limit their business scope. They will also target different customer and territorial markets.

Market watchers expect the licenses to be issued after the annual session of the National People's Congress being held in Beijing.

A Reminder on the BEA's Accuracy

The Bureau of Economic Analysis in the Commerce Department gives out GDP estimates. As with the Bureau of Labor Statistics and the unemployment rate, they are terrible at turning points. A reminder of that came today when I checked on the consumer indexes put out by Consumer Metrics. They posted this chart showing BEA estimates for first quarter GDP in 2008.

The BEA estimate of GDP growth changed by 3.3% over the past 5 years.

As for the Consumer Metrics own index, here's their Absolute Demand Index, which clearly shows the ongoing depression.

Then there's Railfax's traffic index. We are in the season for the turn in data and one should arrive by the end of the month; the data rebounded in both March 2008 and March 2009.

Hong Kong People Angry Again

No more Hong Kong, no more Tibet

The Encyclopaedia Britannica has begun to refer to Hong Kong as Xianggang, the Modern Standard Mandarin (MSM) pronunciation of the name.

Strange that a British publication would adopt the Mandarin pronunciation and spelling of a city. Perhaps a few more Hong Kongers will pine for independence/neocolonialism to get away from China.

Most people do not expect Hong Kong to be a problem for China, but it could become a PR nightmare if social mood collapses.

Social Mood in Singapore

Singapore’s Foreigner Problem

The abuse is often so vicious that in his 2012 national day rally speech, Prime Minister Lee Hsien Loong noted the proliferation of posts “tormenting and berating” foreigners, adding: “Very few people stand up to say this is wrong, shameful, we repudiate that. I think that is no good.”

In the latest high-profile incident, British banker Anton Casey lost his job and was forced to flee the island last month with his wife — a former Miss Singapore Universe — and son. The hapless Casey received death threats after making sneering comments on Facebook mocking the “poor people” using public transport, though his comments probably had more to do with social class — a subject rarely discussed in Singapore — than with race per se.

The previous month saw a major backlash on social media after Indian and Bangladeshi workers rioted in Singapore’s Little India district, leading Lee to again warn against “hateful or xenophobic comments, especially online.”

Yet the worst abuse is usually reserved for low-paid construction and service sector workers from China, India, Bangladesh and the Philippines. Mainland Chinese are known as “PRCs” — from the People’s Republic of China — and are often ridiculed for their poor English and perceived lack of social graces by the ethnic Chinese who make up around 75 percent of Singaporeans. Chinese bus drivers who staged an illegal strike in 2012 cited this discrimination as one of the reasons for their unhappiness.

Online forums are full of vicious comments about “PRC scum,” “foreign trash,” Filipino “cockroaches” and so on. An event held by Singaporeans in Sydney to celebrate the city-state’s national day last year attracted attention when locals and other foreigners were apparently refused entry. Summing up the siege mentality of many Singaporeans, one of the attendees wrote on a local blog afterwards that: “Everyone of us were on the same page. There were no PRCs, India Indians, Bangla or Pinoys [Filipinos] to annoy us.”

China Ramps Up Military Spending; Move Will Strengthen Anti-China Alliance

In The Logic of Strategy: Yuan Devaluation and the Road to Trade War, I look at the economic angle and Edward Luttwak's book, The Rise of China and the Logic of Strategy. One of his points was that a major military buildup by China is alarming to its neighbors and sending them into the arms of the United States, to the point where they are prodding the U.S. to play a role in the region.

This latest news means there will be no easing of tensions.

China's Xi ramps up military spending in face of worried region

The government said it would increase the defense budget by 12.2 percent this year to 808.23 billion yuan ($131.57 billion), as China seeks to develop more high-tech weapons and to beef up coastal and air defenses.

Will the United States eventually decide that the way to slow Chinese military spending is to slow the Chinese economy? As I mentioned in the prior post, there are growing economic arguments against free trade. Trade deficit nations such as the U.S. also benefit in the short-run from trade restrictions because it means the domestic economy must supply more goods and services. The odds are certainly above zero that a politician will see a way to boost the economy and appeal to nationalism with one policy.

Paper Gold Not Dead Yet

Haven't updated this chart in awhile, but it shows speculative gold positions at their highest level in over a year.

Trust, WMP Activity Weak In February

The monthly trust report from 金牛 is out. First up is newly issued trusts, then newly established ones. The chart on top is from last month so you can see the numbers from February 2013. Newly issued trusts raised considerably more than in February 2013, but the other figure was lower by about 25%. Lines are the money raised, bars are the number of products.

Spring Festival fell in the first week of February, so that hurt fundraising results. The make or break month here though.

Here's the same charts for WMPs:

Stars Aligning For A March Cash Crunch as PBOC Drains Liquidity

First some English language coverage of the trust situation from Bloomberg:
China Banks Show Too-Connected-to-Fail Link to Loans

Du Ronghai received an urgent phone call from his private banker at Industrial & Commercial Bank of China Ltd. about an investment opportunity promising a 10 percent annual return. Only for the privileged few, he was told.

Du, who owns an apparel manufacturer in southern China, said he hopped on a plane the next morning for a four-hour flight from his home city of Harbin. That afternoon, at an ICBC office in Guangzhou, he looked at the sales contract he was required to read in person and invested 3 million yuan ($488,000), his first foray into the high-yield world of shadow banking. The employee kept telling him the product, called a trust, was so good that bank staff were pooling money to buy it, he said.

“I knew nothing about it, but the return was very, very tantalizing, and the way they presented it was like if I don’t buy it now, someone else will grab it in seconds,” said Du, who at the time, about two years ago, had almost 30 million yuan parked at Beijing-based ICBC in deposits earning less than 3 percent annual interest. “I was thinking, if I can’t trust ICBC, who else can I trust?”

High pressure sales tactics and a total trust in the financial institution. Not a good mix. Turns out Mr. Du invested in the infamous "Credit Equals Gold" trust.

That figure is equal to more than 80 percent of banks’ shareholder capital and has increased 65 percent annually for the past three years, Werner wrote in a Jan. 22 note.

The figure referred to is the total amount of shadow banking assets.

The top three shareholders of Beijing-based China Credit Trust are state-owned enterprises, including People’s Insurance Company (Group) of China Ltd., which owns a 33 percent stake and is the trust’s biggest investor.

This is why yuan depreciation is the most likely course of action: the central government is already intimately involved in the financial system.

“China needs a default, but not now,” said Xu Gao, Beijing-based chief economist at Everbright Securities Co. “A default would lead to an exodus of capital from similar financial assets, followed by a bank run, as liquidity is quickly drained in the financial system. Nobody will be willing to lend to each other -- just like what happened when Lehman went bankrupt. This is simply unaffordable to the government which has repeatedly vowed to avoid systemic risks.”

Default never comes when you want it. When times are good, bad debts can be serviced. It is when the economy sours that a default can cleanse the system. Repeated bailouts teach the financial sector that they will never be responsible for their bad decisions.

China has a record of bailing out banks in distress. In the late 1990s, it injected 270 billion yuan of capital into the four largest lenders, which were then on the brink of bankruptcy, and carved out 1.4 trillion yuan of nonperforming loans from their books. Since 2003, the government has spent $79 billion recapitalizing the firms and wiped away another 1.4 trillion yuan of bad loans.

A bailout might not be as easy this time around. China’s nebulous world of shadow banking, which includes trusts and wealth-management products, as well as guarantor and underground financing, accounted for 84 percent of GDP in September 2013, rising from 70 percent at the beginning of that year, according to JPMorgan.

The bailout in the late 1990s was a simple matter. The country was growing fast and accumulating reserves. Now, reserves have stopped growing rapidly and in fact are likely to start winding down soon, having already peaked as a percentage of GDP.

For Du, the roller coaster of Credit Equals Gold didn’t stop him from putting more of his savings into trusts. He said he has recently bought similar products from other banks, including China Minsheng Banking Corp. (1988) and Shanghai Pudong Development Bank Co. (600000), and will continue to invest.

“The risk is not with trusts, it’s about which bank you plan to partner with,” said Du. “I’m totally done with ICBC and now going with the smaller ones because they are more willing to honor what they said.”

Fool me once, shame on you. Fool me twice......

China Central Bank Guides Short-Term Rates Higher

China's money market interest rates jumped on Tuesday after the nation's central bank withdrew more liquidity from the financial system, signaling that it intends to continue its efforts to rein in risky lending and facilitate economic restructuring by guiding rates higher.

A benchmark cost of short-term loans among banks, the weighted average of the seven-day repurchase agreement rate, rose to 3.52% from 2.82% at Monday's close.

Heading for another cash crunch.....

However, analysts said they expect the PBOC to be less aggressive in guiding money market rates higher in the coming months than it was last year, given recent signs that the nation's economy is slowing.

To help curb risky lending, the Chinese central bank has engineered four cash crunches in the financial system since June, pushing the benchmark borrowing cost to around 4%-5%, compared with 2%-3% before the summer funding squeeze.

Engineered is too strong of a word. The Chinese central bank has, except for September, allowed the market to panic briefly before bailing everyone out. It's true that borrowers and lenders across the economy are behaving more cautiously, a result of the well publicized default of "Credit Equals Gold" in January. Whether the PBOC is able to put enough scare into everyone is another question. Mr. Du clearly hasn't learned his lesson. But engineered assumes the PBOC created the situation. It didn't.

There is a real scarcity of real capital in the Chinese economy. Interest rate liberalization has quickly led to the growth of products such as Yu E Bao, which soaked up billions in assets and offer much higher interest rates. Rates are high because money supply growth (inflation) is high, but real capital is constrained by the financial system, while malinvestment is high due to savings being allocated based on politics, not profits. If the central bank did nothing, there would be widespread bankruptcies and defaults across the entire financial system. Instead, the central bank let's everyone get close to the edge and the pulls back.

This strategy can work if the economy stays strong, but if it weakens, the central bank will run out of good options.

China Trusts Still Struggling To Raise Capital; Real Estate Liquidation Possibly Caused By Trusts In Trouble, Not Developers

First the charts of newly issued trusts and newly established trusts. The data is revised each week, but there haven't been any surprises.

The first chart shows that from initial data last week, only 14 trusts were issued for ￥1.7 billion yuan. Recall that there are expected to be ￥4 trillion in trusts maturing this year, which would require a weekly fundraising of ￥75 billion to merely keep the market from contracting. Trust fundraising was way off from December numbers and down from January 2013 and there's been no improvement in February. Another domino is set up for yet another cash crunch at quarter end as we head into March.

Trusts are also playing a role in the real estate price cuts in Hangzhou. (杭州地产资金链内幕：德信地产信托承压)

It turns out that one day after slashing prices and selling out the properties, the developer in question (德信 or DoThink) terminated their trust plans 6 months early. The article notes that this is rarely seen.

Hangzhou Industrial & Commercial Trust required the firm to cut prices and move inventory in order to pay back its loans. However, both firms denied the loan was called and said it was a voluntary prepayment by 德信, moreover they did the same thing in July of last year. An industry insider quoted in the article said that more than half the time, if the trust is terminated early it is due to financial pressure.

The article goes on to discuss price cuts from developer Tianhong (teh developer whose offices were occupied by angry home buyers a week prior), noting the firm is in weaker financial condition, yet even more opaque in its finances.

Commentary

The reporter in the story wasn't able to determine who was the protagonist in the story. It sounds as though 德信 may not be in financial trouble, but it raises the question of why they'd slash prices and liquidate to repay a trust 6-months early, considering that the price cut far exceeds the interest costs they'd incur over the period.

This story raises a new twist in the credit bubble: the trust industry may be forced to call in loans due to financial pressure and that could be the pin that bursts the bubble. As the above charts show, fundraising growth is negative and only flat at its best this year. It is plausible that the pressure to sell properties quickly may be coming from the trusts and flowing to the real estate developers, rather than the other way around. It won't matter where the pin comes from if the bubble bursts, but this shows how destructive credit can be to the economy when it becomes excessive (speculative and Ponzi finance according to Minsky). It doesn't matter if there are lots of home buyers lined up for years to come, just as it didn't matter that there were plenty of home buyers in 1929. All of the discussion of urbanization and hundreds of millions of home buyers waiting in the wings is a mute point if assets are forced into liquidation today. Credit is the key.

Maotai Bust May Be Finishing

First there was the Maotai bubble, now there is the bust. Maotai prices fell from 2800 yuan at the peak to 900 to 1000 yuan per bottle today. Wuliangye fell from 1600 yuan down to 600 to 700 yuan per bottle. According to reports, inventory has been moving at these prices and it may signal a bottom for these spirits.

Chinese liquor companies have pretty low valuations, some have decent yields, and not a few are priced to reflect the expectations of slow or flat growth for the next couple of years.

茅台五粮液价格探底 二三线品牌感受压

How Harvard Looted Russia

Why didn't the U.S. help Russia recover in the 1990s? There was a golden opportunity to turn a former foe into a friend through a prudent foreign policy, but instead we see the United States bully Russia when it was weak and then confront it as it finally did recover in the 2000s. It turns out that one of the driving forces behind this policy may have been Wall Street and Harvard hunting for profits.
Testimony of Anne Williamson Before the Committee on Banking and Financial Services of the United States House of Representatives September 21, 1999

So lush were the bond market’s rewards that dubious market participants included the Russian Central Bank itself through an off-shore firm known as Fimaco. The involvement of the Harvard Institute of International Development’s [HIID] honchos in the same conflict-of-interest activities has already been admitted publicly and remains the object of a Boston Grand Jury’s scrutiny. The Harvard Management Corporation[HMC], which invests the university’s endowment, was also an avid purchaser of Russian bonds, a dubious and unsettling history since there is no legal separation of HMC and the university itself. According to the Russian Interior Ministry’s Department of Organized Crime, Western employees of Russian banks, Western bankers and consultants, Russian bankers and anecdotal evidence, other likely participants include certain employees of the U.S. Treasury, of the multilateral agencies (most especially the World Bank’s Moscow offices), of bilateral aid agencies, and policy and program consultants acting through accounts established in their wives’ maiden names with non-U.S. reporting brokerages in Moscow. Even the Ford Foundation’s Moscow office sponsored its own internal Russian bond shop for which the unthinking Russian managers once asked this reporter to drum up U.S. investors.

One particularly striking aspect of Bill Clinton’s presidency is how aggressively his administration has worked to capture the political support of the financial sector, offering up heretofore unseen gobs of government favor. [A disproportionate number of firms receiving OPIC (Overseas Private Investment Corporation, a government entity) guarantees, Export-Import bank lending, and IFC (International Finance Corporation, the private lending arm of the World Bank) and Russian Enterprise Fund participation were generous contributors to both Clinton campaign coffers and the DNC.] The basic formula was simple, it’s not the rocket science Russia’s Harvard advisers intimated it was: The bread and butter of all equity markets are bonds. Wall Street wanted a debt market. You build it and we’ll come, they said.

The aid program delivered best it could what was in reality a flimsy contrivance, which - in turn - was really only an exotic venue through which to pass public funds to select Russians of the Clintons’ and HIID’s choosing and to Wall Street investment banks the Clintons hoped to entice permanently into their orbit of supporters and contributors. In short, the Russian bond market was the Arkansas Development Finance Authority gone international.

Today the Clinton Administration’s chief defense for their hand in Russia’s ruin is that somebody had to keep the communists at bay. But there were no communists in Russia by late 1991, only nascent investment bankers looking to nail down a stake any which way. Communism had evaporated by late 1987, the year in which the Russian people were allowed to hold convertible foreign currencies. Overnight, the power of money displaced the power of ideology.

The Clinton Administration would soon be gone, but Harvard remained. The capture of the political system was complete and continued under Bush, then accelerated under Obama.

Once the criminal financial flows from Russia and Asia were combined with the easy money common to presidential election cycles and began pumping into the economy in the spring of 1995, it wasn’t long before asset inflation hit U.S. corporate share valuations. Throughout 1995 and 1996, the money supply kept rising, and along with it mutual fund holders’ paper wealth. Attracted by the double-digit yields found in risky, unregulated environments abroad, the banks - given the election year liquidity the Fed wished to export - lent unwisely and to excess. The moral hazard the 1995 $40 billion bailout of Mexico unleashed (the debt was refinanced, not repaid, with additional IMF lending and proceeds from eurobond sales in 1996) led to a tripling of international capital flows. Investors took greater and greater risks in the belief that the "new paradigm" economy promised taxpayer-provided redemptions if necessary. The consequence of all those dollars frolicking in exotic locales is a $141 billion bailout for Asia, more than $20 billion for Russia in 1998 alone, and $30 billion for Brazil in 1999.

Cures under discussion all share one quality; each has some aspect that degrades American citizens’ independence and prosperity while delivering yet more more to intrude to the political class. It is one more irony of the post-cold war environment that ambitious American policymakers, who were so busy "reforming" Russia in the most appallingly cavalier and self-serving fashion, failed to honor the lesson Russia has to teach, i.e. liberty and empire do not cohabit.

The 1930s were the last era in which the international political and financial elite sought advantage through control of the global economy. What economists call "hot money" raced from one nation to the next throughout that era, leaving a trail of competitive currency devaluations in its wake. Six decades ago, as nation after nation was humbled by and strangled with the manipulations of the financial world’s insiders, history saw fit to serve up Adolph Hitler.

And the future:

The worst of it was that some pretty good ideas - private property, sound money, minimal government, the inviolability of contract and public accountability - that have delivered to the West’s citizenry the most prosperity and the most liberty in world history, and might have done the same for the Russians, were twisted into perverse constructions and only then exported via a Harvard-connected cabal of Clinton administration appointees who funded - without competition - their allies at Harvard University courtesy the public purse. Joining the US-directed effort were the usual legions of overpaid IMF/World Bank advisers whose lending terror continues to encircle the globe.

But where, in a land in which today more of the people die each year than are born, lies the gain? History’s yardstick will measure out the answer, and I suspect it will not suit us.