Western Banks Scramble As China's "Rehypothecation Evaporation" Goes Global | Zero Hedge

Posted by straightlinelogic 11 years, 1 month ago to Economics
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This is a long article, but well worth it for anyone who wants to understand what's going on in the world's largest economy, and how it may affect the rest of the world. Essentially, an arbitrage has been set up to take advantage of the discrepancy in US and Chinese interest rates (borrow in dollars, lend in yuan, hedge the currency exposure) and various commodities collateralize the yuan loans. Sooner or later these types of arbitrages fall apart as they become more popular. The extra kicker in this blow up will be that many of the commodities pledged as collateral have either been pledged as collateral multiple times or have been rehypothecated. (I pledge my copper to you for your money, you then pledge that same copper to someone else as collateral for their money. If this sounds absurd, it is, but it goes on, and not just in commodities. It is, in fact, the way most credit markets work. Treasury debt, mortgage-backed securities, corporate debt, and so on are all rehypothecated in the repo market. That's how the failure of one "systematically important" institution (like Lehman Brothers) can bring down the entire global financial system, as multiple claimants desperately try to recover the same collateral.)
Keep in mind that the Chinese have created far more funny money liquidity since 2008 than either the US, Japan, or Europe. I would say that the odds of the next financial collapse starting in China are high. If you really want to get up to speed on it, this article, and the articles linked within it, are great places to start.


All Comments

  • Posted by LetsShrug 11 years, 1 month ago in reply to this comment.
    Bill Cosby... I hate to be a downer, but my sister met him once...he was a rude ass hole. Condescending as hell.
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  • Posted by Robbie53024 11 years, 1 month ago in reply to this comment.
    I'm convinced that she, Alexis de Tocqueville, Ben Franklin, and a few others were actually time travelers. Like on Star Trek, their Prime Directive was not to be uncovered nor to directly change history, but they left clues and warnings, that if one listens to closely, are very clear and precise about what to watch for and guard against.
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  • Posted by teri-amborn 11 years, 1 month ago in reply to this comment.
    I saw him in concert in 1979 ... about the time frame of this clip. What an incredibly funny fellow!
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  • Posted by ObjectiveAnalyst 11 years, 1 month ago in reply to this comment.
    Hello teri-amborn,
    Thank you. :) I try to keep my conversation as light as possible. I do not wish to offend anyone, and we all need to keep our spirits up, in as you say "these troubling times." Here is something for fun... about children... kind of reminds me of those in the Capitol... :) https://www.youtube.com/watch?v=8ysFvUiz...
    Regards,
    O.A.
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  • Posted by wiggys 11 years, 1 month ago in reply to this comment.
    I for one and I am sure I am not alone have gotten very tired of these long in the tooth people who cower to the white house occupant perpetually. I am reading for the second time "return of the primitive" and today I started AR's Ford Hall Forum lecture delivered on April 10, 1977 "Global Balkanization". I never cease to be amazed at her ability to not only comprehend what is going on but also to explain it so somebody like me can also comprehend what is going on.
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  • Posted by 11 years, 1 month ago in reply to this comment.
    Especially the editorial page, which has never met an intelligence program or foreign war it didn't like. To be expected now that they are part of Murdoch's propaganda machine.
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  • Posted by teri-amborn 11 years, 1 month ago in reply to this comment.
    You are SO funny! A great sense of humor really helps get us through these troubling times. Thank you for your levity.
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  • Posted by Temlakos 11 years, 1 month ago
    And we all thought the Chinese were salivating at the thought of us working for them? And they turn around and make the same mistakes?
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  • Posted by robertmbeard 11 years, 1 month ago
    This is a very good article with detailed analysis of the commodity rehypothecation risk in China. Because of their significantly less transparent banking system and accounting standards, many expect the level of credit over-leveraging in China is larger (as % of GDP) than most other countries. If true, and if anything like this triggers a period of much needed de-leveraging, it could make our de-leveraging in real estate investments look somewhat tame by comparison.
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  • Posted by 11 years, 1 month ago in reply to this comment.
    I can't speculate on why Soros dumped banks. What I do know is that the Too Big To Fail banks are all bigger than they were in 2007, the world as a whole is far more leveraged than it was in 2007, and nobody, including people inside the banks, can make a reasonable estimate as to potential losses if that leverage unwinds. On that latter point, I said the exact same thing in 2007 and said it was reason enough not to invest in the big banks. Europe's banks are even more opaque, and undoubtedly in worse shape, since so many of them have massive exposure to their own governments' debt.
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  • Posted by $ Mimi 11 years, 1 month ago
    The article mentioned Citigroup by name. Could this be why Soros dumped his Citigroup stocks a couple months ago? (he also dumped Bank of America and um.I don’t recall the third.)
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