When the Head of the Chinese Central Bank Makes An Airport Trade


An airport trade is when somebody puts on a trade far bigger than he can afford.  He then heads to the airport with a one way ticket to a foreign nation, preferably one without an extradition treaty.  If the trade is a winner, the guy enjoys a blowout vacation then returns as the conquering hero.  If the trade is a loser–well, welcome to Margaritaville.

There are rumors ricocheting around the internet and news that Chinese Central Bank Chairman Zhou Xiaochuan has defected to the United States.  The original version of the rumor, according to Stratfor, related to a huge loss on Chinese investments in US securities:

The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBC, including Zhou.

Uhm, no.  Completely implausible. US Treasury data show that in mid-2009, China owned about $760 billion in Treasuries, and about $450 billion in agency securities.  There is no way that it could have lost $430 billion on these positions, obviously.  Especially since Treasuries have been up recently.  Indeed, people are speaking of a Treasury bubble.

To lose huge money on Treasuries in this market you’d have to be short.  Friend and frequent commentor Charles does a quick back of the envelope calculation, and figures that somebody would have to be short about $4.5 trillion in Treasuries.  Zero Hedge calculates $3.5 trillion.  Either way, no way.  Like anybody could put on such a position with nobody knowing.

But Zhou hasn’t been seen.  Internet searches on his name have been blocked in China, as have websites carrying the rumor.  The rumors of  defection are flying fast and furious.  Chinese repo rates spiked.  There’s smoke, so what’s the fire?

One story is that this is all part of a power struggle in the leadup to a transfer of power in 2012.  Given the opaque nature of Chinese politics, this is plausible.

But here’s another, more ominous possibility.   Helicopter Zhou has overseen massive injections of liquidity into the Chinese market to fight the financial crisis.  There are widespread worries about a housing bubble, and the cracking thereof, with disastrous consequences for banks.  Similarly, there are myriad reports about massive quantities of bad loans, including huge amounts to local governments.  The recent bank “recapitalization” plan, which seems to have more in common with a three card monte game than a real recapitalization, only adds to concerns.

Put all this together, and it is plausible that Zhou has realized that the whole structure is on the verge of collapse, and that he is the natural fall guy.  So, he’s getting out while the getting is good.  The biggest airport trade, ever.

This bears watching.  If the rumors are true, and his defection/departure has anything–anything–to do with a deteriorating financial and economic situation in China, we are all in for a hell of a ride.  What exactly?  Who knows?  Commodity prices would likely crash.  But beyond that, given the opacity of the Chinese economy, financial system, and political system, it’s difficult to know how they would react and what the effects of their actions would be, either in China or the larger world.

Keep your eye on this one.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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