We’ve noted several times before how bizarre rumors and specious reporting about China have an unfortunate tendency to gain acceptance in global financial markets.
So it seems only fair to give the markets due credit for apparently shrugging off one of the more outlandish bits of balderdash to emerge in recent memory from the swamp of China speculation.
It started when some Chinese websites began carrying rumors that the People’s Bank of China had somehow lost $430 billion (yes, with a “b”
on its investments in U.S. bonds, and that, as a consequence, the Chinese government was preparing to punish those responsible, namely central bank Governor Zhou Xiaochuan. Some of the reports, according to a later account, also said that U.S. Fed Vice Chairman Donald Kohn had threatened to retaliate against any punishment of Zhou by disclosing information about the Swiss bank accounts of 5,000 Chinese officials. The story was attributed to Ming Pao, a Chinese-language broadsheet that is considered one of Hong Kong’s more reputable newspapers, and it was followed by further speculation that Zhou had fled China for the U.S.
It’s hard to say which part of this tale seems most far-fetched. That China had somehow managed to lose $430 billion — equal to more than half of its known holdings of Treasurys and nearly a fifth of its total of $2.45 trillion in foreign exchange reserves — without anyone noticing? That it had done so with investments in U.S. government-backed bonds at a time when prices of both Treasurys and U.S. housing agency debt are close to historic highs? That a Fed vice chairman would make such a threat? That he could have done so without anyone reporting it? That the U.S. has information on the Swiss bank holdings of 5,000 Chinese officials? That Zhou would flee to the U.S.?
It wasn’t too much of a stretch to wonder whether the rumor’s next iteration might have Zhou and the Yeti spotted riding Nessie bareback into the sunset.
But the rumors persisted in China. In an apparent attempt to tamp them down, the central bank on Monday posted photos with two news releases on its website showing Zhou meeting foreign guests. And Ming Pao on Monday issued a statement on its website categorically denying that it had ever reported any of the Zhou rumors ascribed to it. Ming Pao “strongly condemns the act of using Ming Pao’s name to spread false information,” the statement said.
Meanwhile, Chinese web pages carrying the rumor became inaccessible and censors began blocking Google searches of Zhou’s Chinese name for users inside China.
Perhaps the story might have lived and died in China, as many rumors do. But then Stratfor — a firm that says it offers “unique insights into political, economic, and military developments” — published a report later Monday on its website calling international attention to the tale. The report, titled “China: Rumors of the Central Bank Chief’s Defection,” was widely circulated among financial market participants in the U.S.
It noted that the Zhou rumors were unconfirmed and said that unspecified “reports by state-run Chinese media appeared to send strong indications that Zhou is in no trouble at the moment.” It also detailed various other past rumors of Zhou’s political demise.
Stratfor followed with another report. It again acknowledged that the rumors were unconfirmed, but also said that “Zhou cannot be confirmed to have appeared in public since the rumors began” and that if indeed he had fled to the U.S. it “would have serious ramifications for domestic and foreign perceptions of China’s political and financial stability, as well as for U.S.-Chinese relations.”
Online financial rumor peddlers followed up, some adding their own dubious speculation. The stage seemed set for another China-based market conniption.
But the market seemed to do a funny thing: Ignore the rumors. The shrug of indifference at a purported $430 billion bond loss raised the tantalizing prospect that investors and traders are learning not to believe everything they read about China.
How to explain the rumors? One suggestion was that they were a sign of division in China’s leadership. Possibly. Or they might have been an attempt to goose the markets, or a simple hoax, or just another bit of tittle-tattle run amok in a land that adores conspiracy theories.
In any case, by Tuesday the rumor finally seemed to be subsiding. PBOC deputy governor Hu Xiaolian dismissed the speculation when it came up in an interview with The Wall Street Journal, noting that Zhou had been chairing a PBOC meeting during the period when was purportedly on the lam.
Stratfor, meanwhile, issued a new report Tuesday. It was titled “China: Zhou Defection Rumors Refuted,” and said: “The governor of the People’s Bank of China has not defected to the United States, sources report.”
mode off but my question does remain!
