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Posted at 7:50 PM ET, 08/30/2010

Top China bank official's defection rumors quashed

By Jeff Stein

U.S. government officials are throwing cold water on super-heated internal Chinese reports that the head of China’s top bank has defected.

Stratfor, the global intelligence analysis group, reported Monday that Chinese-language blogs were reporting that Zhou Xiaochuan, governor of the People's Bank of China, “may have left the country.”

But George Friedman, chief executive officer of Stratfor, said that the swirling rumors, which also accuse Zhou of overseeing a $430 billion loss on U.S. Treasury bonds, have little basis in fact and may instead signify a power struggle in advance of a leadership change in 2012.

“We don't believe it either,” Friedman told SpyTalk, referring to the alleged $430 billion investment loss. But he added, “I'm less concerned about the number and the specific charges than the politics of a senior banker clearly under attack without the government stepping in and backing him. We really don't know what it all means, if anything, but the numbers aren't important.”

[UPDATE: Japan’s financial regulator met with Zhou in Beijing yesterday, Bloomberg reported Tuesday, quoting Toshiharu Mashita, public relations director at Japan’s Financial Services Agency.]

According to Stratfor, the rumors were built on a foundation of intrigue.

“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," Stratfor reported.

"Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China.”

Two knowledgeable government officials, speaking on condition of anonymity, said they had no evidence of Zhou's defection and that he was not in U.S. custody.

"There's no indication at this point that he's defected,” said one. “It doesn't pay to give too much attention to rumors."

A nonpartisan congressional China expert, speaking on condition of anonymity, said that the losses cited for the PBC were ridiculous.

“I’m not sure how exactly anyone could have ‘lost’ money on investing in U.S. Treasuries since they have been doing a lot better than U.S. stocks,” he said by e-mail.

“The dollar, relative to the RMB, is about the same as it has been since July 2008, so it can’t be a dollar/currency loss. In addition, it is Chinese policy to invest in Treasuries or U.S. corporate bonds or agency debt—as in Fannie Mae and Freddie Mac. And a $430 billion loss? That’s a lot. But it hasn’t happened.”

“Did someone steal or misappropriate $430 billion?” he asked. “Hardly likely. That would be a big chunk of China’s $2.5 trillion in foreign currency reserves.”

Chinese embassy officials did not respond to e-mailed requests for comment.

By Jeff Stein  | August 30, 2010; 7:50 PM ET
Categories:  Financial/business, Intelligence  
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Comments

Couple of things:
Why would the State Dept comment about a high level defection? Maybe he went to another friendly country. It wouldn't be in his best interest to come here, it would only rock the boat. Not to mention, I wouldn't trust us either.

Second, he was supposedly short not long UST. Expecting rates to go up not down, its called inflation. The 10yr went from 4% to 2.5% in a few months, that's deflation or a flight from risk. 1.5% down is huge in the 10yr., sometimes it takes years to make a move like that.
If you use margin or leverage, not to mention derivatives or other financial vehicles, he could easily blow a couple of billion, maybe not a half trillion.
GS, JPM, BLK would be more than happy to be his banker/broker.

Finally, the ChiComs are know for rumors, but this would be a huge one. You can't make this stuff up, throw it out there, and then go silent. It really not in their best interest. Or maybe it is?

Posted by: Palidogg | August 31, 2010 12:26 AM | Report abuse

He's probably wanted in a major scam. Every top Chinese leader (and their family) is allowed a bit of corruption. In fact, its a great way to ensure loyalty (everyone knows the game and can be prosecuted at any time) - but some of them just get too greedy.

Posted by: pgr88 | August 31, 2010 8:56 AM | Report abuse

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