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Friday, June 26, 2009

China, Cleverly Dumping US Dollars

FN: China is dumping dollars, but far more cleverly than you might think.

Immobilienblasen has noticed a rather curious tendency for China to overpay in "China Inc." Deal Premiums. What exactly is that all about?

Well, imagine you had a bunch of money... err... US dollars for example. You've also got a bunch more of these US dollars coming in daily. You don't believe they will hold their value. So you don't really want them. That is quite a problem.

The first trick is to get rid of them... without actually seeming to get rid of them. The second trick is to get rid of them in such as way as to not destroy their value.... yet.

The single best way to do this of course is to use your US dollars to buy hard assets. This looks "normal". It isn't nearly as obvious as "diversifying" your currency reserves. China is doing exactly that. The "China recovery" story is nothing of the sort. The Chinese demand for commodities is not a function of economic growth but rather a function of hoarding. There are Consequences to this Phantom Commodity Bull Market which will become apparent soon enough.

China has been buying into oil with size and at a premium. This has analysts puzzled:

"Sinopec’s offer is equivalent to $34 a barrel of proved reserves and $14 a barrel of proved and probable reserves. The African transaction average in 2007, when the average crude price is similar to current prices, was $14.40 a barrel for proved reserves and $9.90 for proved and probable reserves, respectively. On a proved basis, the 2007 average suggests $3.1 billion total value for the deal. Therefore, $7.2 billion implies a 135% premium."

But when it becomes obvious to investors the world over that a US dollar devaluation is the only possible way to manage the kind of debt burden the US has accumulated, those premiums will vanish instantly. Oil quoted in US dollars could easily make new highs beyond $147 in such a scenario. China will not only have safe guarded the wealth of its citizens by owning oil fields, but will also have increased the global political power of the country thru the acquisition these strategic assets.

While the US empire has stumbled and is desperately trying to avoid a faceplant, the Chinese have taken the opportunity to break out into a sprint. Even in a best case scenario where the US pulls off a miraculous recovery, valuable ground will have been lost and the global balance of power will never again be the same.

China Reiterates Call for New World Reserve Currency (Update4): "China’s central bank renewed its call for a new global currency and said the International Monetary Fund should manage more of members’ foreign-exchange reserves, triggering a decline in the U.S. dollar.

“To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” the People’s Bank of China said in its 2008 review released today. The IMF should expand the functions of its unit of account, Special Drawing Rights, the report said.

The restatement of Governor Zhou Xiaochuan’s proposal in March added to speculation that China will diversify its currency reserves, the world’s largest at more than $1.95 trillion. Chinese investors, the biggest foreign owners of U.S. Treasuries, reduced holdings by $4.4 billion in April to $763.5 billion after Premier Wen Jiabao expressed concern about the value of dollar assets. That reduction came a month after China boosted its holdings by $23.7 billion to a record.
“Zhou Xiaochuan sees the current international financial system is flawed, putting too much emphasis on the dollar as a reserve currency,” said Kevin Lai, an economist with Daiwa Institute of Research in Hong Kong.

President Barack Obama needs the support of China as the U.S. tries to spend its way out of recession. The Dollar Index that measures the currency’s performance against six trading partners fell as much as 0.8 percent to 79.779 at 1:11 p.m. in London. U.S. Treasuries were little changed with the 10-year yield at 3.53 percent."

53 comments:

Anonymous said...

Damn. Chinese are brilliant, no wonder North Korea is being bold. They dont give a flying fck anymore.THey trade with China, so anything they need CHina is the burgeoning #1 World power...so they have a sidekick.

Anonymous said...

The price of oil could shoot? What about Nat Gas? What could we expect for Nat Gas?

Anonymous said...

Cleverly?

Haven't they been publicly whining and complaining about the dollar for months now?

SS said...

Ben,

Glad your back. How do you feel about the inflation vs. deflation argument, I can't recall any of your prior posts on the subject.

As for our nat gas friend all else being equal the U.S. has experienced additional finds in the Arkansas shale. Our domestic price should stay low for a while.

SS

wunsacon said...

Cheap/plentiful NG right here in the US.

PICKENS PLAN!! PICKENS PLAN!! PICKENS PLAN!!

Anonymous said...

Hii,
My 2 cents
big picture

With these levels of compliance should be near the top of a medium-long term.
I do not believe in running to 1,000 + on the spx.
I do not believe that two consecutive weeks will close above 956 in the coming months.
I do not believe that the spx can make a monthly close above 956 in the coming months
This is a typical bear market rally the market should be very close to the selloff back again.
During the coming weeks I will follow this charts.
Click to zoom in.
3 Charts - http://followmarketrend.blogspot.com/2009/06/spx-should-be-near-top-of-medium-long.html

Anonymous said...

How did Japan finance it's deficit in the 90's?

Anonymous said...

Is there any info about strategic oil stockpiles in China? How full are they? Can they still store more?

John Galt said...

Brilliant analysis. People think that the Chinese acquisitions of hard assets is a wasted and fruitless effort. But if/when the economic period once called "normal" returns, they hold more cards than we ever could dream of. And if any American thinks that despite centuries of bitter conflict that China and Japan, business is business and the Japanese and Chinese will work together if it means leaving the Yanquis out of the equation and earning huge profits.

admin said...

Weekly Market Analysis from Charts and Coffee - http://chartsandcoffee.blogspot.com/2009/06/sunday-night-coffee-6282009.html

Anonymous said...

There is a serious logical problem with the core of this proposition, that china is getting rid of dollars by overpaying: They can burn the dollars, which will reduce the price of future purchases of the same asset class, increase military expenditure, buy dollar denominated assets etc.

In short, overpaying is never an optimal strategy, and would require remarkable evidence and dismissing all the other reasons the purchase price has that premium (perhaps there are other deal terms that required that price, terms that weren't disclosed in press statements).

Anonymous said...

All ready in Nat Gas. 18 to 1 right now

Anonymous said...

Conspiracy or not? 2 or 3 weeks ago 2 jap guys get caught crossing Italian border with 134.6 biilion in bonds denominated in US dollars. Destination Switzerland. They are released after stating they are employees of the Ministry of Finance, JAPAN.
About same time Russian finance minister gives an endosement to the US dollar as the worlds reserve currency.Makes a sharp change from America bashing.
March 09 China buys 300,000 tonne copper, word is they have been stockpiling iron ore both onshore and offshore in bulk ships. Why? Price negotiations are currently underway wit Rio and BHP for a 30 to 40% price reduction. We know they play with the Zinc prices. You tell me they have been stockpiling oil.
You guys (I'm an aussie) tell me there commercial banks are lending to Chinese buyers of commodities in the past 3 months. Authority commes from higher up.
Chinese are in Australia looking @ everything, Commodities, mining companies, real estate etc etc.
Our Aussie mining companies in Africa are coming up against the Chinese and they have plenty of US dollars to spend.
China is doing currency swaps with there trading partners.
China is spending huge amounts internally.No need to go on and on
Nothing above in isolation is of concern, but taken together, I concur. Some entities are playing a double game. Officially they support the dollar then quietly use the back door and divest.I would do exactly that if I had 60 to70% of my reserves in US dollars.
My question is, what has changed in the past 3 or 4 months to ratchit up the intensity?
Didn't Bill Clinton say, 'IT'S THE DOLLAR STUPID'. TERRY.

fajensen said...

Nothing above in isolation is of concern, but taken together, ...

China have also introduced export restrictions on a range of raw materials.

http://www.latimes.com/business/la-fi-china-trade24-2009jun24,1,173658.story

Obviously China want to keep the value-adding processes at home instead of being stupid like the Arabs and swap all their resources for paper.

Or ... China have decided that North Korea needs a humanitarian intervention.

JB said...

Here is a bloomberg report that's food for thought.

“There have been discussions both in China and abroad about the possibility to diversify into gold and commodities,”
Beijing-based analysts Tao Wang and Harrison Hu said in a report.
“We do expect China to increase its purchase of gold and other
commodities over time, but these markets are just not big enough
to make a meaningful dent in the structure of the overall
foreign-exchange holdings.”
The CHART OF THE DAY shows how China’s reserve assets are
worth more than twice the combined value of the European Union’s
gold reserves, Chile’s yearly copper production, Australia’s
annual iron ore exports and Oman’s proven oil reserves, based on
data compiled by Bloomberg. China’s reserves as of March 31
would be about equal to the value of the U.S.’s proven oil
reserves based on a price of $64 per barrel, data show.
“If China decided to hold 5 percent of its current $2 trillion of reserves in gold, it would need to buy more than
3,000 tons of gold, or about one year of world production,” the
analysts wrote. For other “hard” commodities, “there is just
not enough of it compared to the size of the reserves, or even
the annual increment,” said the June 19 report.
China could have paid for its copper imports five times
over and its iron-ore imports two times over in 2008 by using
only about a quarter of the foreign reserves it added that year,
according to UBS. Ninety days of oil imports, which is the
government’s target for its strategic petroleum reserves by 2020, would cost less than $50 billion, the analysts wrote.

photinacook said...

Not so clever. The smartest place to spend dollars is in the United States. They should buy all the coal we can mine in VW, WY and CO, and buy trucks and buses from Detroit if the price is good (I think it is, but those auto workers "make" (get) more than physicians, so I am not sure). They should buy American-made Toyotas and other small cars, which their people will want, at a good price. They are just beginning an infrastructure boom similar to the USA 1950's, so anything American made that will assist that is a good buy. This will help prop up the economy those dollars depend on, and make the dollar less prone to collapse.

Then again, economist Harry Dent is betting on severe DEflation as Americans are much less eager to buy anything. When money changes hands slowly, that is the SAME thing as a smaller supply, which is why tomatoes do not cost $100 a pound right now.

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willson said...

Interesting… I might try some of this on my blog, too. It’s quite interesting how you sometimes stop being innovative and just go for an accepted solution without actually trying to improve it… you make a couple of good points.

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Beaming your support. How do you touch roughly the inflation vs. Deflation arguing, I can't retrieve any of your prior posts on the field.
As for our nat gas booster all else beingness compeer the U.S. Has experienced extra determination in the Arkansas shale. Our domestic terms should check low for a while.

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Generic Cialis said...

I didn't know that you can do it in that way but people got aware of it. So it isn't the most clever way to do it.

fix credit said...

As long as China runs a trade surplus with the states then it has to accumulate dollars. The idea they can 'dump' is nonsensical.

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