China Makes a Brilliant Move

In the global financial game, China is positioning themselves strongly for the next set of moves.  It’s impressive... very impressive!  Let me summarize quickly so that you’ll understand what I’m talking about. 

-          China holds more American debt than any other country.

-          China has expressed concerns that our reckless stimulating the economy will ultimately devalue the dollar.  This is bad for them because the dollars they’ve invested in will be worth less.  Bottom line: they lose money.

-          Catch 22.  China knows that the dollar will devalue, but if they start divesting their US Treasuries it will cause a panic that will also devalue the Treasuries.  Bottom line: they lose money whether they hold onto their treasuries or sell them.

I’ve been thinking that either China would try to sell their Treasuries or try to ride out the storm and hold onto them, hoping for the best.  It turns out that they have a much better plan, and actually one that I have been advocating for individuals and families.  That is, they are using their US dollars to buy tangible, hard assets that they will need in the future and can be stored easily.  See this article published in the UK. 

China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

…The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."

The bottom line: China is using their US dollars to buy commodities that are cheap now and will certainly cost a lot more later after inflation kicks in.  Brilliantly played.