This page has been archived and commenting is disabled.
China’s Fires the Warning Shot on US Debt
China is the world’s largest creditor
nation. While the US Federal Reserve has overtaken it as the largest owner of
US debt, it is China, not the Fed, that determines the world’s attitude towards
the US’s financial situation.
After all, the Fed has become the toxic
waste depository for all of Wall Street and so consequently must continue its
US Treasury buying in order to maintain the illusion that the US financial
system is solvent.
China, on the other hand, is a voluntary purchaser of US Treasuries.
And what China does, the rest of the world will follow.
With that in mind I want to alert you to
the below news story:
China’s Sure Bet
As
the dollar wobbles, China is pulling back from U.S. Treasury securities and
buying up hard assets around the world. THIS
YEAR, FOR THE FIRST TIME EVER, China has been investing more overseas in assets
like iron, oil and copper than it puts into U.S. government bonds. China in
this year's first half spent $31 billion on hard assets, compared with $23
billion on Treasuries and other U.S. government bonds…China’s preference for hard assets over Treasuries, taken by itself,
will put upward pressure on U.S. interest rates and make U.S. economic growth
somewhat more difficult…
I’ve
commented on this news story previously in other articles. However its
importance cannot be overstated. Understand that China CANNOT simply dump US
debt on the open market in large quantities without risking a full-scale
systemic meltdown (if it did, other US-debt holders would follow suit resulting
in a full-scale implosion).
Instead,
China must handle this issue delicately until it can risk a direct
confrontation with the US without putting its economy at too much risk. With
that in mind, consider that China has cut its US Treasury holdings by 7% year
over year.
This is a
serious warning shot of what’s to come. We’re talking about China dumping some
$68 billion in US debt in just one year. Indeed, it is clear China is making
moves to continue its ascent to super power status, removing any potential
weakness it might face in future conflict with the US (such as overreliance on
the US as a trade partner or reserve currency).
To be clear,
China has proven itself EXTREMELY adept at matters of international finance/
trade. With that in mind, it won’t
openly challenge the US regarding monetary policy or diplomatic matters until
it holds ALL the trump cards and can openly challenge the US without exposing
its economy to a massive downturn (much as it did with Japan during the fishing
boat scuffle).
In that
regard, going forward I believe China’s monetary/ economic moves will focus on
two areas:
1) Shifting
its reserves away from the US Dollar
2) Shifting
its trade focus away from the US economy
Regarding
#1, over the last five years, China has been on a mega-buying spree of natural
resources. Because of its close proximity and natural resource riches,
Australia has been the primary focal point of these efforts. Indeed, the below
list compiled by The Australian
represents just a handful of China’s moves in this regard:
March
2007: Shougang Corp steel group spent $56 million buying 13% or iron ore
developer Australian Resources and agreed to fund $US2.1 billion development of
the Balmoral South project;
July
2007: CITIC spent $113 million lifting its stake in Macarthur Coal from 11.6%
to 19.9%;
September
2007: Queensland government awards Chalco rights to develop $3 billion bauxite
project near Aurukun;
September
2007: Anshan Iron & Steel paid $39 million for 13% of Gindalbie Metals and
signed $1.8 billion joint venture deal to fund Karara iron ore project in WA;
January
2008: consortium of five Chinese companies given FIRB approval to fund $3
billion Oakajee port and rail project in WA;
January
31, 2008: Shougang Corp spent $400 million buying another 20% of WA iron ore
company Mt Gibson Iron, but has since been forced to sell for breaching
takeover rules;
January
25, 2008: Sinosteel spent $100 million for more than 10% of WA iron ore hopeful
Midwest Corp;
February
3, 2008: Chinalco spent $15.5 billion for 9% of Rio Tinto shares in London;
February
26, 2008: China Metallurgical Group announces proposed $400 million acquisition
of Cape Lambert Iron’s namesake WA project. CMG already owns 20% of nearby $5 billion
Sino Iron Project;
April
28, 2008: FIRB approves China Petrochemical Corporation paying $600 million for
60% control of the Puffin oil field in the Timor Sea, the first time a foreign
government has operated an Australian oil field;
April
29, 2008: Midwest board recommends agreed $1.36 billion bid from Sinosteel
priced at $6.38 a share.
Again, I
want to stress that list represents just a handful of China’s moves in the
natural resource space (my own research shows China grabbing as much as $20 billion
worth of Australian resource companies from February-April 2009 ALONE).
As a
stand-alone subject, these purchases can be taken as China merely trying to
satisfy its economic demands. However, taken in the context of China’s dumping
of US Treasuries, these moves are clearly part of a monetary shift away from US
Dollar denominated assets.
Indeed,
aside from its acquisitions of natural resource deposits, China’s shift away
from US Dollar denominated assets has also involved it heavily investing directly
in commodities themselves:
China’s Gold Imports Surge
Five-Fold
Gold
imports into China have soared this year, turning the country, already the
largest bullion miner, into a major overseas buyer for the first time in recent
memory.
The
surge, which comes as Chinese investors look for insurance against rising
inflation and currency appreciation, puts Beijing on track to overtake India as
the world’s largest consumer of gold and a significant force in global gold
prices.
The
size of the imports – more than 209 tonnes of gold during the first 10 months
of the year, a fivefold increase from an estimate of 45 tonnes last year – was
revealed on Thursday. In the past, China has kept the volume secret.
http://www.ft.com/cms/s/0/9742847e-fe3e-11df-abac-00144feab49a.html
Thus, we see China addressing its first
weakness concerning the US (an over-investment in US Dollar assets) by moving
out of US Treasuries and buying up natural resources and commodities (US Dollar
hedges).
Regarding its second weakness related to
the US (an overreliance on the US for trade), over the last five years China
has been aggressively expanding its trade with non-US countries. Consider the
table below:
As you can
see, in just four years, the US has gone from accounting for nearly a third of
China’s exports to less than a quarter. That is a MASSIVE shift in less than a
decade (at this pace the US will be down to just 15% of China’s exports by
2015).
All of the
moves I’ve outlined thus far, while hugely significant, have not involved China
explicitly stating it was moving against the US and its currency. Indeed, to
most commentators, China’s moves to acquire natural resources and commodities
have been seen in the context of feeding its economic demands.
However,
once you step back and begin to look at these moves in the context of China
trying to rid itself of an over-reliance on the US currency and economy, this
latest decision to dump the Dollar for all trade with Russia represents the
first monetary move China has made that explicitly involves dumping the US
Dollar.
This in turn
should serve as a major red flag that going forward China will be challenging
the US more explicitly which will most likely lead to trade wars and
potentially even a physical war.
Indeed,
we’ve already seen hints of this a few months ago when the US moved to put
tariffs on Chinese tires. China responded by increasing duty taxes on US
automotive parts and poultry.
Expect to
see more of this. As in MUCH more of this. China has made it clear that it is
NOT pleased with the US’s current monetary policy (China has blamed the Fed for
its inflation woes with some officials going so far as to label the Dollar’s
status as a reserve currency, “absurd”). The US has in turn responded by
labeling China a currency manipulator and blaming it for the US’s economic
woes.
This issue
will continue to fester between the two countries and is likely to break out
into more direct confrontations going forward. Considering the wide array of
sectors that China exports to the US, virtually every good you can imagine will
be at risk of potential price hikes due to potential supply shortages from
tariffs or trade wars in the coming years.
Good
Investing!
Graham
Summers
PS. If
you’re getting worried about the future of the stock market and have yet to
take steps to prepare for the Second Round of the Financial Crisis… I highly
suggest you download my FREE Special Report specifying exactly how to prepare
for what’s to come.
I call it The Financial Crisis “Round Two” Survival
Kit. And its 17 pages contain a wealth of information about portfolio
protection, which investments to own and how to take out Catastrophe Insurance
on the stock market (this “insurance” paid out triple digit gains in the Autumn
of 2008).
Again, this
is all 100% FREE. To pick up your copy today, got to http://www.gainspainscapital.com
and click on FREE REPORTS.
PPS. We ALSO
publish a FREE Special Report on Inflation detailing three investments that
have all already SOARED as a result of the Fed’s monetary policy.
You can
access this Report at the link above.
- advertisements -
If you can afford a real diamond ring or other expensive ring, that could be fine. But if you can't, do not push it! The replica tiffany rings will convey commitment and love the same way a pricey diamond ring will. If the woman you are marring will accept the replica tiffany ring, you really should treat her with your best! But if she can't accept anything less than an expensive tiffany ring, she may not be for you but for money,tiffany promise rings sale.
The Air Jordan 2011 are the option of basketball players circle the world and for this purpose, your corporation, Nike is now set one of the maximum presidents in the field of shoe from the ball better.Here comes a fresh color of the Air Jordan 1 Phat Low on which I privately was very joyous for moderately several time. The Olympic colorway of the deep-cut and well-padded Air Jordan 1 has a black nubuck surface, which is blended with a slightly shiny swoosh in crocodile leather effect. They are eye-catching and of course the purpose that the fresh Air Jordan New Arrivals Phat Low even paged Olympia but undoubtedly the colored seams. http://airjordanshoesol.com/
Why does the U. S. need $23bn worth of effin' toys? Whether made here or in China?
Everyone assumes that our Congress critters, White House, and Wall Street are working for the U.S. Not! They're working for China.
...and Wall Street... basically any Pimp who wants to rent them out for money. If they don't do what the pimp says they get slapped and beat up. Look what the pimp did to the Dow Jones after they refused to do TARP 1. Down 700 points in less than an hour. They cried like bitches and sucked dick like the whores they are after that one.
Good Fundamental analysis. I’m waiting to see the mega rich financiers and oil exporters of the world start building vacation mansions along the Chinese coast. That’s when we’ll know we’re really f$&^%k.
It would all be useful investment guidance were it not for the fact that 99% of investors no longer pay any attention to fundamentals. You can be right as rain and still get burned (particularly in the short run) when almost everyone else is day trading ETF’s, chasing momentum, and somehow convincing themselves they can still beat HFT computers and Wall Street insiders to the front.
Look carefully at the list of imports to the US. Electrical Machinery and Power generation equipment are serious categories and we import them because US manufacturing of these items has been offshored by our "leadership". The rest of the list is Walmart shit. All these things could be easily made in the US if investment was made in a few currently vacant factories to bring them up to speed and re-instate some of those lost American jobs. 12-18 months lead time and we could cut all those import categories to Zero. And with a little more effort we could begin making Electrical Machinery and Power generation equipment too. OK Immelt - that used to be what GE did, and now you're the big kahuna of jobs - how about it? Let's make that power equipment and electrical machinery in the US. And while you're at it, let's shrink the pay differential between the factory floor and the executive level to about 10:1 rather than the obscene 100s:1 where it stands today. I know, I know. You'ld like to be smoking what I'm smoking, but hey, its Saturday morning.
haha
http://www.investors.com/NewsAndAnalysis/Article/560292/201101191852/Trading-Away-Secrets.htm
Wars start over things like this. I don't trust the Chinese and I don't trust our Govt or the Fed. We are in a fine pickle. Obama doesn't have a clue as what to do and that is what scares me the most.
Obama, like W, ain't here to solve (our) problems.
Obama, like W, ain't here to solve (our) problems.
China sells its UST holdings. The FED buys all of China's USTs. The USD devalues (whoops). Commodity inflation and specifically the price of FOOD in China does what? Ok, the Chinese then subsidize the price of food with their $3TN hoard, or rather X TN hoard, since they have sold all of their $. Bringing X amount of X currency back to RMB does what versus inflation? Since the $ has devalued to such an extent, US Consumers can't buy jack in terms of imports. The Chinese export to whom? China is a $4TN economy and has created excess capacity exporting to a $14TN economy and a $16TN economy. Who buys Chinese exports then? Rock, paper, scissors. Who do you think is holding the rock, who the scissors?
Just repudiate the debt and watch China eat itself alive.
So basically all the FED etc. have to do is crank up the DXY and pretty much everyone looks the fool! Gold bugs, china, silver bugs, bug bugs.
New world currency? we already have one!
And over the years who, but our wonderful politicians have allowed the Chinese to access our markets for such a low price. How long do we keep up "most favored nation trading status" with a country that is burying us economically.
Actually, that is the US citizens who needed an access to cheap goods.
The Chinese are simply the most successful in providing them with what they wanted.
Isn't it amazing what slave labor will do to the supply/demand curve?
Jay Leno: The negotiatians are over, we get to keep the pandas another five years and China get to keep the jobs. How about this, we get our jobs back - China gets their pandas back and we spray paint a couple of grizzly bears.
Rubbish. Do you REALLY think that the tiny city state of 7 million people known as Hong Kong consumes 174B of Chinese goods each year?
If you think that, you're an idiot. Hong Kong is a port, and the lion's share of Hong Kong's (re)exports is to the United States. Let's be generous and say that HK exports to US make up only 80%. i.e. about 139bio.
And then there is Singapore. Let me ASSURE YOU that the red dot in the straits does NOT personally consume 47bio of Chinese goods each year. Probably more like 7bio.
That means that direct AND indirect trade to the US would be at least 477bio, which is 37%, not a quarter as the article implies.
Nope, China's exports remind me of that song from Grease "Hopelessly devoted to you ....", and if the US goes down, so does China, so does Hong Kong and so does Singapore. There needs to be a LOT more decoupling before China can call the shots.
(On a personal note it would be with great delight that I would watch the Singaporean economy collapse).
XPo, you are halfway there.
Notice also the massive increase in exports to Japan. Did Japan suddenly become a big consumer economy? In all likelihood, these are partially finished goods, being sent to Japan for relabeling to the US. In fact, the exports to Japan may be a total fiction, in that these are Japanese companies shipping direct from China to the US.
Same for Korea.
You are probably right. I know HK and SGP are exporting to the US. I imagine there is some domestic consumption in Korea, but Japanese markets are sewed up tight, so they are probably Japanese manufacturers (who are mostly based in Fujian province) who 'nominally' export the goods to Japan for packaging and sale or export.
Yep, decoupling is a myth. Americans are the world's MEGA consumers. They buy more stuff in one year than 80% of the planet buys in a lifetime.
Michael Fay, is that you?
LOL. Nice one.
XPo - Why, if I may ask, would you like to see Singapore falter?
Nothing complicated. I hate the place. Third world fascist shithole with a first world facade built by someone else, full of self-important, self-entitled nobodies and boring as hell. Only good thing about the place are the non-Singaporeans.
Enslavement or death for all unruly gentiles is the goal.
And what better enslavement model other than China is there?
spoke.com your house or castle and see who owns it.
All your information is online for everybody to see.
US model maybe?
To warrant the liberty of 300 millions, the Chinese have captivated 1 billion.
The US, for 300 millions of free men, 6 billions captives.
China is seriously lagging behind the US. Hard work and stuff.
Australia is just the tip of the iceberg. China has been cutting giant deals Africa. SE Asian, South America etc.
Why isn't the great American entrepreneur out there bidding up African land against the Chinese? At least China is more likely to end up holding the bag on that one...
and they can hold up that bag of shit. The land might be rich in resources......it is also rich in a troubling populace. And apparently, they can't be trained!
That'd be the quickest route for him to go to Gitmo by allying with such despots. Unfortunately it doesn't apply to China.
China is buying hard assets. And what?
The US military network is there to endure. The US is the record holder in terms of breaking treaties. China's purchases are not secure outside their borders. The military, the secret services will be used to promote coups, pressure governments in cancelling Chinese agreements.
Check Sudan for that matter. The US is pushing for independence of a small population so that the oil contracts China holds in that part of the world are cancelled.
When Hu visited Australia in 2009, he spent one day in Canberra and 2 days in Perth, Pilabara region looking thoroughly mining sector and since than more than $ 50 billion has come in Australia with a population of just 25 million
Fifty billion of value?
I remember the Japanese really bid up Rockefeller Center back in the day, too.
Yhatzee!
America becomes the Soviet Union, Africa becomes China and China becomes America.
20 years later.....Chinese Idol, Real Housewives of Shanghai, Are You Smarter Than An American?, Xingang Shore, Married With One Child, Mao's Navy, Chinese Pickers, Beijing Ink. Biggest Loser (Sumo Wrestler Edition), Chinaman v. Food
That's some funny shit right there! Sad, but funny.
Yeah, ok...
Europe goes the Balkans all over due to its demographics.
Middle east stays a shithole but most move to england.
What does it mean for my gold?
i need QE back.
Ho hum. Capital account surplus = Current account deficit. If China doesn't support the US CAS, and no one esle steps in to do it, then Chinese exports to the US shrink as the CAD decrease to the level of the CAS, and China has to face up to the fact that it is hugely over-invested in its export sector. China is in much worse shpae than the US in this regard, since it cannot find another export maket of this size in a world in which eveyone wants to increase exports. All that will happen to the US that the jobs that were exported will start coming home. Much ado about nothing.
I agree with the sentiment expressed about the return of exported US jobs. Looking at the author's list of major Chinese exports to the US, I see a list of employment opportunities for hard working Americans, should their banking, corporate & policy making elites reverse their "outsourcing" agenda.
Sadly, because of the perverse economic incentives to the elite via outsourcing & dollar debasement, that agenda will probably not be reversed until actual full scale war with China is on the horizon. Then it will be accomplished under the auspices of a fascist War Planning Board-type arrangement like those seen in WWI & WWII.
So its WWIII, Fascists vs. Communists.
The Zedge can excuse me for not getting too hopeful about the prospects for freedom & independence from these robber elites, Chinese or American.
All they have to do is revalue the Yuan up and out of 1.3 billion people, I think they can muster up enough consumers to take the US's place, all they need is 300 million of them.
Plus, the US is not China's biggest export market, the Euro zone is and the Euro zone is already trade neutral. The US is in the deepest shit
I don't believe that China set out to decrease the %tage of exports to the US.
Rather, it is a natural expansion of sales, as any merchant or country would do.
Certainly, the US was driven to expansion of exports around the globe, for some decades in the last century.
Now, others who produce more cheaply will follow that trend.
China will start (has started) to build and control production in other, poorer countries so that the economic flow will come back to China.
Chinese play a good hand of Poker. But not very hard to do when your playing partner suffers from either mental retardation or a lobotomy. Wake the fuck up America!
Nah! why bother!
no shit on the playing partner!
+1
But I like the theme of China being a big scary monster that is going to shit us out... Bush should have let people repatriate funds back in 2006 and 2007... but noooooooooooooooooooooooooooo...
just for shits and giggles who owns all of China's start up debt?
you know.. before they went all western... who was that fudning all those new factories? Blackstone?
where did Blackstone raise those monies from? I never saw a public offering circulate in the early years?
so? hmmmmmmmmmmm? who dun it? and who owes who how much? equity participation?
Foxconn is the biggest manu company in China, the CEO built it from the ground up. Started small and never looked back.
How are those "suicides" going?
it doesnt matter I am sure the commies just had some cash laying around then the rest of the world would take for construction materials... I am sure I am wrong, must have paid in gold pandas... my bad? what was I thinking. Tank Man paid with the spare change in his couch, after they gunned him down?
Nixon opening; Kissinger and Assoc. has big time influence in China; Bush was ambassador there. Rockefeller can't be too far behind these assholes.