Much was recently made of China’s physical gold stock revelation & rightly so. On a number of boards & blogs, I have stated my view that China is trying desperately to move away from USD denominated debt & will look at a multitude of ways of doing this.
To recall, the 540 tonnes of gold that China has managed to stash was bought from national producers, therefore it did not need to spend a dime on the international markets to acquire it. By acquiring gold internally, it is free to hoard physical stocks almost anonymously & help drive the price of the yellow stuff up.
Chinese officials have said that they want to be at 5,000 tonnes in the near future, which at a price of $900 per ounce would by value be around 10% of its total foreign currency holdings. Obviously this won’t happen overnight, however, as far as I am concerned, this is as strong a signal as our inscrutable paymasters are wont to give.
At the same time as the gold announcement, there were other topics afoot, notably the head economist of the Chinese National Bank publishing an open essay via the bank's website, calling for a new global reserve currency, which sent tremors across the news networks & triggered much verbiage on various blogs. Almost simultaneously, we found that China had also succeeded in putting in place a number of currency swaps with various nations, once again managing to hedge a little more against the once mighty dollar.
In the first quarter, China agreed to a 70 billion Renminbi ($8 billion) currency swap with Argentina that will allow it to receive Renminbi instead of U.S. dollars for its exports to the Latin American country. Beijing has also signed 650 billion Renminbi ($95 billion) worth of deals since December with Malaysia, South Korea, Hong Kong, Belarus & Indonesia. This would seem to be the start of a trend in SE Asia & also potentially further afoot.
Brazil’s President Lula is presently on a global tour, having stopped in the Middle East for talks with various Arab nations regards Brazilian particpitation in oil & infrastructure projects. What has really caught my eye though is today's coverage in the Journal of Commerce regards Lula’s impending visit to Beijing. Having signed an oil-for-dollars deal with China last year, Lula is now courting for further cooperation between the two BRIC giants, particularly in aviation & infrastructure. Lula has already said that he is keen for the two nations to conduct business via currency swaps, as this will ease trade & over reliance on the USD. In 2008, bilateral trade reached a record $48.98Bn, mostly in iron ore & soy products, companies such as Vale will not be slow to take advantage, as we reported in a recent post.
My contention is that China is at the centre of a huge & concerted effort within SE Asian & other Emerging Market nations to move away from USD dependancy. Look for China to form trade hegemony in Asia, as it slowly turns away from the West economicall. And rightly so, US & Western consumers will not be in a position to absorb China’s manufacturing and export capacity for a long time to come, forcing it to look for alternative markets, whilst putting in fiscal controls as we have seen above. Fund My Mutual Fund carries a very good article on this: It’s China’s World; the Rest of us Just Live in It ; sadly, I have to agree with him.
Disclosure: Author holds positions in PBR & VALE