In today's markets, I think of China as the smart money -- the entity with a sufficient amount of intent and capital to move markets higher. As an individual trader who is not really pushing the market higher -- but rather following the trend of a force that is -- China's actions are always of great interest to me, as I know they have the ability to push price. This sets up easy opportunities to just follow their strategy. In our current world, that means buying commodities and selling U.S. Treasury bonds.
What China is doing is usually openly announced, and thus especially easy for investors / traders to follow. Consider the following news bits:
1. China, like India, is buying farmland. Are they purchasing farmland in anticipation of a world in which food production may have difficulty meeting demand? I would suspect that is their driving ideology, and that it may have some merit. (MOO) is an agribusiness ETF that I think would be effective as a proxy for speculating on farmland prices. MOO's biggest holding is Monsanto (MON), which I would prefer to avoid for ideological reasons, although that may be a common concern with many big agricultural plays if you share skepticism of such companies. I consider farmland better suited towards purchase on private markets and for those with entrepreneurial ambitions rather than stock market speculators.
2. China is striking deals around the world to ensure it has a strong supply of uranium, presumably to serve as fuel for the nuclear reactors she has planned. Uranium is one of my favorite opportunities presently, as my recent Seeking Alpha articles clearly indicate. Uranium Energy Corporation (UEC) and Cameco Corp (CCJ) are my two favorite plays here.
3. China is the global king of rare earths, owning 95% of all current production and moving aggressively to tighten its grips by raising prices and reducing exports. The rare earth market is one I find especially difficult to invest in. I generally stay away from this opportunity, with the exception of Quest Rare Minerals (QRM) whom I took a very small stake in, on grounds that it was being so widely recommended by professional students of the market I trust and respect, while still being ignored by non-specialist investors. REE is an ETF that may be of interest for those looking for a sector fund to play this angle.
4. Of course, last but certainly not least is gold (PHYS), which China has been aggressively accumulating for nearly 10 years now. Porter Stansberry goes so far as to call it The Largest Gold Accumulation Plan of All-Time.
What's China Selling?
We've covered what China's been buying -- but what about the other side of the coin, which is what they're selling? A big part of that is obviously the country's vibrant export industry. However, China's exports have been declining. The country does have a huge stockpile of reserves built upon years of trade surpluses, and it is increasingly cashing in those reserves -- so, we see that China is, in a way, long commodities and short paper currencies. Those concerned about inflation, stagflation, and hyperinflation will surely be familiar with this viewpoint and its supporting rationale.
Also related to China's decision to accumulate commodities by selling paper currencies is their decision to increasingly operate as a seller of U.S. Treasury bonds. It was recently reported that China's holdings of U.S. Treasury bonds declined in the second half of 2011, with China ending up a net seller.
The flow out of U.S. Treasury bonds and into gold is one I've been particularly bullish on. While I don't recommend shorting anything in an inflationary environment -- and incurred some losses for shorting bonds last year -- Treasury bonds remain the asset I feel is most worthy of being shorted, and China's actions and the gold/long-dated Treasury bonds (TLT) spread has been widening since the financial crisis of 2008. The chart below illustrates:
I expect this widening to occur, and I still feel that the Treasury bond bubble will eventually pop. The only question for me is whether the popping occurs via a free market panic exodus or is legislated into existence via a new international monetary agreement.
Personally, my portfolio is very much aligned with China. This strategy of following China is one of the easiest ways to think about the current market, and I believe this strategy will continue to be worthwhile until a new international monetary agreement to reconcile the global sovereign debt crisis is established.
Additional disclosure: I am long physical gold and gold mining shares.