China: Converting U.S. Treasuries Into Hard Assets

Includes: CAF, TLT, UDN
by: Katchum

A month ago I indicated in this article that China (NYSE:CAF) is massively buying copper. It seems that this trend hasn't stopped yet, and it won't stop anytime soon. The level of LME copper warehouse stocks has been trending down since late last year (Chart 1), which incidentally coincided with China decreasing its margin requirements on banks, which I discussed in this article.

(Click charts to expand)

Chart 1: LME Copper Warehouse Stocks Level

Meanwhile, China posted a very large trade deficit of $US 31.5 billion, as it is importing more and more crude oil and commodities like copper, natural gas, zinc and iron ore.

  • Copper imports jumped 17% month over month.
  • Crude oil imports went to a record high of 5.95 million barrels per day, up 1% month over month.
  • Iron Ore imports jumped 9.5% month over month.
  • Zinc imports jumped 47% in January.
  • Natural gas imports jumped 67% in January.

China's February export growth rebounds to 18.4 percent, but imports jump 39.6 percent (these numbers are year over year).

This translates to

$U.S. 114 billion export

$U.S. 146 billion import

And gives us the massive trade deficit of $U.S. 31.5 billion.

It is notable is that this trade deficit has never been this large on average since the 1990s.

China Balance of Trade

It looks like China is bracing itself for rising commodity prices. As a consequence, it's rather a prudent precaution for China to convert its U.S. treasuries into real assets, which it is doing right as we speak. It cut its U.S. treasury holdings to $US 1.15 trillion in December 2011 (Chart 2) and I can already predict that its U.S. treasury holdings for January and February 2012 kept declining. For your information, Russia is also doing the same as China (Chart 3).

Chart 2: China US Treasury Holdings 2011

Chart 3: Russia US Treasury Holdings

Conclusion: The evidence is crystal clear, the end game is finally starting. China is turning U.S. treasuries into real assets and is finally promoting domestic consumption in China. The only one to buy U.S. treasuries (NYSEARCA:TLT) from now, will be the federal reserve itself. This will finally lead to the demise of the U.S. dollar (NYSEARCA:UDN).

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.