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Graham is Senior Market Strategist at OmniSans Research. He is co-editor of Gain, Pains, and Capital, OmniSans Research’s FREE daily e-letter covering the equity, commodity, currency, and real estate markets. Graham also writes Private Wealth Advisory, a weekly investment advisory that alerts... More
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  • China's Investing in a NEW Currency... and It AIN'T the Dollar 2 comments
    Jun 15, 2009 01:12 AM

     Let’s talk about China.

    China is the US’s largest creditor. All told, the People’s Republic has $700+ billion in US Treasuries. However, if you account for other dollar denominated investments, China is believed to have 70% of its $1.7 trillion in foreign reserves sitting in green backs.

    That’s an unbelievable amount of money invested in the US dollar. Needless to say, the Chinese are not too happy about our Central Bank’s decision to print TRILLIONS of dollars propping up the US financial system.

    Indeed, the initial rumblings of what will eventually turn into outright conflict (either economic or war) have already begun. China’s Premier Wen Jiabao recently commented,  "We have lent a huge amount of money to the US…Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried." 

    Other, former Chinese officials have been less polite in their public statements. Yu Yongding, a former Chinese central bank adviser, recently referred to the US Federal Reserve “as the world’s biggest junk investor… ridden with rubbish assets,” and to Chairman Ben Bernanke as “helicopter Ben.”

     The situation has gotten intense enough that Secretary of the State Hillary Clinton flew to Asia to plead with China and other US creditor nations to continue buying US Treasuries. “By continuing to support American Treasury instruments the Chinese are recognizing our interconnection. We are truly going to rise or fall together," Clinton said at the US embassy there.

    In simple terms, China owns a TON of dollar denominated assets. And the Fed is doing everything it can to devalue the dollar. Thus China has a few options:

    1. Openly sell the dollar, thereby destroying the value of its reserves and inviting open war with the US.
    2. Quietly shift away from the dollar without openly attracting attention or threatening the US publicly.

    The Chinese government, particularly its Premier, has been floating option #1 in the media, discussing the potential for dropping the dollar standard along with Russia and Brazil.

    However, this boils down to nothing more than grandstanding. The Chinese are not idiots. And they know that dropping the dollar standard would destroy a HUGE portion of their foreign reserves, since everyone and their mother would follow suit.

    Indeed, abandoning the dollar for another currency (say the yen or euro) would serve no benefit from an economic standpoint. It would crush China’s Treasury denominated reserves as the dollar plunged.  It would also be akin to trading one problematic investment for another: no major world currency is backed by gold or any asset of real value.

    No, to my way of thinking, the Chinese are merely posturing with these statements, trying to draw attention away from the fact that they’re already begun pursuing option #2 (diversifying away from the dollar in private). Indeed, China has already begun moving into a new currency, one that is neither fiat nor flawed. And they did it in their usual manner: under the radar with great focus and determination.

    That new currency is natural resources.

    Throughout 2009, China has been buying up natural resources, commodities, and other real assets at a break-taking pace: copper imports hit a record 329,000 tons in February, only to be eclipsed by a new record of 375,000 tons in March.

    The copper story is just the latest and most obvious display of China’s new currency binge. The Chinese have been buying up mines, metal ore (57 million tons of iron in April alone), and other resources for years now. The headlines were right under the world’s collective nose, but no one was thinking “diversification away from the dollar.” Instead they were thinking, “purchases needed to fuel economic growth.”

    Truly, it wasn’t until the world noticed that China was still buying commodities in record amounts even after its economy took a hit that the media began to connect the dots.

    Here’s a few dots to consider…

    • Feb.10, 2009: China buys Oz Minerals, the world’s second largest zinc miner for $1.7 billion
    • Feb. 12, 2009: China buys $20 billion worth of Rio Tinto, one of the three largest iron ore producers, giving it the potential to raise its stake to 19%.
    • Feb. 24. 2009: China buys 16% of Fortescue Metals an Australian iron ore company.
    • April 1, 2009 China buys $46 million worth of Terramin Australia’s lead and zinc supplies in Algeria.
    • April 15, 2009: China buy 51% of Ontario’s Liberty Mines: a nickel producer.

    One should also consider that these are merely the transactions that are publicly displayed. The Chinese government has proved adept at buying assets below the radar via foreign holding companies and other complicated business structures. Informal accounts posit that China has in fact scooped up even more natural resources and mines via these methods today.

    The reasoning here is simple. Unlike paper currencies, natural resources and commodities cannot be reproduced ad infinitum by central banks. Thus they are inflation proof. In addition, natural resources actually offer a direct benefit to China’s economy whereas an investment in a foreign currency (the dollar or otherwise) is merely a means of parking cash for a return.

    Finally, and most notably, natural resources allow the Chinese to diversify away from the dollar without damaging their current dollar holdings: or their relationship with the US: if word got out that the Chinese were dumping Treasuries, the Treasury market would implode, destroying the value of China’s current investment.

    Make no mistake, the Chinese have already begun diversifying away from the dollar. They just haven’t advertised the fact openly. Chinese students openly laughed at our Treasury Secretary Tim Geithner when he gave a talk there promising that “Chinese assets were safe” in the dollar.  If Chinese STUDENTS can figure the Fed’s moves out, what do you think the Chinese GOVERNMENT is doing?

    I think we both know the answer to that.

    Best Regards,

    Graham Summers

     

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This post has 2 comments:

  •  
    While foreign investments in natural resources-related assets is a good strategy, it is not the answer for solving the global multicurrency problem, which continues to put all the people of the world at risk of global financial crisis. Having multiple currencies, whose values fluctuate, is a relic of history and should be discarded as soon as possible.
    . Today, we must research and plan for a Single Global Currency, and if
    we are lucky and plan ahead, we will avoid a major currency
    crisis. The next major realignment of the world's major currencies
    should be to a common currency managed by a monetary union central
    bank. When such a currency supports countries with 40-50% of the world's GDP, that currency will become the defacto Single Global Currency, and the "tipping point" momentum will favor its continued growth, until it
    supports all the countries of the world. This is one route to a Single Global Currency managed by a Global Central Bank within a Global Monetary Union, and the benefits can be measured in the trillions, annually.
    Such a Single Global Currency will provide what the people of the world
    want - stable money.
    The primary problem for the euro and every regional monetary union
    today is that they must still exist in the multicurrency world where the value of its currency will fluctuate against other currencies.
    If 16 countries can use the same currency, why not the 192 U.N.
    members? Those 192 countries now use 141 currencies and the number is
    dropping annually. The euro is definitely a harbinger of the future,
    and soon all 25 EU members will be part of the EMU, and by then, there
    will be more EU members to add. Several of the remaining non-euro EU
    members are now seeking admission as soon as possible. The IMF has even urged several EU members to "euroize" even before completing the standard accession process.
    In addition to eliminating currency fluctuations, the use of a Single
    Global Currency would eliminate the current foreign exchange trading
    expense of $400 billion annually, eliminate currency risk, eliminate
    current account imbalances, eliminate the need for foreign exchange
    reserves (now totaling more than $6 trillion); and bring other benefits
    worth trillions, such as reducing the impact of global financial turmoil
    such as we are now experiencing.
    The Single Global Currency Assn. (singleglobalcurrency.org) promotes the implementation of a Single Global Currency by 2024, the 80th
    anniversary of the 1944 conference.
    The world is moving toward a Single Global Currency through the
    creation, expansion and merger of regional monetary unions. Other
    routes are through "ization" (as in "dollarization"and "euroization")
    and international monetary conferences proposals and agreements, such
    as were seen at Bretton Woods. The merger of the eurozone with one or two other currencies is one possible route to a Single Global Currency.
    The challenge now is to reach that goal deliberately, as soon as
    possible, with as little cost and as few crises as possible. If the
    eurozone were to merge with the U.S. dollar of the yen, or if the yen
    and the U.S. dollar were to form a monetary union, the road to a Single
    Global Currency would be clear.
    The only remaining questions about implementation of a Single Global
    Currency are: when? and how much cost and turmoil will the world
    endure before that implementation.
    See the book, "The Single Global Currency - Common Cents for the World."
    Morrison Bonpasse
    Single Global Currency Assn.
    Newcastle, Maine, United States
    Jun 15 06:12 AM | Link | Reply
  •  
    you are a FLAKE,AND A BABOON,when and if that were to happen(single currency)who is going to be the primerrary holder?its always,and i mean it strongly ALWAYS SOMEBODY will have the upper hand.


    On Jun 15 06:12 AM Morrison Bonpasse wrote:

    > While foreign investments in natural resources-related assets is
    > a good strategy, it is not the answer for solving the global multicurrency
    > problem, which continues to put all the people of the world at risk
    > of global financial crisis. Having multiple currencies, whose values
    > fluctuate, is a relic of history and should be discarded as soon
    > as possible.
    > . Today, we must research and plan for a Single Global Currency,
    > and if
    > we are lucky and plan ahead, we will avoid a major currency
    > crisis. The next major realignment of the world's major currencies
    >
    > should be to a common currency managed by a monetary union central
    >
    > bank. When such a currency supports countries with 40-50% of the
    > world's GDP, that currency will become the defacto Single Global
    > Currency, and the "tipping point" momentum will favor its continued
    > growth, until it
    > supports all the countries of the world. This is one route to a
    > Single Global Currency managed by a Global Central Bank within a
    > Global Monetary Union, and the benefits can be measured in the trillions,
    > annually.
    > Such a Single Global Currency will provide what the people of the
    > world
    > want - stable money.
    > The primary problem for the euro and every regional monetary union
    >
    > today is that they must still exist in the multicurrency world where
    > the value of its currency will fluctuate against other currencies.
    >
    > If 16 countries can use the same currency, why not the 192 U.N.<br/>members?
    > Those 192 countries now use 141 currencies and the number is
    > dropping annually. The euro is definitely a harbinger of the future,
    >
    > and soon all 25 EU members will be part of the EMU, and by then,
    > there
    > will be more EU members to add. Several of the remaining non-euro
    > EU
    > members are now seeking admission as soon as possible. The IMF has
    > even urged several EU members to "euroize" even before completing
    > the standard accession process.
    > In addition to eliminating currency fluctuations, the use of a Single
    >
    > Global Currency would eliminate the current foreign exchange trading
    >
    > expense of $400 billion annually, eliminate currency risk, eliminate
    >
    > current account imbalances, eliminate the need for foreign exchange
    >
    > reserves (now totaling more than $6 trillion); and bring other benefits
    >
    > worth trillions, such as reducing the impact of global financial
    > turmoil
    > such as we are now experiencing.
    > The Single Global Currency Assn. (singleglobalcurrency.org)
    > promotes the implementation of a Single Global Currency by 2024,
    > the 80th
    > anniversary of the 1944 conference.
    > The world is moving toward a Single Global Currency through the<br/>creation,
    > expansion and merger of regional monetary unions. Other
    > routes are through "ization" (as in "dollarization"and "euroization")
    >
    > and international monetary conferences proposals and agreements,
    > such
    > as were seen at Bretton Woods. The merger of the eurozone with one
    > or two other currencies is one possible route to a Single Global
    > Currency.
    > The challenge now is to reach that goal deliberately, as soon as
    >
    > possible, with as little cost and as few crises as possible. If
    > the
    > eurozone were to merge with the U.S. dollar of the yen, or if the
    > yen
    > and the U.S. dollar were to form a monetary union, the road to a
    > Single
    > Global Currency would be clear.
    > The only remaining questions about implementation of a Single Global
    >
    > Currency are: when? and how much cost and turmoil will the world
    >
    > endure before that implementation.
    > See the book, "The Single Global Currency - Common Cents for the
    > World."
    > Morrison Bonpasse
    > Single Global Currency Assn.
    > Newcastle, Maine, United States
    Jul 16 06:43 PM | Link | Reply
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