Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

RenMinBi: Reserve or Reservation?

For paid subscribers I wrote yesterday about a sale by one of our recommended shares of $1.019 bn in assets to Petrochina. And I noted that PTR is buying supply security and not interested in profits. At reader request I am following up.

   &nbs... PTR parent China National Petroleum Co. has a 14% rate of return on capital, compared to 36% for Exxon, XON. Its mission is gathering crude for China. Thus it operates in many rogue states. Last month PTR bought a Kazahkstan oilfield, also paying over the odds.

      I concluded: I would rather sell to Petrochina than own it. One reason is that I do not want to own stock in companies which pump oil in outlaw states like Sudan and Myanmar (Burma). But my main reason is not ethics but economics. 

   &nbs... Chinese big corporations have a mission only tangentially linked to earning profits. It is to serve the regime. The deformed banking system allocates money to large-cap state and supposedly private companies to achieve Beijing’s goals. 

      These may be goals we favor (like economic stimulus); or ones which are more dubious (like censoring the Internet, part of the mission of the Baidu search engine.) And gathering in natural resources for China is a key element of its oil and heavy industry.

      Some of the nonsense being written about the Renminbi (also called the Yuan) challenging the U.S.$ as a reserve currency is based on ignoring how Chinese reserves and banks work. The authors are also ignoring the fact that China operates a system of tight exchange controls.

   &nbs... This rigid Great Wall around the RMB means it is not going to become a reserve currency or even a vehicle for financing international deals for China itself any time soon. Doing a bunch of currency swaps worth under $100 bn can't make China  an open economy. Nor will a few deals with Taiwan or the sensible program of building up Chinese reserves in some currency other than the U.S. dollar. 

   &nbs... Or buying Brazilian chickens to replace the scrawny and disease-prone hens raised by China’s farmers under a recent bilateral deal. Healthier, yes; but not a mark of future Chinese prowess as a reserve currency. The RMB is a reservation currency.

     A Canadian reader asked for an explanation of the divergence in pricing of railroad shares listed in Shanghai from those listed in Hong Kong as “H” shares. Hong Kong is part of the real world, and its currency, while pegged to the U.S. dollar, is freely traded. The RMB is traded only in China itself. It is illegal to export currency, as I discovered with my spare change last year. I gave it to my younger granddaughter who likes coins.

   &nbs... So movement of stock in Shanghai or Shenzhen is entirely based on internal Chinese supply and demand. There can be no arbitrage with the same or similar equity traded in Hong Kong or anywhere else in the world.

     Now for the ethics: China ruthlessly engages in what Lenin would have called imperialism: buying mines and oilfields, vast acreage for food and industrial crops, nasty and dangerous factories, and shipping their output home to China. The countries welcoming this investment are not just good guys like Lula in Brazil, but also some of the most corrupt countries in Africa and south east Asia.

   &nbs... And also countries I am personally boycotting on human rights grounds, like Burma and Sudan. I know embargos don’t work; I know that it is relatively easy for a U.S. investor who absolutely insists on investing in Raul Castro’s Cuba to do so via Canada. But I don’t do it.