CHINA TIGHTENS THE SCREWS
China clearly acts as the spearhead in the global revolt against the USDollar and its primal position that makes no sense any longer. They have lost respect for US banks and have lost confidence in their policies. They have responded to obstructed partnerships, like with Rio Tinto, by announcing a new initiative. They will invest heavily in hedge funds, directing funds into commodity related investments. This step will remove a key US$ support pillar. China is in transition, building its domestic demand, as its exports decline. In all likelihood, global price inflation will originate in China.
CHINA LEADS THE FOREIGN REVOLT
◄$$$ FOREIGN REVOLT AGAINST USTREASURYS AND USAGENCY MORTGAGE BONDS CONTINUES, WITH DATA FINALLY SHOWING UP IN CAPITAL OUTFLOWS, WHICH SHOW A RECENT ABANDONMENT, ENOUGH TO JUSTIFY THE USDOLLAR DECLINE $$$. The capital flow data has been released as of end April. China cut its holdings of USTreasury Bonds by $4.4 billion, down to $763.5 billion. They remain the larger foreign holder of USTBonds, ahead of #2 Japan. Russia's holdings were reduced by $1.4 billion to $137 billion. Those of Brazil fell by only $600 million to $126 billion. Those of Japan also fell only slightly, by $800 million to $685.9 billion. Michael Woolfolk at Bank of New York Mellon said, "China and Russia both indicated a desire to diversify out of dollar denominated instruments, and April seems to have emphasized their current position." China has begun a buyer strike on USTBonds. See the sharp decline, now at dead stop. USGovt and banking officials claim China has no choice but to continue their purchase, but they have stopped.
Foreign investments in USAgency Mortgage Bonds has declined in eight of the last ten months. Mortgage debt fell by $2.5 billion in April. Net purchases of US stocks continued to rise, but at a slower pace. They rose by $4.6 billion in April, after a $13.2 billion rise in March. A net stock decline would contribute to a substantial US stock market decline. However, US Corporate Bonds declined by a net $9.7 billion, the biggest decline since November. As reported in the June Macro Economic Report, USTreasury yields are moving up quickly in key maturities, a certain threat to any possible USEconomic recovery. The biggest damage has been done in mortgage rates, thus rendering a total stall to the mortgage refinance efforts.
Alexei Ulyukayev, first deputy chairman of the Russian central bank, said recently that some of his nation's reserves might be moved into bonds issued by the Intl Monetary Fund. Global geopolitics have entered the picture. Axel Merk is an excellent currency analyst. He said, "There is kind of a political dimension and an economic dimension. The folks who are actually on the line making the decisions, they are fully aware we are dependent on the dollar. It is not going to change any time soon." See the Bloomberg article (CLICK HERE).
The net capital outflow for the United States was $53.2 billion in April, including $8.8 billion in long-term assets. This is a true hemorrhage of capital, hardly a confirmation of anything remotely resembling a recovery. That is a $630 billion annual pace for exit. Also, the current account deficit was only $101.58 billion in 1Q2009, versus $154.98 billion in 4Q2008. The first quarter was the smallest since the last quarter of 2001. My analysis has cited that the US deficits would come down in a meaningful manner only when the USEconomic is mired in a highly destructive recession, one that threatens the entire nation's viability and future. So the US has a powerful recession and a huge capital exit. These are not characteristic of recovery or any return to health.
LOST RESPECT & LOST CONFIDENCE
◄$$$ WHEN TREASURY SECRETARY GEITHNER VISITED CHINA, HE ELICITED LAUGHTER WHEN GIVING REASSURANCES, THE ULTIMATE INSULT IN THE CHINESE CULTURE, THE PINNACLE OF LOST RESPECT FOR THE US FINANCIAL CONDITION $$$. USDept Treasury Secy Geithner actually had the stupidity to tell China that its USDollar assets are safe, when the entire informed clear thinking world knows otherwise. He has lost all credibility, and must be replaced. He can no longer deal with Chinese leaders and bank officials on a respectful basis. A major goal of Geithner's first visit to China in his new post was to allay fears that the USGovt monstrous budget deficit (marred by hemorrhage) and desperate monetary policy (marred by hyper-inflation) will undermining both the USDollar and USTBonds. China is the biggest foreign owner of U.S. Treasury bonds. China is the biggest foreign holder of USTreasuries with $768 billion at the end of the first quarter, but their US$-based investments could total twice as much. Factor in USAgency Mortgage Bonds and USCorp Bonds.
When the mentally undersized but criminally connected Geithner said to an audience at Peking University, “Chinese assets are very safe,” he drew loud laughter from his student audience, a stern signal of profound skepticism in China about trust of the United States. It is unclear which is greater, their disrespect for US bankers or their distrust of US$-based assets. Many critics in China argue that vast savings should instead be used to raise living standards at home. USFed Chairman at the same time gave assurances to the Chinese that the USGovt would not monetize its debt, which goes counter to the admission of precisely that in mid-March, monetization of $300 billion in USTreasury Bonds. This means one of two things. Either Bernanke is incompetent and fails to comprehend monetization, or he is a sociopathic liar. In either case, he must be replaced.
Geithner gave his Beijing hosts empty assurances, which contain nothing but seeds of future betrayal. He is aware that the USGovt must bring down the fiscal deficit to a sustainable level eventually. He spoke of the USGovt deficits being reduced by over 75% in the next year, an absolute travesty of a claim, totally unrealistic, and perceived as deceptive desperate nonsense. He assured that China's investments in US financial assets are safe, and reminded them that the Obama Admin is committed to a strong USDollar. These are worse than empty words. They are insults to their intelligence. Then he also grossly misrepresented the Chinese position. In an attempt to reassure investors, Geithner actually said that Chinese officials expressed "justifiable confidence in the strength and resilience and dynamism of the American economy." Any Chinese official who read that is probably very angry.
The USDept Treasury is committed mainly to fraud, cover-ups, with continued power and dominance. Geithner talked about future discipline, an interesting contrast to the absence of any admission of past lack of discipline. He said, "We have the deepest and most liquid markets for risk-free assets in the world. We are committed to bring our fiscal deficits down over time to a sustainable level. We believe in a strong dollar, and we are going to make sure that we repair and reform the financial system so that we sustain confidence. China is already too important to the global economy not to have a full seat at the international table." Three thoughts strike as the USGovt debt is in practical technical default. The highly liquid markets in the US are precisely the enabling factor for colossal crimes perpetrated upon the world with fraudulent mortgage bond sales. The high liquid markets in the US also mask an array of deep counterfeit operations in USTreasurys Bonds and USAgency Mortgage Bonds. These criminal failures have been called errors of judgment, but regardless, they result in a change of the guard and a bigger Chinese role in international policymaking. This is demanded by China.
Geithner recognized no return to business as usual either for the United States or China was possible. He actually acknowledged implicitly that Americans must live within their means, and must pay down debt. He proclaimed the need for growth strategies to be amended. He said, "Purchases of US consumers cannot be as dominant a driver of growth as they have been in the past. In China growth that is sustainable will require a very substantial shift from external to domestic demand." He noted that China is in a strong position whereby it can rely upon domestic growth and demand. Toward that end, Geithner called for a more flexible exchange rate regime for the Yuan, which would permit the Chinese currency to rise. He tried to sell the concept in terms of spurring greater Chinese demand, and thus growth in the Chinese Economy. A stronger Yuan would make imports cheaper for China, but at the same time force the price of Chinese exports higher for foreign customers. The US bank leader is calling for a change to bring greater price inflation to the USEconomy!
A global shift of power comes. The USGovt through the minion Geithner offered firm US support for a greater Chinese role in running global banking institutions, including the Intl Monetary Fund. The question arises of whether to reduce the US voting share, or the European share, or both, in the IMF decision making bodies. Geithner said, "The United States will fully support having China play a role in the principal cooperative arrangements that help shape the international system, a role that is commensurate with China's importance in the global economy. As we go through the severe stresses of this crisis, we must not turn our backs on open trade and investment. In return, we expect increased opportunities to export to and invest in the Chinese economy." In other words, a bigger vote comes if China opens its trade barriers. China is very worried about growing protectionism, trade war, and ugly emotional political fallout in reaction to widespread and unprecedented loss of American jobs. The Chinese have erected some of the biggest barriers to trade in the world. They bristle at the prospect of trade tariffs, but they routine impose such charges themselves in order to protect their own fledgling industries. The problem is China has so many fledgling industries. See the Reuters article (CLICK HERE), and for amusement see the I-Tulip mock interview parody of Geithner in China (CLICK HERE).
◄$$$ BEIJING LEADERS WARN NOT TO BE COMPLACENT ABOUT CHINESE SUPPORT FOR USTREASURYS, AS ALTERNATIVES DO EXIST $$$. The USGovt continually makes the grand error to take China for granted as a creditor. US officials steadily proclaim that China has no choice, and alternatives would render great harm and loss to their own vast savings accounts. Yu Yongding (not to be confused with DingDong) is a former central bank advisor. He told Geithner during his Beijing visit not to be complacent. He said, "I wish to tell the US government: 'Don't be complacent and think there is not any alternative for China to buy your bills and bonds.' The euro is an alternative. And there are lots of raw materials we can still buy." China is already diversifying in these directions. Yu stressed how the US interests and Chinese interests are intertwined. He also warned, "You should not try to inflate away your debt burden… The borrower should keep their promises. The US should be a responsible country." It is way too late for responsibility, as desperation has set in following deep corruption.
Here is an example of Western bank analysts and how they fail to comprehend the full picture. Sean Callow is a currency strategist at Westpac Banking in Sydney Australia. He said, "China will be shooting themselves in the foot if they push this issue too hard. If they are too alarmist and contribute substantially to a dollar and Treasuries sell off, they are going to feel more pain than just about anybody in the world."That is well understood. What Western analysts fail to acknowledge is that China might be very willing to lose a few hundred billion$ if that loss removes the US-UK continued colonialist control that strangles them, and if it earns a seat at the global finance minister table, if it presents an Open Door for global leadership that they covet. The Chinese regard it as an 'investment' while the United States and United Kingdom and European Union and the many other Western centers of power regard it as a 'loss.' The investment unlocks the door to a different global power structure and different axis of banking power. That is precisely what China and Russia strive for and demand.
China is indeed concerned about USGovt spending and fiscal deficits. The expected consequences begin with more lost confidence in the USDollar and eventual price inflation. The Chinese leaders are well aware of the undermined value of China's USTreasury holdings, and will demand concessions, as any creditor would. The USGovt deficit is expected to reach at least $1.75 trillion ($1750 billion) in the fiscal year ending September 30. The deficit last year was a (mere) $455 billion. The deficit for the following year is not expected to come down much at all. Perhaps China will put greater pressure on the US to end the wars!
Goldman Sachs estimates that the USTreasury may borrow a record $3.25 trillion this fiscal year ending September 30, almost four times the $892 billion it borrowed in 2008. The exploding US deficit puts the AAA credit rating for USTreasurys at risk. For now, the bond market shows continued strong international demand for US$-based financial assets, but the demand is primarily from central banker locations. The US Federal Reserve holdings of Treasuries on behalf of central banks and institutions across the globe increased in May by $68.8 billion, equal to 3.3%, the third most on record. They are prominent at USTreasury auctions, since without them, the auctions would probably fail. Their prominence is not a sign of stability, but rather a growing desperation of the central bankers and gradual recognition of failure for their franchise system. Some analysts call it a technical USTBond default, when monetization is taken into account. See the Bloomberg article (CLICK HERE).
◄$$$ A CHINESE BANKER SUGGESTS THE USGOVT SHOULD ISSUE BONDS IN YUAN DENOMINATION, WOW! $$$. What might initially seem like a sarcastic message has some merit. It reeks of distrust. If the United States creditor nation is to continue with outsized loans in the formal credit supply, then denominating the USGovt securitized debt in Yuan currency makes sense. That would remove the USDollar risk to the creditor, which deserves protection. China now demands protection. The Chinese are working feverishly to install the Yuan currency throughout their trading world, in order to denominate their sales and purchases outside of US$ risk. This is the main issue, to minimize US$ risk to the great creditor nation. Curiously, Tokyo leaders are talking about the USGovt issuing debt securities in Yen terms. The issuance of foreign denominated USGovt debt securities could grow into a global firestorm demand, solving the USGovt credit needs, but essentially ripping the global reserve status from the USDollar.
Guo Shuqing is the chairman of state controlled China Construction Bank (CCB). He has suggested that the USGovt should start issuing bonds in Yuan, rather than its own USDollars. He is exploring the feasibility of loans issued to trading companies in Yuan, thus allowing Chinese and foreign companies to settle their bills in Yuan rather than in USDollars. Guo pointed out that the Yuan bond issuance in Hong Kong and Shanghai would help to develop the Chinese debt markets and promote the Chinese Yuan as a major international currency. Obviously, with US$ dismissal! A chorus of senior Chinese Govt officials has voiced concerns about the stability of the USDollar, its inherent risks. They want the Yuan to be used more widely. Guo said, "I think the US government and the World Bank can consider the issuing of renminbi bonds."He recommends the bond issuance be relatively small, at between 1 and 3 billion Yuan, worth US$160 to US$480 billion, or £100 million to £300 million. He has also pushed for more mutual cooperation between the US and China to promote Chinese financial services. China is in a perfect position to vastly expand its financial services, since it owns so much feedstock inventory, namely capital from huge savings accounts.
It is not coincidental that Chinese leaders submitred such a revolutionary suggestion immediately after US Treasury Secy Geithner visited. The entire trip and most meetings were predicated and motivated by both the risk and weakness of the USDollar from extreme USTreasury Bond supply tied to unprecedented USGovt debts. Demand for the outsized sales of US debt securities will be sufficient to meet supply, Geithner expects. He must not read much about the steep decline in foreign trade surpluses, but then again, he is not a good economist or banker. The US and China have agreed to hold economic talks in WashingtonDC in the week starting July 27th. The summit should be thorny. See the UK Telegraph article (CLICK HERE).
◄$$$ CHINA HAS MADE A STRANGE REQUEST TO THE USGOVT, TO ISSUE MORE T.I.P.S. BONDS, WHICH WILL FORCE US LONG-TERM INTEREST RATES HIGHER AND REVEAL THE CORRUPTION IN US STATISTICS $$$. This could be a very clever tactic by Beijing in the Great Bank Wars. It reeks of distrust. Higher bond yields would guarantee that Chinese investments in US debt will pay a proper yield as the USDollar is diluted from excessive debt issuance. If not, then Beijing will be motivated to expose the corrupt Consumer Price Index. See the Money News article (CLICK HERE).
HARD ASSET PUSH INTO HEDGE FUNDS
◄$$$ CHINA PLANS TO DIRECT FUNDS AWAY FROM USTREASURY BONDS AND TOWARD HEDGE FUNDS $$$. China has made an enormous decision. They will direct a portion of their mountain of reserves toward managed hedge funds, perhaps in parallel with continuation of mining firms acquisitions. This is a new direction for Beijing, clearly in response to the refusal by Rio Tinto to permit a $19 billion stake from the Chinese aluminum giant Chinalco. British investors and Board members on Rio Tinto in London balked at several key provisions. Just one more example of discrimination. The Chinese were frustrated and angered by the another refusal like the failed Unocal deal in 2005. Clearly, whether stated openly or not, the Chinese are thwarted by USGovt and UKGovt hidden leaders from investing in strategic firms. So they will launch a sustained counter-attack with allied hedge funds, which already are engaged in mortal combat with the USGovt. From their point of view, tarnished by ill feelings, their money is good for credit supply but not good for commodity supply lines. So China will continue its pursuit of significant interests in commodity firms, both metals and energy related, and will amplify the pressures by taking scattered interests in hedge funds. The hedge fund direction will amplify the value of their property acquisitions in perfect synergy. The USDept Treasury often employs attacks of hedge funds to fortify the USDollar. One by one, pillars of US$ support are being removed or eliminated. What a paradoxical twist! Let's watch to see if Beijing and Shanghai become new centers for hedge funds with close business ties with New York and London, each facing steep decline from their own greed, fraud, and unbridled leverage, once called financial innovation.
Felix Chee is a key adviser to China's $200 billion sovereign wealth fund. At the prestigious GAIM International hedge fund conference at the Grimaldi Forum in Monaco last week, Chee stated "We will have a preference for managed accounts. The platform would like a core of single manager funds and fund of funds. It will be across the spectrum of strategies. We are looking for the best managers and a handful of fund of funds, and when I say handful I mean five or less."Chee will initially run the China Investment Corp hedge fund and its proprietary trading desk. Chee previously managed the endowment at the University of Toronto, whose $1 billion portfolio centered on hedge fund assets. He is a veteran.
Look upon the Chinese decision as providing a huge second wind for the hedge fund industry. The attacks by Wall Street, clearly urged by the USDept Treasury and several USGovt agencies, have logged many frontal assaults, the most powerful and egregious occurring last autumn 2008. Hedge funds have been blamed for much of the speculation and deep damage done to the US financial system, very wrongly. Since when is it the investor who is the problem, when private funds wish to avoid a quagmire in the US$ and Black Hole in USTreasurys and corrupt den in Wall Street? Hedge Fund Research estimates there were about 6644 hedge funds operating at the end of March. At the industry peak in December 2007, the army of hedge funds totaled 7634. They managed $1.9 trillion at that point. In year 2008, for every hedge fund started, two closed down.
The Chinese initiative will enable Beijing fund managers actually to post USTreasurys as collateral for vast hedge fund positions in commodities. If they undergo Wall Street assaults, the USTBonds must be liquidated in the process if a particular hedge fund position is ruined, like with crude oil or gold or copper. More surreptitiously, the vast mechanisms used by the official US financial system support for USTreasurys can now be indirectly deployed by China to transfer thrust and power to the commodity arena, via the hedge funds. This would represent a grand swap of USTBonds for commodities, with the USGovt forced to reinforce the positions, and the Chinese motivated to continue with USTBond purchases. WOW! WHAT A BRILLIANT STROKE!!! Everybody is happy, but the USDollar is forced downward while commodities are forced upward. The USGovt strategy is thus turned against itself, provided the Chinese greatly amplify their financial paper support mechanisms within the hedge fund and securities side of the commodity arena. The hedge fund industry has a longstanding preference for important large investments positions in opposition to the USDollar, called the dollar bear trade. They rise in value upon declines in the US$ currency. Commodities like gold and crude oil are the leading assets with a negative US$ correlation, but others like copper and natural gas also align in opposite fashion and have been very popular. China has the capability and potential to add continuation to the commodity price recovery seen in the last three months, to give a second strong leg. See the Bloomberg article (CLICK HERE).
Aaron Krowne is head of the Mortgage Lender Implode website (CLICK HERE). He made some great points in a private email. The Chinese have a brilliant stroke of using financial paper to fortify their diversification into commodities, the hard assets. This cannot be emphasized enough. With strong volume in this initiative, they can force a commodity price runup on a broad scale, by recycling a significant portion of the trade surplus from American origin. In doing so, the USGovt deficits will finance the commodity boom in a grand circular paper route, encouraging banks to join, thus isolating the USFed and USDept Treasury further! Krowne said the following.
"Now why would they prefer managed accounts? Why not cut out the middlemen? Hedge funds have hefty fees, and funds of funds add even more graft. The reason is: managed accounts would not be nominally owned by Chinese. The Chinese are obviously more than willing to pay the additional fees for the indirection and discretion that managed accounts afford. And I suspect Anglo/American politicians are fine with this as well. No more ugly nationalist takeover battles to quell populist discontent. If they go heavily the hedge fund route, China can actually use their Treasuries as futures market collateral without 'dumping' the Treasuries. They would basically be swapping Treasuries for commodities positions. This suggests we might see more 'unexplained' commodities inflation in the coming months and years, even before the dollar tanks outright… With the full complement of Fed laundering facilities, mortgage (and other toxic) assets being swapped for Treasuries, and Treasuries for cash (printed). This facilitates the banks taking commodities positions for themselves and hedge funds (Chinese). It leaves the Fed with mostly toxic garbage, which will end up being the 'backing' of the dollar and the reason monetization will be permanent."
Krowne went further with astute comments on the derailed attempt at hedge fund regulation in the past few months, shrouded in silent publicity. Many wealthy people probably made a phone call or reminded a politician who the real boss is. Back in September, the Hat Trick Letter mentioned that China was in charge far more than was mentioned in the US press. They undoubtedly forced the Fannie Mae nationalization (Govt Sponsored Enterprise), in order to assure continued value of the mortgage bonds held by China. He made some new points about how hedge fund accounts will be better funded, from a deeper Chinese well that will be harder to bust by Wall Street criminal assaults. Bear in mind that the Quantitative Easing is a response to pay for the many programs, something the Chinese hate. It is a cost response. Krowne concluded further:
"That explains why the Draconian punitive hedge fund 'regulation' fizzled, and why the GSEs got bailed out, why the Chinese switched to buying Treasuries anyway, why Quantitative Easing was begun, why TARP passed, and so on. Some of this surely would not have happened (TARP especially) if US domestic politicians were truly in charge. But loyalty does not play in; they are controlled with a choke collar. Note also that hedge funds have a potential increased measure of independence now. Since prime brokers are still not giving them much credit, now they can go to Chinese patrons and ask for more collateral when positions move against them. And, to boot, the Chinese constitute a much much deeper capital well than any bank or typical hedge fund investor."
◄$$$ THE CHINESE REACTION TO BLOCKED ACQUISITIONS REVEALS THEIR VERY CLEAR STRATEGY, DIVERSIFICATION INTO HARD ASSETS $$$. The Chinese will not willy nilly invest vast trade surpluses into USTreasury Bonds and other US$-based securities. China not only boasts the Great Wall, but also commands the Great Wall of Money that will eventually cascade onto world markets. That cascade could be more important as a factor in generating US price inflation than the buildup and spillover of the USFed balance sheet. Great distrust lingers with Western leaders, that the Chinese motives are not purely commercial in nature, but rather are strategic in rendering damage to the USDollar, and worse, in creating different supply lines that could cut off actual supply to entire economies. On the other hand, the Western firms are desperate for cash, something the Chinese have in mountains, not loaded with metal ore, but on designer paper with ink. China Investment Corp, one of their major sovereign wealth funds, recently attempted to grease the gears, to engage in back door payola, by investing over $1 billion to fortify its 10% stake in Morgan Stanley. China must diversify over $2000 billion of foreign exchange reserves, a mindboggling large sum. China alone owns about $744 billion of USTreasury Bonds. They are certain to continue broad initiatives to secure deals in Africa, Latin America, and Central Asia, where no obstructions exist. Word has it that large regions in Africa would prefer to forge giant contracts with the West, but financial woes, insolvency, and entanglements interfere, resulting in more Chinese deals. The Chinalco/Rio Tinto failure has motivated a new course in China policy, thus accelerating plans to spread portfolio risks via diversification. If the USGovt defies Beijing, then the great creditor can yank a cord and deny USTreasury Bond purchase until the vassal turns more obedient.
The Chinese strategy has become clear. They have been placed unwillingly into a tremendous vise at the helm of command. Their condition works at cross purposes with the USGovt, which is deeply committed to rescues and stimulus amidst shoring up a failed structure, all at great cost. The cost undermines the vast Chinese wealth accounts. China will not openly sell their USDollar holdings, which would be viewed as an open declaration of financial war. Instead, China will continue to encircle the USDollar, to encircle the vast supply chain, and pursue what should be regarded as a noose around the neck of the USGovt and USEconomy. If not a noose, the hedge fund commodity investment path binds the USGovt in an array of ropes that constrict its movements and limit its options, like the indebted prisoner it is. Recent efforts to establish the Chinese Yuan currency as a global reserve alternative have proven effective. See the landmark deal with Brazil. Settlement of international transactions will more often be completed in currencies outside the USDollar sphere. What we are witnessing is a death of the USDollar by a thousand cuts, a Chinese torture tradition. The Beijing leaders have decided, for political and practicality reasons, to employ the Gradualist Approach on numerous fronts. They plan to walk away from the USDollar, not run, not abandon it, and shift their strategy without openly threatening the US on the global stage. Together they serve the purpose, to force a change in the US-UK dominance in banking that has led to a crippled global financial structure. The colonialist titans want a return to the past, an impossibility. Instead, they must realize their colonialism since 2001 have backfired in grand fashion.
If truth be known, as Seeking Alpha puts it, "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. 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. 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."
◄$$$ THE CHINA SYNDROME INVOLVES DIVERSIFICATION BY CHINA AWAY FROM PRIMARILY US$ DEBT AND TOWARD HARD ASSETS $$$. This is precisely the alternative mentioned by Chinese officials to Geithner's face. Maybe he is ignorant of commodities, thinking only about cotton and cocoa. Price signals are currently distorted toward China and speculative traders, as their demand has grown sharply in the last couple months. They are collectively purchasing, stockpiling, and hoarding hard assets, with a perceived motive to diversify away from the USDollar. The movement has begun; the reality is noticed; the effects will be felt. The world financial markets are seeing a clear middle phase of a 'cashing out from the dollar' and flight to hard assets and real goods. The unfortunate consequence is for higher commodity prices acting as a tax that further suppresses growth. The commodity tax is felt more by nations whose currency is falling, like the United States and the United Kingdom. The commodity tax is felt as a discount by nations whose currency is rising, like Europe and China. One should be disappointed that even now, people are still unable to connect the dots and see that the USDollar is suffering a doomed fate, motivating a grand flight to hard assets, led by China. The movement will continue for another two years.
CHINA, EXPORTS & INFLATION
◄$$$ THE ORIGIN OF PRICE INFLATION IS LIKELY TO BE CHINA, NOT THE UNITED STATES, WHICH IS POWERLESS TO STOP IT $$$. The analyst writers are having fun, reminding us that the Great Wall of China contains money to pour upon the global economy. The rest of the world is too desperate for capital to refuse its flow. China is well along in a new powerful initiative to stockpile commodities, to purchase important stakes in lesser supply firms, to lock in foreign supply contracts, and to engage in broad multi-faceted deals that build partnerships. At the forefront is the failed $19 billion deal for Chinalco to acquire a larger stake in Rio Tinto, the Anglo-Australian mining giant. The Chinese aluminum producer wanted to work toward an important merger. Instead, Rio Tinto will work with BHP Billiton to create an inefficient monster commodity firm. Later in the future, China might swallow the entire RioT/BHP pair to solve the Australian debt crisis. They had concerns cared for, the deal carefully structured to meet foreign ownership regulations in Australia, while allaying concerns in the United Kingdom about investor pre-emption rights. Instead, the deal failed, and China is likely to take more aggressive action against the ultimate colonialist tagteam, the US and UK. In the colonialists view, the Chinese daughters with dowry are not good enough for the Anglo ordinary sons who bring debts. China remembers well the insulting refusal by Unocal on a buyout acquisition bid by China National Offshore Oil Corp (CNOOC) a few years ago.
Next comes the aggressive assault with cross motives and single goal. China will continue its stockpiling, continue its supply chain dominance, and work harder to weaken the US-UK stranglehold on financial rule. The next device might be actively pursued, or passively permitted. The Chinese have their own ambitious stimulus package initiatives, but the big difference is they have actual capital to spend rather than additional debt. The United States has committed to a $787 billion stimulus plan, but China will pursue its much larger $586 billion stimulus plan to act upon an economic under 20% the size. China is not burdened by debt, but burdened by decisions on where to direct huge savings, which moronic US economists and analysts call a vulnerability. The US will continue to pour money down a Black Hole in Wall Street's backyard. Utterly amazing how incompetent US analysts can be!
A few details highlight how China is registering purchases that overshadow their industrial needs, but at the same time surely satisfy those needs. Chinese imports of copper hit a record 329,000 tonnes in February, surpassed quickly by a new record 375,000 tonnes in March. The Chinese gathered iron mines, totaling 57 million tonnes of iron ore in April alone. Seeking Alpha points out five large deals, each locking up industrial base metals between February and April of 2009. China took control of Oz Minerals, the world's second largest zinc miner for $1.7 billion. They added $20 billion investment in Rio Tinto, moving their stake to 19% in this world class iron ore producers. They bought a 16% stake in Fortescue Metals, an Australian iron ore company. They purchased $46 million worth of Terramin Australia's zinc and lead supplies in Algeria. They took a 51% stake in Ontario's Liberty Mines, a nickel producer. See the Seeking Alpha article (CLICK HERE).