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China's stockpile solution
Evidence has begun accumulating that China is stockpiling commodities. In February and March, Chinese copper imports rose between 91 and 97.2 per cent (year on year) while consumption only rose 38-39 per cent. In March, aluminium imports reached a three-year high, oil imports a 12-month high. Refined zinc imports are at a record high while refined nickel imports are close to a record. It's estimated China imported 17 million tonnes of iron ore in February and March, over and above consumption with the surplus noted by observers as “piles of red dirt everywhere”. China has also revealed a substantial lift in gold reserves. All of which is very good news for Australia.
What’s going on? Well China has a problem. Currently their foreign exchange reserves are about $US2 trillion. Of that amount, about $745 billion is invested in US treasury notes. Following US attempts to reflate their economy, Chinese Premier Wen Jiabao in mid-March expressed concerns about a weakening greenback.
So how feasible is it for the Chinese to switch out of the US dollar? What could they buy?
Base metals
The quick answer is everything! And then a lot more! Let’s take the London Metals Exchange (LME) base metal stockpiles first. My quick 'back of the envelope' calculation of its current value is about $9.3 billion. At that price if China wanted to buy the entire LME inventory, it would absorb less than 1.5 per cent of China’s investment in US treasury notes!
Oil
If China is happy buying commodities then buying oil is a 'no brainer'. China currently 'admits' to a strategic oil reserve of about 100 million barrels. The trouble with oil is you can’t just store it in a warehouse. You must have (or build) appropriate storage facilities. China claims to be constructing facilities to hold another 180 million barrels. But they won't be complete until 2011. At a current cost of $50 per barrel the new facilities will hold oil worth about $9 billion. That’s almost the cost of buying all the LME’s base metal inventories. But it won’t happen for another two years.
Let’s put to one side the issue of storing all this stuff. It might just be easier to buy the companies mining it – the same philosophy is behind Minmetals' bid for Oz Minerals ($US1.2bn) and Chinalco’s desire to invest another $US19.5bn into Rio.
Gold
Last week China claimed it had increased its gold reserves from around 600 tonnes to 1,054 tonnes. At $900 per ounce that represents a $33.5 billion investment or less than 2 per cent of its total currency reserves. It’s one of the smallest relative holdings in the G20. The US reserves of over 8,000 tonnes are the largest.
If China adds another 400 tonnes to its reserves, at current prices of $900 per ounce it would cost another $12.7bn. But at its current buying rate, that would take another 4 years.
So after buying all the current LME non-ferrous metal stockpiles ($9.3 billion), diverse miners like Oz Minerals and a substantial slice of Rio Tinto ($20.7 billion), raising its gold reserves ($12.7 billion) and filling its still-to-be-completed strategic oil reservoirs ($9 billion), China would have spent just $51.7 billion or 7 per cent of their current holdings of US treasury notes!
And there are plenty of barriers to achieving even this modest spend. Physical constraints mean it would take them years to complete. Commodity prices at the least would be firm; with the doubling of prices not out of the question, and the reality is that the rises could be much much more.
On the other side of the equation the US dollar might collapse as China funds its purchases. And after all that, China would still be left with almost $700 billion of treasuries, give or take a few billion.
All of which exposes a problem the Chinese have long had. Their currency reserves are so vast and have been accumulated so quickly (over 90 per cent of them in the last decade), they have had very little alternative to investing in US treasuries. And the US has been only too grateful to keep printing more treasuries to help their Chinese friends and their liquidity problem.
China’s dollar trap
Nobel laureate Paul Krugman aptly termed it “China’s dollar trap”. The Chinese now find themselves with 30 per cent of their foreign currency reserves in US$ at a point in time where “quantitative easing” (ie printing money) could seriously undermine the value of that dollar. No wonder Wen Jiabao is worried.
It’s easy to see how the Chinese got here. The US dollar is the most liquid market they could find. They may have thought ownership might give them considerable leverage over US government policy. Think Taiwan, maybe even Korea. And their Faustian pact with the US, allowed them to industrialise, while the US consumed and had a good time.
Uncle Sam just said “thank you very much”. When former Vice President Dick Cheney reportedly said “Reagan proved deficits don’t matter” he was articulating a US policy that has been around for at least the last three decades.
There is now a natural economic tension between the US and China. The Chinese are stuck. If they abandon the US dollar and redeem their treasuries they will cause the very thing they seek to avoid – a collapse of the US dollar. And the relatively limited liquidity of alternative investments is a further significant constraint. But if they do nothing, they might see the US government’s actions destroy the US dollar anyway.
There is an old banking maxim variously attributed to John Milton Keynes, John Paul Getty and even Donald Trump. Adapted for the Chinese 21st century dilemma it is: “When you owe the Chinese a billion dollars you have a problem, but when you owe the Chinese a trillion dollars they have the problem” .
Mike Mangan is a portfolio manager at 2MG Asset Management whose performance was ranked top decile amongst Australian Equity managers for the 12 months to March 2009 by the respected Mercer survey. |
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[已全部更新]自由自在闯九州｜日本九州15天环岛自驾 (2016-1-7) sulenan 
发表于 2009-4-28 08:56
