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China’s Got a New Currency… and It Sure AIN’T the Dollar

Commodities / China Jun 17, 2009 - 10:36 AM GMT

By: Graham_Summers

Commodities

Best Financial Markets Analysis ArticleLet’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:

Openly sell the dollar, thereby destroying the value of its reserves and inviting open war with the US.
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

http://gainspainscapital.com

Ps. I’ve put together a FREE Special Report detailing what investments will soar when China finally pulls the plug on Treasuries. I call it the Inflationary Holocaust Surival Guide. You can pick up a FREE copy at http://gainspainscapital.com

Graham Summers: 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 monthly investment advisory focusing on the most lucrative investment opportunities the financial markets have to offer. Graham understands the big picture from both a macro-economic and capital in/outflow perspective. He translates his understanding into finding trends and undervalued investment opportunities months before the markets catch on: the Private Wealth Advisory portfolio has outperformed the S&P 500 three of the last five years, including a 7% return in 2008 vs. a 37% loss for the S&P 500.

Previously, Graham worked as a Senior Financial Analyst covering global markets for several investment firms in the Mid-Atlantic region. He’s lived and performed research in Europe, Asia, the Middle East, and the United States.

    © 2009 Copyright Graham Summers - All Rights Reserved
    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

    Graham Summers Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

FromLori
18 Jun 09, 08:47
china currency

The Chinese are also making a takeover bid for Addax, who control vital parts of the enormous Iraqi oil fields.


FromLori
18 Jun 09, 08:48
china currency

I think the Euro is going to become the dominant currency — I don’t like to see it, but that’s where I think we’re headed.


FromLori
18 Jun 09, 08:48
china currency

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.

I don't get it. He states this and then goes on to support just the opposite for the rest of the article by listing all the things China is doing to prepare for disconnecting from the dollar.

Ever notice how financial wizards NEVER take a stand?


FromLori
18 Jun 09, 08:48
china currency

Personally, I’m not looking forward to trading in my wallet for a wheel barrow just so I can go buy a loaf of bread; however, if the current administration decides to keep cranking out Franklins to pay for the debt they’re running up now with funny money later, we may all be broke before 2012.


raybbr
18 Jun 09, 08:49
china currency

Yes, they often contradict themselves and seldom say “I was wrong.”

But in this case, the option could be that it would be economic masochism for the ChiComs to dump the dollar.

But we are their enemies. Their goal is not only to be strong economically, but to ruin us. When the time is right (when it will inflict the most harm on the US and Europe), they will dump the dollar. They'll take a loss, but they'll still be the dominant power.


southlake_hoosier
18 Jun 09, 08:49
china currency

They are indeed China isn’t buying them the fed is...

Via: Reuters

The Federal Reserve is buying Treasuries maturing May 2016 through May 2019 on Wednesday, the New York Federal Reserve said on its Website.

The purchase, which started at 10.16 a.m. (1416 GMT) and ends at 11 a.m. (1500 GMT), is part of the U.S. central bank’s emergency effort to keep long-term interest rates low.

The Fed said in March it would buy up to $300 billion in U.S. government bonds over six months.

Directly Related: China Sells Bonds to “Show Concern”

Via: AFP:

A decision by China to reduce its US Treasury holdings suggests concern about the US attitude towards its economic woes, Chinese economists were quoted as saying in state media Wednesday.

The remarks, coming after US data showed a modest decline in Chinese investments in US government bonds, were in contrast to an earlier statement in Beijing which had said the recent sell-off was a routine transaction.

“China is implying to the US, more or less, that it should adopt a more pragmatic and responsible attitude to maintain the stability of the dollar,” He Maochun, a political scientist at Tsinghua University, told the Global Times.

According to US Treasury data issued Monday, Beijing owned 763.5 billion dollars in US securities in April, down from 767.9 billion dollars in March.

It was the first month since June 2008 that Beijing failed to purchase more US T-bills.

Zhang Bin, a researcher at the Chinese Academy of Social Sciences, said China’s move showed a more cautious attitude.

“It is unclear whether the reduction will continue because the amount is so small. But the cut signals caution of governments or institutions toward US Treasury bonds,” Zhang told Xinhua news agency.

China’s foreign ministry said Tuesday that its purchases of US Treasuries remained based on “security, liquidity and value preservation”.

For Zhao Xijun, deputy director of the Finance and Securities Research Institute of People’s University, China may have reduced its holding of US Treasuries simply because it needed the money.

Zhao said the sell-off could have been in order to pay for its own economic stimulus package.

“The reduction was a result of composite factors, such as the investment need and the market change,” Zhao told Global Times.

ource: Breitbart

The dollar fell against the euro and yen on Wednesday after major emerging economies cast doubt on its long-term future as the world’s main reserve currency, dealers said.

In late morning trading in London, the European single currency climbed to 1.3867 dollars from 1.3838 dollars in New York late on Tuesday.

Against the Japanese currency, the dollar slipped to 96.30 yen from 96.42 yen on Tuesday.

Leaders of the so-called BRIC nations — Brazil, Russia, India and China — had on Monday called for a “more diversified” currency system.

“The BRIC leaders are divided between supporting the US dollar — as it is the only choice for now — and advancing the march for an alternative,” said Phil McHugh, who heads the corporate foreign exchange desk at currenciesdirect.com.

“The (BRIC) meeting... will affect future sentiment on the dollar,” he added.

Elsewhere on Wednesday, investors awaited an announcement from US President Barack Obama on reforms of the financial system.

Obama was expected later in the day to propose wide reforms that would result in the Federal Reserve gaining broad powers and a national bank supervisor being created to avoid a repetition of the financial turmoil.

It will be the first major bid to overhaul the highly complex US financial regulatory network since a US home loan meltdown shook the core of the system and sent global markets into a tailspin.

“We’re going to make sure that we’ve got a systemic regulator, somebody who can oversee the entire system and, when you start seeing the kinds of risks that we saw being taken in this last crisis, that we can catch it before the crisis occurs,” Obama told financial news channel Bloomberg Television.

Officials told a media briefing that Obama would propose a Financial Services Oversight Council led by the Treasury Department to oversee supervision of the financial system.

In trading here on Wednesday, the euro was changing hands at 1.3867 dollars against 1.3838 dollars late on Tuesday, at 133.52 yen (133.45), 0.8486 pounds (0.8434) and 1.5086 Swiss francs (1.5059).

The dollar stood at 96.30 yen (96.42) and 1.0881 Swiss francs (1.0881).

The pound was at 1.6338 dollars (1.6402).

On the London Bullion Market, the price of gold edged up to 934.08 dollars an ounce from 934 dollars an ounce late on Tuesday.

I do not know with what weapons World War III will be fought, but World War IV will be fought with sticks and stones.”

ALBERT EINSTEIN

http://www.reuters.com/article/marketsNews/idUSTAR00120520090617

http://www.google.com/hostednews/afp/article/ALeqM5hh_obyP1M5omCldWzTGwtHgJAOBw

http://www.breitbart.com/article.php?id=CNG.5df48ce0851221bad106b502bb21bc48.741&show_article=1


DB
18 Jun 09, 08:50
china currency

Well ... :)

Because the feet of the statue in Daniel chapter 2, from Nebuchadnezzar’s dream are partly of iron. There’s no mistaking what the iron was.

Now, admittedly, that’s one of those Bible prophecy things.

But also look at the non-prophecy things, as we should.

But going further, the dollar is at high risk because we’re in such financial trouble. Worse than I imagined possible and I was shouting warnings more than 3-1/2 years ago. As you can imagine, few paid attention.

Although some gave support for the ruble, I don’t think Mother Russia’s policies are going to make the ruble a world currency. Putin already messed up a ton of investing in Russia last year with the Georgia thing.

IMHO, we’ll be lucky if we don’t hit 1930 again. Once the laid-off auto workers, car dealer workers, parts supply workers, etc. burn through whatever savings / (reduced) retirement they have, they’ll try to unload their homes in this lousy market. And there are still ARM’s out there.

O’s “infrastructure” jobs create no long-term, or even short-term product that we can sell to other countries. It’s nice to have a bridge, but if folks aren’t using it to go to work, pay taxes, create producs and services that other countries need, they’re rearranging deck chairs on the Titanic.

Yeah, I’m very concerned about a total collapse of our economy. Let’s hope I’m wrong but I see nothing indicating otherwise.


FromLori
18 Jun 09, 08:50
china currency

"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."

They have every right to be unhappy. So am I.

"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."

Anyone who has money invested in the US finacial markets is or should be more than a little worried about Obama's careless spending of money the nation/ taxpayers just don't have.

Driving up the national debt- essentially borrowing this money from both present and future taxpayers- is an inflationary practice among other things.

The national debt is enormous, so enormous that it is about 35% of our total national product- the amount of money this nation makes as a whole.

Some people may argue this figure, but remember, the GNP number should reflect our current GNP not our GNP from 2 years ago, before this "recession" hit.

$ 11,519,165,444,236. and climbing at a rate of about 6 million a minute.

The reason China and everyone else is worried is because we can't even pay the interest on this massive national debt Obama raked up in just 6 months of stumbling around the white house, and spending like a drunken sailor taking his linebacker built wife on dates with the air force one helicopter. Maintaining those muscular shoulders takes a lot of fine cuisine I suppose.

And as our GNP continues to decline, our national debt will continue to represent a larger percentage of it, as well the interest will become a larger and larger amount which we can't pay, so it continuously adds on the total amount we owe.

Because Obama cannot sell enough treasury bills to pay this national debt, and to fund other spending dreams he has, instead of cutting back on government spending and paying down this heavy burden he has placed on our shoulders, He has chosen to simply print more money.

Doing this drives down the value of our dollar. The more he prints, the less it is worth. This most of all, is what worries ANYONE who has money invested in American markets, not just the Chinese.

Worse, if all these investors, like China, decide to cash in their treasury notes before Obama devalues them any further, this will cause a run on the USD. To meet the demand for payment of these treasury notes, Obama will have to run the presses even faster to print up this money. He has no other source.

This will send our dollar spiraling down to the levels Zimbabwe bucks are currently at.

This will as you can imagine, not be very good times.


DB
18 Jun 09, 08:50
china currency

I think the Euro is going to become the dominant currency — I don’t like to see it, but that’s where I think we’re headed.

There are few options really. I don't think the world is yet ready to put its' faith into the currency of a communist nation that commits human rights violations such as China, eliminating that as a possibility. Russia is too unstable and does not have the reputation for honest market behavior given its' past. Japan lacks standing in the world to step up as the bearer of the new dominant world currency. That leaves the Euro as an established currency that has held its ground against the dollar.

I have been reading talk of China pushing for a new currency to be introduced by an organization like the IMF, but that would be an untested solution and probably too risky. The Euro is the best and most viable option, though it will never enjoy the solid foundation that the dollar has had over the years. There is too much political instability in a currency shared by participating nations rather than a currency grounded in one, strong, unified nation like the US.

I have to work now, but I'll check back later on this discussion.


FromLori
18 Jun 09, 08:51
china currency

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.

BINGO! China is headed for the dollar exit door without drawing the world's attention to realize it, thereby causing a stampede. They are scurrying to buy up limited hard assets with their glut of dollars while they can still pass those dollars off as worth something.

By the time all the other nations (including the U.S.) finally realize the dollar is bankrupt and worthless, the Chicoms will have bought a huge amount of limited resources, leaving the sellers holding a bunch of worthless paper. It's brilliant, IMO, but equally sad to see our nation being pwned by a bunch of commies turned entrepreneurial.

36 posted on 18 June 2009 14:29:40 by OB1kNOb (I asked my broker what he's buying today. He replied: "Canned food and ammunition.")


mr_hammer
18 Jun 09, 08:51
china currency

"I don’t believe “O” is an idiot for one second, however I do believe he has no real grasp economics and is only following the path laid out to him by his socialist puppet masters...a.k.a. Soros etc."

You think he knows what he's doing in general, bankrupting the nation in order to destroy the markets, take over the banking system and key industry, then rebuild the nation into what he and his commie/Marxist revolutionary pals envision?

Possibly, but it doesn't make sense to leave himself broke and unable to pay his new national brownshirt enforcers and other new order government entities he needs to keep his subjects in line and subdued. Otherwise he'll have an angry mob mass revolt on his hands.


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