Financial topics

[Higgenbotham]

The point has been made on this thread that China has elected to continuing to pay the price of growing U.S. dollar dependency, in order to gain the above continued benefits from the U.S., while preparing for war with the United States..

When in fact, IMHO, China has stopped paying the price of growing U.S. dollar dependency, but is still gaining the benefits, and is still preparing for war with the United States.

If that's your point, I still don't agree with it but do now understand where you're coming from.

[Reality Check]

Had the Chinese been able to substitute gold or oil for those foreign currency reserves they would have, but there wasn't enough for sale. I would agree that prior to 2009, the Chinese looked at US dollars as being the preferred foreign currency alternative to purchasing gold or oil, and since then they no longer prefer US dollars over other foreign currencies.

Gold, copper, oil and virtually all commodities are sold on the free market to the highest bidder.

China could have used it's mountains of U.S. cash, in the period before 2009, to purchase these hard assets rather than U.S. Treasury Bonds. China simply made an investment decision to purchase U.S. Treasury Bonds, rather gold, copper, oil, or whatever. That was the China plan prior ot 2009, and they stuck to it.

Buying oil reserves in, and near, Indonesia, by purchasing a U.S. oil company made lots of sense for China.

I am not sure China purchasing energy fields in Canada, by buying Canadian corporations, has the same benefit to a China preparing for war with the United States, but it is hard to speculate on their war plans.

Canada can nationalize Chinese owned assets in Canada, as easily as China can nationalize western owned assets in China.

[Higgenbotham]

Had the Chinese been able to substitute gold or oil for those foreign currency reserves they would have, but there wasn't enough for sale. I would agree that prior to 2009, the Chinese looked at US dollars as being the preferred foreign currency alternative to purchasing gold or oil, and since then they no longer prefer US dollars over other foreign currencies.

Gold, copper, oil and virtually all commodities are sold on the free market to the highest bidder.

China could have used it's mountains of U.S. cash, in the period before 2009, to purchase these hard assets rather than U.S. Treasury Bonds.

The problem with oil is storage. That's why they would have to buy the assets in the ground.

The problem with copper is its bulk. It's too heavy to use as reserves.

That leaves gold and while the Chinese would have been willing to spend that $300 billion per year on gold (or whatever was left of that $300 billion that they didn't spend on other things, but accumulated as reserves) the volume of gold sales worldwide are not enough to accumulate that volume of gold by purchasing it on the free market. The only way to buy that volume of gold is to find a horde that someone is willing to sell.

[Reality Check]

The point has been made on this thread that China has elected to continue to pay the price of growing U.S. dollar dependency, in order to gain the above continued benefits from the U.S., while preparing for war with the United States..

When in fact, IMHO, China has stopped paying the price of growing U.S. dollar dependency, but is still gaining the benefits, and is still preparing for war with the United States.

If that's your point, I still don't agree with it but do now understand where you're coming from.

If that's your point, I still don't agree with it but do now understand where you're coming from.

Either I do not understand your point, or you need to look at the numbers over the last two years a little closer.

I agree that two years is not a long term trend, but using numbers that are over three years old ( when the last clear pattern ended ) to predict what China is doing now, and China will do over the next few years, makes even less sense.

But again, I may simply not understand your point.

[Reality Check]

...
That leaves gold and while the Chinese would have been willing to spend that $300 billion per year on gold (or whatever was left of that $300 billion that they didn't spend on other things, but accumulated as reserves) the volume of gold sales worldwide are not enough to accumulate that volume of gold by purchasing it on the free market. The only way to buy that volume of gold is to find a horde that someone is willing to sell.
...

This is an excellent example of how the ever changing, every increasing, ever dynamic nature of the Trade Surplus numbers make the opposite point.

In 2012 the Trade Surplus China will enjoy as a result of bi-lateral trade between the U.S. and China is on track to exceed $300 Billion.

But this number has been strongly, and steadily, growing since 2001, except for a one time dip in 2009, that was more than made up for by a trade surplus in 2010 that was greater than in 2008.

2001: 84 Billion
2003: 124 Billion
2005: 202 Billion
2008: 268 Billion
2010: 273 Billion
2011: 293 Billion
2012: >300 Billion

As shown above, Surpluses were much smaller in the period 2001 through 2005, yet that is when China made the choice to buy U.S. Treasury Bonds rather than something else.

From 2010 on there was 2 to 3 times as much U.S. cash to invest, yet this is the period of time China virtually ended the purchase of additional dollar based investment securities, such as U.S. Treasury bonds.

The numbers speak for themselves: http://www.census.gov/foreign-trade/balance/c5700.html
and: http://www.davemanuel.com/charts2/china ... _debt.html

[vincecate]

That leaves gold and while the Chinese would have been willing to spend that $300 billion per year on gold (or whatever was left of that $300 billion that they didn't spend on other things, but accumulated as reserves) the volume of gold sales worldwide are not enough to accumulate that volume of gold by purchasing it on the free market. The only way to buy that volume of gold is to find a horde that someone is willing to sell.

You forgot silver. If I was China I would buy up huge amounts of silver too.

The market can accomodate any demand by adjusting the price. If China had wanted to purchase $300 billion per year the last 4 years they could have done so, but the price of gold would be higher then and now.

[Higgenbotham]

The problem with oil is storage. That's why they would have to buy the assets in the ground.

The problem with copper is its bulk. It's too heavy to use as reserves.

That leaves gold and while the Chinese would have been willing to spend that $300 billion per year on gold (or whatever was left of that $300 billion that they didn't spend on other things, but accumulated as reserves) the volume of gold sales worldwide are not enough to accumulate that volume of gold by purchasing it on the free market. The only way to buy that volume of gold is to find a horde that someone is willing to sell.

I agree. It was an economic choice. But it was a choice.

India chose to invest in gold, even though it drove the price of gold up.

The U.S. elected to created a strategic petroleum reserve in salt domes. Even though the storage is very expensive and it did drive the price up even using limited purchases.

I'd agree the Chinese could have bid the price of gold high enough to drive enough supply out to spend their "excess" dollars.

Had one of a handful of large gold holders been willing to meet the Chinese at the market, the Chinese would have made a choice to do so. When nobody did, the Chinese made a choice to walk away from that purchase rather than drive the price high enough to bring the gold out into the free market. Whether that was a true choice or not is debatable. It was made within the constraints and whims of the market but absent the constraints, the Chinese would have opted to buy at the market. Virtually nobody else is big enough to face those constraints.

[Reality Check]

But again, I may simply not understand your point.

One aspect is you said China is no longer exposed to a growing US dollar dependency. It is strictly true that the Chinese have declining dollar dependency (reserves in the form of US bonds) since 2009, as you pointed out. Prior to 2009, the Chinese preferred dollars over other forms of currency, as you also pointed out. By making the US dollar a less desirable currency to hold, the Chinese have shifted out of US dollars to other currencies, as you also pointed out. However, that doesn't decrease the overall exposure of the Chinese; it increases it because the currencies they shifted to are inferior to what the US dollar once was. While the Chinese have stopped paying the price of growing U.S. dollar dependency, the price they were paying has been transferred to currencies that may be less risky than current dollars but are more risky than what the dollar used to be.

You make some excellent points regarding the different types of risk China is opting into, as they opt out of taking on more U.S. Currency based risk, while at the same time continuing to grow their currency reserves, just not in U.S. dollar based instruments.

One issue that makes this changing risk difficult to quantify is the fact that China considers the percentage of investment in each type of currency, and each type of investment instrument, a state secret and does not release figures breaking their foreign currency reserve down by country or investment type. I assume we know the U.S. Treasury bond numbers, because they are registered bonds, not bearer bonds. Thus the U.S. government can release U.S. Treasury bond numbers.

From the U.S. point of view most of the benefits of running a trade deficit with China have disappeared. The U.S. is now printing money to finance the purchase of Chinese goods, rather than borrowing the money we used to pay for Chinese goods, from the Chinese. What is the difference? If China was to start a war with the U.S. we could simply cancel repayment of the U.S. Treasury bonds registered to China as war reparations.

The U.S. was previously gaining economic leverage over the Chinese when China was investing over half of China's every growing foreign currency reserves in U.S. Treasury bonds. Now that percentage of China's growing foreign currency reserves invested in U.S. debt is shrinking ( from 50% to less than a third in just the last two or three years ). U.S. economic leverage on China to prevent war is shrinking.

At the same time the U.S. continues to ship manufacturing capacity, engineering capacity, mining capacity and intellectual property to China as part of the free market decisions of corporations with operations in both China and the U.S.

Once located in China, such property is subject to nationalization by China in the event of war.

[Reality Check]

One side effect of China not releasing a break down by country and asset type of their total Foreign currency reserve holdings:

It is very difficult to verify that the total foreign currency reserve numbers released by China, both those totals including precious metals, and those totals not including precious metals, are accurate.

As the U.S. percentage of paper foreign currency holdings in China has dropped from 50% to 33% it has been harder and harder to verify where the rest of the Chinese government reported 3 Trillion plus in foreign paper currency investments is invested, or even if it has been converted into some type of tangible asset that can be stored in China.

[Higgenbotham]

From the U.S. point of view most of the benefits of running a trade deficit with China have disappeared. The U.S. is now printing money to finance the purchase of Chinese goods, rather than borrowing the money we used to pay for Chinese goods, from the Chinese. What is the difference? If China was to start a war with the U.S. we could simply cancel repayment of the U.S. Treasury bonds registered to China as war reparations.

The U.S. was previously gaining economic leverage over the Chinese when China was investing over half of China's every growing foreign currency reserves in U.S. Treasury bonds. Now that percentage of China's growing foreign currency reserves invested in U.S. debt is shrinking ( from 50% to less than a third in just the last two or three years ). U.S. economic leverage on China to prevent war is shrinking.

Excellent point. I had not thought about that during these recent discussions. I would wonder how Europe would respond in the case of the Euro denominated debt that the Chinese own.