(1) China is switching its foreign reserves from US Treasury bonds into Copper
From: Sino Economics
Date: 17.04.2009 11:41 AM
'Copper Standard' for the world's currency system?
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.
By Ambrose Evans-Pritchard Last Updated: 2:41PM BST 16 Apr 2009
China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.
Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.
"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."
"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.
The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).
While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.
John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."
Zhou Xiaochuan, the central bank governor, piqued the interest of metal buffs last month by calling for a world currency modelled on the "Bancor", floated by John Maynard Keynes at Bretton Woods in 1944.
The Bancor was to be anchored on 30 commodities - a broader base than the Gold Standard, which had caused so much grief in the 1930s. Mr Zhou said such a currency would prevent the sort of "credit-based" excess that has brought the global finance to its knees.
If his thoughts reflect Communist Party thinking, it would explain the bizarre moves in commodity markets over recent weeks. Copper prices have surged 49pc this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15pc to 20pc this year as construction wilts.
Analysts say "short covering" by funds betting on price falls has played a role. But the jump is largely due to Chinese imports, which reached a record 329,000 tonnes in February, and a further 375,000 tonnes in March. Chinese industrial demand cannot explain this. China has been badly hit by global recession. Its exports - almost half GDP - fell 17pc in March.
While Beijing's fiscal stimulus package and credit expansion has helped lift demand, China faces a property downturn of its own. One government adviser warned this week that house prices could fall 50pc.
One thing is clear: Beijing suspects that the US Federal Reserve is engineering a covert default on America's debt by printing money. Premier Wen Jiabao issued a blunt warning last month that China was tiring of US bonds. "We have lent a huge amount of money to the US, so of course we are concerned about the safety of our assets," he said.
The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.
Beijing may yet buy gold as well, although it has not done so yet. The gold share of reserves has fallen to 1pc, far below the historic norm in Asia. But if a metal-based currency ever emerges to end the reign of fiat paper, it is just as likely to be a "Copper Standard" as a "Gold Standard".
(2) China Copper move may secure Cu supply but jeopardise US recovery
From: John Craig
Date: 17.04.2009 02:55 AM
A recent article by Ambrose Evans-Prichard seems VERY significant (ie A 'Copper Standard' for the world's currency system?)
It suggests that China is rapidly running down its $US foreign exchange holdings to buy huge quantities of strategic inputs to its production system. This is just confirming information that was already out there - see
If correct this means one of two things.
Firstly it may mean that China expects, and is moving to try to ensure, that the global financial crisis will result in a general breakdown in the global market economy. China may be ensuring access to the resources needed to manufacture (say) hybrid cars as Evan's Prichard suggested - but, if a run on US Treasuries prevents the US government from funding its stimulus / bank rescue packages and budget deficits which was already a risk, then there is going to be no real market demand for whatever China intends to manufacture because there will be no economic recovery elsewhere for years.
Secondly it may mean that China has made a huge blunder which will be written up in history books as one of the causes of the coming Great Depression - because its commercial desire for profit has caused it to ignore macroeconomic policy imperatives.
In either event it is likely that the whole economic and geopolitical game is going to be changed.
(3) China escaping "dollar trap" by buying Copper; US likely to default
From: firstname.lastname@example.org Date: 17.04.2009 10:59 PM Subject: Revue de presse NM/E2020 - Crise systemique globale
Summer 2009: The international monetary system’s breakdown is underway
The next stage of the crisis will result from a Chinese dream. Indeed, what on earth can China be dreaming of, caught – if we listen to Washington – in the "dollar trap" of its 1,400-billion worth of USD-denominated debt? If we believe US leaders and their scores of media experts, China is only dreaming of remaining a prisoner, and even of intensifying the severity of its prison conditions by buying always more US T-Bonds and Dollars.
The next stage of the crisis will result from a Chinese dream. Indeed, what on earth can China be dreaming of, caught – if we listen to Washington – in the "dollar trap" of its 1,400-billion worth of USD-denominated debt (1)? If we believe US leaders and their scores of media experts, China is only dreaming of remaining a prisoner, and even of intensifying the severity of its prison conditions by buying always more US T-Bonds and Dollars (2).
In fact, everyone knows what prisoners dream of? They dream of escaping of course, of getting out of prison. LEAP/E2020 has therefore no doubt that Beijing is now (3) constantly striving to find the means of disposing of, as early as possible, the mountain of « toxic » assets which US Treasuries and Dollars have become, keeping the wealth of 1,300 billion Chinese citizens (4) prisoner. In this issue of the GEAB (N°34), our team describes the "tunnels and galleries" Beijing has secretively begun to dig in the global financial and economic system in order to escape the « dollar trap » by the end of summer 2009. Once the US has defaulted on its debt, it will be time for the « everyman for himself » rule to prevail in the international system, in line with the final statement of the London G20 Summit which reads as a « chronicle of a geopolitical dislocation », as explained by LEAP/E2020 in this issue of the Global Europe Anticipation Bulletin.
Quarterly Chinese foreign exchange reserves growth - Source: People’s Bank of China / New York Times, 04/2009
Behind London’s « fools’ game », where everyone pretended to believe that an event of « historical » international co-operation (5) took place, the G20 summit in fact revealed major divisions. The Americans and British (followed by a compliant Japan) desperately tried to preserve their capacity to maintain control over the global financial system, freezing or diluting any significant reform granting more power to the other players, but in fact no longer powerful enough to enforce their aims. The Chinese, Russians, Indians, Brazilians,… strove to change the balance of the international monetary and financial system in their favour, but were unable (or maybe, deep down, unwilling (6)) to impose their reforms. The Europeans (the EU without the United Kingdom) proved incapable of making up their minds between the only two options available: duplicating US and UK policies and sinking along with them, or questioning the very roots of the current monetary and financial system in partnership with the Chinese, the Russians, the Indians and the Brazilians. Today the Europeans have avoided following Washington and London in their endless reproduction of failed past policies (7), but they do not yet dare to prepare for the future.
The ongoing collapse of world trade growth cannot be explained by past relationships – Quarterly growth rates annualized - Source: OECD, March 2009
The Europeans can be held accountable if, in the remaining small window of opportunity (less than 6 months now), they fail to undertake the necessary steps to avoid a 10 year-long tragic crisis (8). Indeed they have the technical know-how that can help to create an international currency based on a basket of the world’s most important currencies, and they know which political approach is required to best combine the various strategic interests of a group of countries whose currencies would comprise the new international reserve currency. Unfortunately, EU leaders (namely Eurozone ones) clearly seem unable to face their responsibilities today, as if they preferred to let the Western system break down (though claiming the contrary) rather than fight to turn it into a bridge leading to a new global system. It may be a choice (LEAP/E2020 does not believe so); it may also be the result of the pusillanimity of EU leaders selected on the basis of their docility (vis-à-vis Washington and major European financial and economic players). In any event, this neutrality is dangerous for the world because it prevents the launch of an effective process to avoid a decade-long tragic crisis to unwind (9).
In this issue of the GEAB, our researchers anticipate the different forms a US default will take at the end of summer 2009, a US default which can no longer be concealed concealable from this April (most taxes are collected in April in the US) onward (10). The perspective of a US default this summer is becoming clearer as public debt is now completely out of control with skyrocketing expenses (+41%) and collapsing tax revenues (-28%), as LEAP/E2020 anticipated more than a year ago. In March 2009 alone, the federal deficit has nearly reached USD 200-billion (way above the most pessimistic forecasts), i.e. a little less than half of the deficit recorded for the entire year 2008 (a record high year) (11). The same trend can be observed at every level of the country’s public organisation: federal state, federated states (12), counties, towns (13), everywhere tax revenues are vanishing, suffocating the whole country with spiraling debts that no one can control anymore (not even Washington).
US tax receipts on corporate income (1930 – 2009) - Sources: US Department of Commerce / Saint Louis Federal Reserve (Q2-Q3 2009 projection by EconomicEdge)
In this issue of the GEAB (N°34), our researchers focus on how to explain the « mystery of gold price ». Indeed, our seekers (of information, not gold) identified a number of interesting leads to understand why (14) the price of gold has been fluctuating around the same level for months when the number of gold buyers is constantly increasing and demand for coins and bars far exceeds available supply in many countries.
Finally, our team gives recommendations on how to prepare for the crisis in the coming months, with particular regard to savings and life-insurance.
(1) Total Chinese foreign exchange reserves amount to USD 2,000-billion, of which USD-denominated assets are 70 percent maximum, equal to USD 1,400 billion. The remaining 30 percent mainly consists of EUR-denominated assets.
(2) Most of the time, the same « experts » predicted that global economy would benefit from banking deregulation, that the Internet economy was opening up an era of endless growth, that US deficits were a sign of strength, that US house prices would always go up, and that taking on debt was the modern way to get rich.
(3) The message on the necessity to switch international reserve currency, sent out by Beijing to the world – to US authorities in particular –, on the eve of London’s G20 Summit, was not intended to merely test the waters nor was it some vague attempt with no hope of success. The Chinese leaders had no illusion on the chances for this topic to be actually addressed in the G20 Summit, but they wanted it to be discussed in the backrooms, because they wanted to send an unofficial signal to all the players of the international monetary system: in Beijing’s mind, the Dollar system is over! If no one wishes to prepare for a common alternative system, the alternative system will be built some other way, knowing that the actions the Chinese are currently taking corroborate this intention. For instance, precisely these days (random political schedule is rare in Beijing) a book is being published, entitled « Unhappy China », arguing that Chinese leaders should stand up and impose their choices on the international arena. Source: ChinaDailyBBS, 03/27/2009
Friday, April 17, 2009
'Copper Standard' for the world's currency system?
From Peter Myer's elist: