China’s Q1 GDP growth figures came in on Thursday at a quarterly 6.1 per cent – less than the widely forecast 6.3 per cent, reports Reuters, reflecting a further slowdown in the country’s hitherto stellar growth.
But is this only a temporary slip? Could China actually be one step ahead, actively masterminding its future GDP dominance forever?
China-reserves watcher Brad Setser notes in his latest post on the CFR’s Follow the Money blog that China did indeed reduce its dollar holdings in February. As he writes:It is a good thing the US trade deficit has come down, because foreign demand for US financial assets — actually foreign demand for US assets other than short-term Treasury bills — has dried up. Foreign investors bought $68 billion of T-bills in February. Russia alone (likely Russia’s central bank) bought close to $14 billion. Private investors — seemingly Japanese private investors — also bought $23.5b of longer-term Treasury notes. Otherwise, though, foreign investors didn’t buy much of anything. And Americans also didn’t buy many foreign assets.*
And specifically…In February, China bought Treasuries. $4.64b by my count. It bought $5.61b of bills, while reducing its long-term Treasury holdings by $0.96 billion.
Meanwhile, if you’ve been watching the copper market you’ll have noticed a bit of an arbitrage trade going on. Over the past month, European prices have routinely been “rallying” on strong Chinese buying. With prices much lower at the London Metal Exchange than in Asia — and shipping costs also low — the arb trade does make sense. However, what does seem peculiar is that the arb seems to be closing upwards and being driven specifically by China, whose manufacturing and general export industries — for which copper is a major input — are still drastically suffering from the impact of the financial crisis. What’s more, there’s no imminent sign that exports are likely to recover anytime soon.
Nevertheless, the point is China is buying. So much so that it’s driving the market towards 6-month highs. Note the latest Bloomberg copper market report (our emphasis):
April 15 (Bloomberg) — Copper gained for a fifth consecutive session in London, the longest rally in 14 months, as falling inventories signaled demand is picking up. Inventories in warehouses monitored by the London Metal Exchange dropped 11,600 metric tons, or 2.4 percent, to 480,400 tons, the biggest decline since Oct. 21.
Futures for May delivery in Shanghai are $485 a ton more expensive than London, encouraging Chinese consumers to import more metal, said Herwig Schmidt, head of sales at Triland Metals Ltd. in London. “This price differential works like a big vacuum cleaner,” Schmidt said. “As long as this goes on, people say, ‘let’s go with it’.” Copper for delivery in three months rose $96, or 2 percent, to $4,795 a ton at 4:28 p.m. in London. The five-day gain is the longest since early February 2008.
Copper gained 10 percent the previous four sessions, and yesterday traded at $4,925 a metric ton, the highest since Oct. 20, on increased imports from China, the world’s largest buyer. Metal scheduled to be taken out of warehouses, known as canceled warrants, fell the most since March 17, according to London Metal Exchange figures, signaling eroding demand.
So why oh why is China buying all that copper? The industry answer is simply that China is building up its commodity reserves while copper prices are cheap. But it’s hard to rationalise given the state of the global economy. So is China simply awaiting a large pick-up in domestic demand once its own stimulus kicks in? Or does it really believe the US recession really won’t last past 2009?
Fear not, for the Daily Telegraph’s Ambrose Evans-Pritchard has the answer: China, he says, may be preparing to redefine the entire way it manages and invests its dollar surpluses. No more need for US Treasuries, he writes: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.
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.”It’s not such a crazy concept if, first, you look at the evidence and rationale.
Many economists and notable figures (Barack Obama among them) believe the financial crisis is actually a great opportunity to reinvest in a greener future for the world– the idea being that all those stimulus cheques should be used on the development of a new, renewable energy infrastructure for the world, hybrid cars, solar panels etc..
And it is Evans-Pritchard’s belief China could be readying itself exactly for that sort of future, a future which will include the need for a mass producer of hybrid cars, for one. A vital component in hybrid car manufacturing is of course copper. The ambition may be even greater too. As Evans-Pritchard reports:
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).
FYI thin-film is the technology that makes solar panels much more efficient. Accordingly, with the right materials and commodities at its disposal at the key moment, China could position itself to become the renewable manufacturing hub for the world. Certainly, when it comes to solar power, the move makes a lot of sense for China. Production of solar panels is extremely labour intensive, and as yet no one has been able to create a completely machine-led production line because panels are so fragile. Labour and silicon, however, are two things China has plenty of.
Furthermore, given China’s calls last month ahead of the G20 for a new reserve currency system, the idea that China may be strategically diversifying its reserves to metals becomes even more plausible. Evans-Pritchard quotes a number of analysts who certainly think the case is strong. He also reminds us that Zhou Xiaochuan, the central bank governor, specifically refer to the “Bancor” in his comments — a currency unit proposed by Keynes at the onset of Bretton Woods that would be anchored on 30 commodities — a broader base than the Gold Standard.
The fact that a serious debate is even taking place on the subject among the investment and business community goes to show how far the financial crisis has potentially ruptured the heart of the capitalist model on which the world previously depended. What’s more, it seems that US Treasury secretary Tim Geithner may be listening.
In his first semiannual report on foreign-exchange policies, Geithner has backed away from earlier accusations that China is a currency manipulator. His latest assertion, in fact, simply states:“Treasury did not find that any major trading partner had manipulated its exchange rate for the purposes of preventing effective balance-of-payments adjustment or to gain unfair competitive advantage.”
As Bloomberg notes this very much clashes with his statement to a Senate panel on January 22nd in which he said:
President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency.
Which leads us to wonder if Geithner originally was just trying to call China’s bluff a la “Go on, sell your Treasuries, we dare you” — betting they wouldn’t because they couldn’t (not without harming themselves at the same time). In which case, the latest comments presumably mean China’s currency reserve talk has struck a chord. Is Geithner now hoping Beijing may change its mind on the whole sorry reserve affair if the US government lets its have its way with the renminbi? Perhaps.
But then again, it may be a little too late for that.
Related links:
Geithner Refrains From Labeling China a Manipulator – Bloomberg
LME copper inventories falling – FT Alphaville
A commodity anchor, or oil as money – FT Alphaville
A ‘Copper Standard’ for the world’s currency system? – Telegraph