Guest Author - Tony Daltorio
You would think that Treasury secretary Tim Geithner would learn his lesson by now. Apparently, he is rather dense. Every time he says something negative about China - "they are a currency manipulator" - or something similar, Chinese officials fire right back.
Chinese officials fire off statements about the US trillion dollar deficits, the crazy monetary policy of the Federal Reserve, how the US Dollar should no longer be the world's reserve currency, etc. In light of our ever-growing debts and the need for China to continue buying our Treasury securities, why doesn't Mr. Geithner just shut up?
There is little chance that China will sell much of their current holdings of US Treasuries. However, there is a very real danger that China will greatly reduce their future purchases of US Treasuries.
At various investing sites, such as Seeking Alpha, I often see statements which I would characterize as both naive and arrogant. People state that "Where else would China put their money? They have no choice but to put it in the US". No, they don't.
China is already diversifying the monies that they are currently investing. China is buying massive amounts of commodities - oil, metals, food - and storing them for future use. They are buying these REAL ASSETS, with US Dollars, at bargain basement prices. Bargain basement prices, I might add, that have been brought about by the dimwits on Wall Street who continue to sell commodities.
China is also buying 10% to 20% positions in stocks of commodity producers around the globe, both large and small. That way they will have a "say" as to where these commodities are shipped. In addition, China is investing directly into major energy projects both in Russia and in Brazil (Petrobras).
One side note - Petrobras of Brazil first came to US banks for funding for their deep-sea oil projects. Wall Street, of course, refused to help. So they turned to China, who was more than happy to help. Oil experts are already calling Brazil the next Saudi Arabia and the US blew it.
China has bought some other currencies as well, such as the euro. China also announced today that they have doubled their holdings in gold! The Chinese believe that gold is a much safer long-term holding than the US Dollar.
Also China has begun doing "currency swaps" with trading partners and other emerging economies around the globe. China is doing this in order to extend the Chinese currency's (YUAN) role in global trade. This is the beginning of the transformation of the yuan into a global currency, ala the US Dollar.
China's Economy Is Doing Fine
Despite the global slowdown, China's economy has only slowed and is still growing nicely. Retail sales are up 15% annually. In March, auto sales in China surged another 10% to over 1 million units for the first time ever. Meanwhile, March sales in the US slid to 850,000 - down 37% from last year. March was the third consecutive month that Chinese car sales exceeded those in the US.
The Chinese stock market has also outperformed the US. The 20% rise in the S&P from its March low only brings it back to where it was in October 2008. In contrast, the Hong Kong Hang Seng index is now 40% above its October 2008 lows. By the way, there are similar results in many of the emerging markets.
Please feel free to contact me directly with any comments or questions about this article or any other subject.