China Is Through Screwing Around, Seeks to Deploy Reserves to Buy Real Assets

By: Graham_Summers

Starting with the re-opening of formal trade arrangements in 1971, China has undergone a near unprecedented level of economic transformations. The country’s per-capita income doubled from 1978 to 1987 and again from 1987 to 1996.

In those 20 years, more than 300 million Chinese ascended out of poverty with accompanying dramatic changes in lifestyle, professions, and diet: between 1985 and 2008, average Chinese meat consumption more than doubled from 44 pounds to 110 per annum.

However, most Americans (including the Government) have been blind to this economic reality, choosing to focus instead on China’s social qualities. Indeed, it was not until the Chinese Dragon was literally breathing down Uncle Sam’s neck ¾ China overtook the US as the world’s largest consumer of coal, meat, grains, and steel in 2004¾ that the latter became aware of the former’s economic developments in any real fashion.

Which brings us to today, where the US is trapped in a symbiotic relationship with the very country that will overtake it in the next 15-20 years. The first wave of our symbiosis was based on manufacturing (China producing the goods we bought). That wave, in turn, created the second, more important symbiosis: China is now our largest creditor nation.

China’s Gross National Savings as a percentage of GDP currently stands at or around 53%. The country sits atop $2.0+ trillion in national reserves, some 70% of which is believed to be in US Treasuries and dollar denominated assets… which has created quite a problem because the Chinese, like any investor, want a decent return on their investment.

And our Fed Chairman, Ben Bernanke has been hell bent on devaluing the dollar to recapitalize banks. Whenever you start throwing trillions of dollars around bailing out your cronies ($24 trillion according to Neil Barofsky), running record deficits, and generally trashing your currency so that bankers can collect record pay, you run the risk of pissing off your creditors. For the US, this means China. And China is getting pissed about the US’s bailout frenzy.

Over the last few months, the news headlines between China and the US have been like a game of tennis. Every time Ben serves up another bailout or lending program, China fires back with a “drop the dollar as reserve currency” headline. Bernanke then curtails the money spending temporarily.

However, a few weeks ago things started getting serious: China’s Premiere stated, "We should hasten the implementation of our 'going out' strategy and combine the utilization of foreign exchange reserves with the 'going out' of our enterprises.”  This is a full-blown warning shot: China is flat out saying, “we’re going to start buying real assets instead of Treasuries with our reserves.

Politicians are master of spin. They usually mince their words, talk a lot, and say very little. For China’s Premiere to openly say, “we’re going to speed up our process of buying real assets instead of US debt,” is a very, VERY meaningful statement.

It takes on even more meaning when you consider that China then flew over its Vice Premiere to meet with Bernanke and the White House the VERY NEXT week… which just so happens to be a week in which the Federal Reserve needs to sell $236 billion Treasuries (in desperate need of China’s support).

If anyone could get the Fed to fess up as to when the Quantitative Easing (QE) will end, it’s got to be our #1 creditor, the folks holding $1 trillion+ in dollar denominated assets. What I would give to be a fly on the wall of those meetings.

I’m guessing China didn’t like what the Fed had to saw.

Chris Martenson recently uncovered that it was the Fed, NOT China who bought most of the 7 years Treasury Notes issued last week. As you probably know, last week the Treasury issued a record $260 billion in debt. Of this, $109 billion were Treasury Notes: shorter-term debt. The issues were as follows:

• 2 year:  $42 billion (Tuesday)
• 5 year:  $39 billion (Wednesday)
• 7 year:  $28 billion (Thursday)

The two year and five year issues were weak and bordered on failure. In fact, if it weren’t for the fact that Primary Dealers (one of the parties involved in buying Treasuries) are REQUIRED to buy, the 5’s would have actually failed (meaning not all of them would have been bought).

In spite of the weak 5-year auction, the 7 year auction offered the next day went extremely well. I, and quite a few others, were baffled by this. But we’re not anymore. Turns out the Federal Reserve got some Primary Dealers to load up on the 7’s by promising that it would buy $14 billion worth of them the next week!!!

All told, the Fed bought $14 billion of the $28 billion 7’s that were issued. They only waited a week to buy them from the Primary Dealers. Forget the fact that this is sneaky way of trying to hide the fact China and other countries don’t want our debt anymore… this is MORE of the Quantitatie Easing that Bernanke said he was going to phase out. The story was broken to the public by Brian Benton and Financial Sense University.

http://financialsense.com/fsu/editorials/2009/0804.html

Folks, China is through screwing around. They’ve made it clear that don’t HAVE to buy our debt and are quite comfortable putting their money to use elsewhere. The fact that the Fed is now buying Debt from the Treasury in this sneaky fashion makes it clear that without the Fed, we might have seen failed auctions.

And the dollar and Treasuries are on borrowed time. Indeed, the dollar may very well start the next wave of this financial crisis. If that happens, gold could very well explode through the roof.

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Good Investing!

Graham Summers

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.

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