Saturday, April 18, 2009

Is China the Source of the Commodity Mini-Bottom?

I alluded a couple of weeks ago to what looks like a bottom and possibly a new rally having developed in the commodity markets, specifically oil. According to this article, it could be the result of strategic buying by China:
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."
If this is the case, and I have every reason to believe that it is, it might be the primary source of the mini-boom that we are seeing. And which appears to be petering out. Oil has fallen back below $50/ barrel a few times over the last few weeks. It is back over $50, but having shown technical weakness isn't likely to take off again precipitously any time soon. Unless, of course, there is a complete collapse of the dollar, in which case Katy bar the door. In reality, commodity booms, like all booms, are driven by currency devaluations. So we can expect that in the longer run commodities will take off again when the Great Devaluation of the 21st century takes hold. In the shorter run, China and others will eventually sate their dollar unwindings, and with the global economy in the depths of recession, we can expect commodity prices to begin another leg down provided the recovery is still some years away. Yes, China and others will lose money in the short term as their commodity hoards fall in value while the dollar putters along. But this is one small price to pay for a half century of rapacious mercantilism, among many others sure to crop up soon. And it is a far smaller loss than they would have taken had they stuck with their dollar hoard. It appears they also have an eye towards creating an out-and-out dollar replacement and on-world-currency:

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.

Note that this is the exact interpretation I just gave, with a layer of conspiracy thrown in for good measure. But in any event, the moves are spurred by perceived future dollar weakness.

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.

This is slightly disingenuous. China has the world's largest reserves - $1.95 trillion, mostly in dollars - because it has been holding down the yuan to boost exports. This mercantilist strategy has reached its limits.

Just like I said. But in light of recent events, it raises an interesting question: Does this make communist central banker Zhou Xiaochuan a right-wing extremist and potential terrorist threat? How about Ambrose Evans-Pritchard, the guy who wrote the article? I'm just asking. Where's Janet Napolitano when you need her?

No comments:

Post a Comment