Has China Begun Preparing For The Crack-Up Boom?

We came across a thought provoking article by Telegraph’s Ambrose Evans-Pritchard where he suggests that perhaps China’s diversification from US assets might already be happening.

But instead of accumulating gold, which most observers have been expecting her to do, the diversification process could have been channeled through unexpected assets….copper and other base metals.

We quote Mr. Pritchard in “A Copper Standard' for the world's currency system?” (bold highlight mine)

``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).

Circumstantial evidence seem to corroborate such hypothesis.

One, China’s purchases of US treasuries appears to have slowed.

According to the New York Times, ``China’s foreign reserves grew in the first quarter of this year at the slowest pace in nearly eight years, edging up $7.7 billion, compared with a record increase of $153.9 billion in the same quarter last year.

While others suggests that China’s apparent moderation in acquiring of US assets could be a function of diminishing forex reserve accumulation, the alternative is that China could indeed be massively accumulating base metals including copper.

Next, copper prices have been on a rampage since hitting a low last December.

And if Mr. Pritchard’s account of China’s accumulation is accurate then the rise in base metal prices could also be reflective of the Middle Kingdom’s tacit diversification…

Moreover, Mr. Pritchard seems to connect these activities to China’s recent call for a global currency system.

From Mr. Pritchard, ``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…

``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.”

Mr. Pritchard’s essay reminds us of Ludwig von Mises' admonition in Interventionism: An Economic Analysis, Inflation and Credit Expansion of the harmful effects of persistent inflationary policies…

``But on the other hand inflation cannot continue indefinitely. As soon as the public realizes that the government does not intend to stop inflation, that the quantity of money will continue to increase with no end in sight, and that consequently the money prices of all goods and services will continue to soar with no possibility of stopping them, everybody will tend to buy as much as possible and to keep his ready cash at a minimum. The keeping of cash under such conditions involves not only the costs usually called interest, but also considerable losses due to the decrease in the money’s purchasing power. The advantages of holding cash must be bought at sacrifices which appear so high that everybody restricts more and more his ready cash. During the great inflations of World War I, this development was termed “a flight to commodities” and the “crack-up boom.” The monetary system is then bound to collapse; a panic ensues; it ends in a complete devaluation of money Barter is substituted or a new kind of money is resorted to. Examples are the Continental Currency in 1781, the French Assignats in 1796, and the German Mark in 1923.”

While China has spoken of the need for a global currency, our thought is in acquiescence to Mr. Pritchard's supposition that China could indeed be seeking insurance with massive purchases of metals which could eventually back their currency.

Maybe China's is doing a flanking approach with accumulation centered mostly in base metal and copper first, agriculture and energy next and lastly gold.