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. 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. – UK Telegraph
Dominant Social Theme: China looks at its options.
Free-Market Analysis: Ambrose Evans-Pritchard strikes again. The UK Telegraph ace financial reporter regains his mojo with this story, excerpted above. We love reading Evans-Pritchard when he seems energized (he hasn't been, always, recently), and this article is an energetic one. It's also a bit of a conundrum because it is one of a string of prescient articles written by Evans-Pritchard, and one starts to wonder how he breaks all these big stories. Here's an excerpt of another from him, one we already commented on:
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 49% this year to $4,925 a tonne despite estimates by the CRU copper group that world demand will fall 15% to 20% this year as construction wilts.
You know, if you are Evans-Pritchard, the world is your oyster when it comes to sources; you can just pick up the phone and almost anyone will speak to you on background. But who is apt to be a special source for Evans-Pritchard? Not everyone would be motivated to share special insights of this magnitude. But whoever it is has a special perspective about China. Could it be the Chinese themselves? That's a stretch. The Chinese, at high levels, are extremely paranoid people. The chances of someone who knows something about what's going on sharing with Evans-Pritchard seem fairly slim. The only guy with enough clout and inside knowledge is central banking head Zhou Xiaochua – and he already talks to the Financial Times it seems (See "China wants IMF to manage new one-world reserve currency," Daily Bell, March 24).
No, we figure that whoever is handing out these kinds of insights is on the outside looking in, but has a great grasp of what's going on in China and is especially interested in the Chinese as a world power and as a financial and monetary entity. For a while we wondered if Evans-Pritchard was getting these insights from currency master George Soros, but Evans-Pritchard has a sort of free market approach to things that doesn't suit Soros' politics. Evans-Pritchard mentions Soros a good deal in some of his reporting, and not necessarily unfavorably, but hardly ever seems to quote him.
While sniffing around Soros however, we stumbled on his associate again, as always, Jim Rogers (pictured above left), Soros' long time partner. Bingo. We're not saying Rogers is Evans-Pritchard source (yes, there is usually only one main source so long as it is the "right" source – see Deep Throat, etc.) but that he certainly fits the bill. He is a man who has loudly proclaimed his allegiance to a vision of China as the 21st century's world leader and has moved his family over to Singapore where his daughters are being taught various Chinese languages by a multilingual governess. Rogers is canny, motivated and has the requisite financial background and sophistication. If he's short the dollar (we bet Soros could be), he also has a motive.
The next question to ask is does he make an appearance in Evans-Pritchard's universe. We found the following article by Evans-Pritchard, apparently quoting Rogers, as follows: Jim Rogers, the commodity king and former partner of George Soros, said the Federal Reserve was playing with fire by cutting rates so aggressively at a time when the dollar was already under pressure. The risk is that flight from US bonds could push up the long-term yields that form the base price of credit for most mortgages, thus driving the property market into even deeper crisis. "If Ben Bernanke starts running those printing presses even faster than he's already doing, we are going to have a serious recession. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems," he said.
OK, the two do seem to be on speaking terms and we believe they share some of the same market philosophy. But beyond this we won't travel. We enjoy the speculation, but it's not our main point. Evans-Pritchard is one of the best mainstream money reporters and what we are actually trying to explain is that these speculations have ramifications beyond "news" – whether or not breaking news is the only motive (let's assume it is.) What else? Two important things, at least. First, China is getting the word out that it is very unhappy with American monetization of the dollar. Second, those who help China get the word out on this point also get to slam the dollar.
So … we would leave you with this reminder, dear reader – in journalism, as in other arts (and life itself) everything is not always as it seems. We were never convinced that China was in favor of the Bancor (it was a helluva story), and are not convinced now. Nor are we convinced that the Chinese are really enamored of a copper standard, for that matter. We think the Chinese, through intermediaries shall we say, are floating a bunch of trial balloons – copper being a fairly heavy (and not entirely believable) one.
Historically gold and silver (which do not tarnish) have proven far superior to copper as money metals. Gold we could see, silver, too. But, you know, more likely, being communists, the Chinese do not seem apt to give up on their own currency – and will continue to float various kinds of information and disinformation designed to intimidate US bankers and ensure their US$2 trillion horde of dollars retains some value. Alternatively, if the US continues to make a mess of things, we have no doubt that the Chinese will put on the pressure to build some alternative currency – but copper?
No, we can't see the Chinese giving up on their own paper currency. We may be wrong but we think the allure of central banking will prove more attractive ultimately than building a commodity-based currency. We may be incorrect, and we hope we are. Certainly a commodity-based currency would likely be preferable to what we have now, though a market-based currency that grows up within a market process would be best of all by a long shot. But these stories about China are much more than the theoretical musings of a bunch of academic economists. There is a war going on, and certain reporters (not just Evans-Pritchard, perhaps) may be serving as foot-soldiers.