China hedging the only way they can
May 20, 2009
I recently argued that the Chinese have no choice but to keep buying our treasuries. My friend Aakarsh pointed out they could buy raw materials. I agreed, but wondered just how much of their 1T in dollar reserves they could possibly convert into ore, beans and oil.
Well it’s happening. And here’s a rough indication of their pace:
Without this stockpiling of strategic commodities, China’s trade balance likely would have risen in the first quarter instead of falling $51.8 billion to $62.51 billion, he said.
That means about $60 billion per quarter, $240 billion yearly, of which some part is NOT in dollars. So at this clip, they appear to be using $150 to $200 billion a year of their dollar reserves for materials instead of treasuries.
The question is, how long can they maintain this clip? It’s not just a question of how much of it they can actually use, but also a matter of how quickly commodity prices bounce back to a point where this strategy is not nearly as attractive.