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.

h/t TBP

One Response to “China hedging the only way they can”

  1. […] 7, 2009 I wandered 2 weeks ago just how long China could continue buying commodities instead of U.S. treasuries.  […]

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