China's Buying a New Currency
and It Sure ain't the Dollar
By Graham Summers
is the US’s largest creditor. All told, the
People’s Republic has $700+ billion in US
Treasuries. However, if you account for other
dollar denominated investments, China is
believed to have 70% of its $1.7 trillion in
foreign reserves sitting in green backs.
That’s an unbelievable amount of money invested
in the US dollar. Needless to say, the Chinese
are not too happy about our Central Bank’s
decision to print TRILLIONS of dollars propping
up the US financial system.
Indeed, the initial rumblings of what will
eventually turn into outright conflict (either
economic or war) have already begun. China’s
Premier Wen Jiabao recently commented, "We have
lent a huge amount of money to the US…Of course
we are concerned about the safety of our assets.
To be honest, I am definitely a little worried."
Other, former Chinese officials have been less
polite in their public statements. Yu Yongding,
a former Chinese central bank adviser, recently
referred to the US Federal Reserve “as the
world’s biggest junk investor… ridden with
rubbish assets,” and to Chairman Ben Bernanke as
The situation has gotten intense enough that
Secretary of the State Hillary Clinton flew to
Asia to plead with China and other US creditor
nations to continue buying US Treasuries. “By
continuing to support American Treasury
instruments the Chinese are recognizing our
interconnection. We are truly going to rise or
fall together," Clinton said at the US embassy
In simple terms, China owns a TON of dollar
denominated assets. And the Fed is doing
everything it can to devalue the dollar. Thus
China has a few options:
1) Openly sell the dollar, thereby destroying
the value of its reserves and inviting open war
with the US.
2) Quietly shift away from the dollar without
openly attracting attention or threatening the
The Chinese government, particularly its
Premier, has been floating option #1 in the
media, discussing the potential for dropping the
dollar standard along with Russia and Brazil.
However, this boils down to nothing more than
grandstanding. The Chinese are not idiots. And
they know that dropping the dollar standard
would destroy a HUGE portion of their foreign
reserves, since everyone and their mother would
Indeed, abandoning the dollar for another
currency (say the yen or euro) would serve no
benefit from an economic standpoint. It would
crush China’s Treasury denominated reserves as
the dollar plunged. It would also be akin to
trading one problematic investment for another:
no major world currency is backed by gold or any
asset of real value.
No, to my way of thinking, the Chinese are
merely posturing with these statements, trying
to draw attention away from the fact that
they’re already begun pursuing option #2
(diversifying away from the dollar in private).
Indeed, China has already begun moving into a
new currency, one that is neither fiat nor
flawed. And they did it in their usual manner:
under the radar with great focus and
That new currency is natural resources.
Throughout 2009, China has been buying up
natural resources, commodities, and other real
assets at a break-taking pace: copper imports
hit a record 329,000 tons in February, only to
be eclipsed by a new record of 375,000 tons in
The copper story is just the latest and most
obvious display of China’s new currency binge.
The Chinese have been buying up mines, metal ore
(57 million tons of iron in April alone), and
other resources for years now. The headlines
were right under the world’s collective nose,
but no one was thinking “diversification away
from the dollar.” Instead they were thinking,
“purchases needed to fuel economic growth.”
Truly, it wasn’t until the world noticed that
China was still buying commodities in record
amounts even after its economy took a hit that
the media began to connect the dots.
Here are a few dots to consider…
Feb.10, 2009: China buys Oz Minerals, the
world’s second largest zinc miner for $1.7
Feb. 12, 2009: China buys $20 billion worth of
Rio Tinto, one of the three largest iron ore
producers, giving it the potential to raise its
stake to 19%.
Feb. 24. 2009: China buys 16% of Fortescue
Metals an Australian iron ore company.
April 1, 2009: China buys $46 million worth of
Terramin Australia’s lead and zinc supplies in
April 15, 2009: China buy 51% of Ontario’s
Liberty Mines: a nickel producer.
One should also consider that these are merely
the transactions that are publicly displayed.
The Chinese government has proved adept at
buying assets below the radar via foreign
holding companies and other complicated business
structures. Informal accounts posit that China
has in fact scooped up even more natural
resources and mines via these methods today.
Indeed, the Financial Post recently reported
that China has been secretly buying up gold,
raising its gold reserves by three-quarters
since 2003. The newspaper also reported: “Hou
Huimin, vice general secretary of the China Gold
Association, said China should build its
reserves to 5,000 tons.” That’s more than four
times what China’s current reserves f 1,024
The reasoning here is simple. Unlike paper
currencies, natural resources and commodities
cannot be reproduced ad infinitum by central
banks. Thus they are inflation proof. In
addition, natural resources actually offer a
direct benefit to China’s economy whereas an
investment in a foreign currency (the dollar or
otherwise) is merely a means of parking cash for
Finally, and most notably, natural resources
allow the Chinese to diversify away from the
dollar without damaging their current dollar
holdings: or their relationship with the US: if
word got out that the Chinese were dumping
Treasuries, the Treasury market would implode,
destroying the value of China’s current
Make no mistake, the Chinese have already begun
diversifying away from the dollar. They just
haven’t advertised the fact openly. Chinese
students openly laughed at our Treasury
Secretary Tim Geithner when he gave a talk there
promising that “Chinese assets were safe” in the
dollar. If Chinese STUDENTS can figure the Fed’s
moves out, what do you think the Chinese
GOVERNMENT is doing?
I think we both know the answer to that.