U.S. Dollar Woes Boost China's Global Muscle

Washington continues to believe that the U.S. dollar is a weapon and most of the G8 is playing along. They simply can’t see – or won’t acknowledge – where the dollar is actually headed, even though the evidence is right before their eyes.

On the other side of the world, however, China is refusing to drink the U.S. Kool-Aid. It sees what’s really happening with the greenback, and understands the implications for its own finances and economic growth.

That’s why Beijing has taken matters into its own hands.

As Beijing breaks with the West, Western investors need to take notice – China is now a serious player on the global financial stage. It’s only going to grow in power and stature. And it has a powerful hand to play.

Wheeling and Dealing

Not only does the Red Dragon have a $2.3 trillion cache of reserves to work with, it also has the world’s most powerful growth engine: An economy that’s advancing at an 8% clip, 1.3 billion consumers who save an average of 35% of their incomes, and a government that’s spending money in an effort to propel them into the 21st century.

What makes this especially poignant is that China understands its role – past, present and future. Most of its leaders are exceptionally well versed in Western history, meaning there’s a profound understanding of the problems and potential obstacles the West faces as it attempts to bounce back from the worst financial crisis since the Great Depression. There’s an irony here, since China may understand our problems even better than we do.

China’s outlook and economic fate is no longer totally dependent on the United States and other Western counterparts. China knows that it has to take matters into its own hands if it is to avoid being dragged down and smothered by Western has-beens. Beijing is doing just that.

What’s more, China’s leaders are taking a whole host of steps that will affect basically every asset class on the planet for years to come.

Some of these moves are subtle on their face, but will have a broad and lasting impact that investors need to see and understand. Others are as shrewd as they are aggressive. For instance, China is actively diversifying its dollar risk by buying up hard assets – including oil, gold and all sorts of other commodities – as part of a global shopping spree that’s unparalleled in recent memory.

As part of his global game of let’s make a deal, China is reaching pacts with resource-rich despots around the world – not because Beijing likes dealing with these people, but rather because China has little choice given is massive population, zooming growth and the neutered status of the Western financial system.

Sheer size isn’t China’s only objective: It also wants to join the “adults’ table” that seats the current global financial leaders. To achieve this status, however, Beijing knows it needs to have a credible currency. Instead of waiting for the international currency exchange community (read that to mean the self-centered currency traders in New York and London) to integrate the yuan into major trading pairs, China’s leadership has been establishing yuan-based swap agreements with nations around the world. In doing so, Beijing has completely bypassed the international system now in place.

China has simultaneously been working – albeit quietly – with other groups having similar vested interests to ensure alternative financing methods, whether the U.S. cottons to Beijing or not. I’ve been predicting this for years, which is why I wasn’t entirely surprised when reports surfaced earlier this month about the Organization of Petroleum Exporting Countries (OPEC) and the so-called “BRIC” nations (Brazil, Russia, India and China) shifting to an international currency basket and gold to replace the use of U.S. dollars in pricing of oil contracts. While this was quickly denied by some of the OPEC nations, their comments made it clear that they were talking about “convenience.”

I could go on but I think you get the picture: The global guard is changing. Whether we like it or not is irrelevant. It’s going to happen, so as investors we need to look for the profit opportunities that will assuredly come our way.

As history demonstrates, these guard-changing shifts are major profit opportunities – and are not to be missed.

Profit Lessons of the Past

As was the case when France’s hegemony was usurped by England’s – and then England’s by United States – there are major profits to be had. To be clear, I’m not calling for the total demise of the U.S. way of life, or a complete abandonment of U.S. assets on the global financial stage. Any such notion would be foolish in today’s interconnected world. The real issue for most U.S. investors is that they need to bring their holding into line with what the changing of the guard implies…and increasing proportion of global choices.

Most investors remain dramatically underexposed to the new realities of global investing. They may have only 15%  – or less – of their portfolios invested in internationally focused investments. At a time when U.S. equities make up less than 25% of the world’s total stock-market capitalization – and when nearly 75% of global economic activity is place beyond U.S. borders – that’s a serious miscue for an investor to make.

What you really want to do is to go with the flow, and recognize the changing of the guard for what it actually is – a new source of wealth.

Keith Fitz-Gerald

November 25, 2009

P.S.: For the last several years I’ve made my insights about the Asian markets and the true nature of the global capital markets available to investors via my daily columns in Money Morning and its monthly affiliate, The Money Map Report. Now I’m making those insights available through my new book, “Fiscal Hangover: How to Profit from the New Global Economy,” which can be purchased here.