China's Currency Reserves
China’s Currency Reserves: China’s Foot on America’s Throat
by Todd Stein
“But the fact that he openly recognized the need to move out of U.S. dollars tells us that a massive dollar decline is not a matter of ‘if,’ but ‘when.’ The largest beneficiary of this will be the precious metals – gold and silver – make no mistake about it.”
The Chinese ambassador to the United States was in our hometown of Dallas this week giving a speech, so we decided to pay him a visit. Ambassador Yang Jiechi, who speaks impeccable English, gave an interesting speech concerning the current and future state of U.S.-Sino relations. The topics that he brought up included the war on terror, reunification with Taiwan, a nuclear-free Korean peninsula, and (of course) economic growth in his native land. The Ambassador did not say anything about his country’s monetary or foreign exchange policy in his prepared remarks.
As the speech concluded, the crowd jumped to its feet and offered a rousing applause. Not being able to help ourselves, our hands shot up the minute the ambassador offered to take a few questions. After a few questions dealing with cultural issues, we finally got to ask him the question that has been on our minds for the past several years.
China’s Currency Reserves: Our Question
TXH: Mr. Ambassador, we would like to ask you a question regarding your currency reserves. The huge pile of U.S. dollars your country has accumulated as a result of its trade surplus with America has been reinvested time and time again in U.S. Treasuries and GSE debt. We know that there is a tremendous amount of international pressure on your country to revalue the Yuan; but we understand why you hesitate to do so because this could cause your domestic economy to slow and unemployment to rise. We also know that your country, which is facing a shortage of several critical natural resources, has recently established a strategic petroleum reserve. So our question is, why you don’t diversify your foreign reserves out of dollar-denominated treasuries and into other stores of value such as euros, francs, gold, silver, oil, aluminum and steel?
China’s Currency Reserves: Chinese Ambassador’s Responce
YJ: (Paraphrasing) Our goal with our exchange rate and economy is to move to more market-oriented policies over time. But you must understand that many companies in China are owned by American and other foreign entities. Furthermore, the dollars that China accumulates are re-invested back into U.S. Treasuries, which is good for America. You also should know that while China enjoys a surplus with the United States, we have large trade deficits with many of our Asian neighbors. But to answer your question regarding diversification out of dollars, we are moving in that direction.
Obviously, the Ambassador wasn’t prepared for our question so he went straight into his standard defensive posture about his country’s exchange rate policy. This is quite understandable as he is probably used to being grilled by American politicians who are upset about the exporting of American jobs. But the fact that he openly recognized the need to move out of U.S. dollars tells us that a massive dollar decline is not a matter of “if”, but “when.” The largest beneficiary of this will be the precious metals – gold and silver – make no mistake about it. The recent launch of the first U.S. gold ETF (ticker: GLD) has already shown incredible demand and we surmise it will only grow from here.
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Todd Stein is an internationally known analyst and the editor of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities in the equity, bond, currency, and commodity markets. For more information, go to http://www.texashedge.com.
Prior to founding Texas Hedge, he was a portfolio manager for 3 1/2 years at Q Investments, L.P. During his tenure at Q, Mr. Stein co-managed a $100 million merger arbitrage portfolio in addition to serving as the firm’s primary analyst on its short distressed/bankrupt equities portfolio. In 2002, Mr. Stein was appointed by the U.S. Trustee of the Northern District of Illinois to serve on the official creditors committee of United Airlines. Ranked #1 in his class, he earned his bachelor’s degree in business administration from the University of Texas at Austin. Mr. Stein is a member of CFA Institute as well as the Dallas Society of Financial Analysts.
Mr. Stein currently resides in Dallas, TX. Personal interests include international travel, politics and the martial arts.