Australia's pole position  

Alan Kohler has an article in the Business Spectator on Chinese stockpiling of metals as a new way of spending their trade surplus instead of buying US Treasuries (pointing to an article by the dubious Ambrose Evans-Pritchard) - Australia's pole position.

he copper price rose another 4 per cent last night. It has now gone up 72.5 per cent since bottoming on December 24th and 56 per cent this year.

Part of this is due to short covering by commodity-based hedge funds but, remarkably, a lot of the buying seems to be coming from China diversifying its foreign exchange holdings out of US dollars and into metals, especially copper.

Ambrose Evans-Pritchard, writing in the London Telegraph, has a fascinating article this morning, suggesting that the Chinese government has made a conscious decision to stockpile physical metals instead of US bonds.

He quotes Nobu Su, the head of Taiwan’s TMT Group, which ships commodities to China, as saying: “China has woken up. The west is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

If this is right, and there is plenty of evidence that is, it fundamentally changes the dynamics of global finance – and very much in Australia’s favour.

The west is borrowing to finance fiscal stimulus, including Australia. China has made it clear that it is worried about the trillions it has invested in western paper, especially US bonds, of which it owns about US$1.7 trillion.

By switching from holding US paper to buying and holding metals China is, in effect, switching from investing in what America has – the promises of capitalism – to something that Australia has plenty of: real metals you can stick in a warehouse, and then use later on.

At a grim time for this nation, this is the best news I have seen for months.

While Australia is borrowing to finance fiscal stimulus, the US has gone further by embarking on a deliberate strategy of gradual “default by inflation” – that is, printing money to finance its Government debt, which reduces the value of the debt over time – along with the value of assets.

Premier Wen Jiabao said last month: “We have lent a huge amount of money to the US, so naturally we are concerned about the safety of our assets.”

And the manifestation of that appears to be that Chinese imports of copper reached 329,000 in February and a further 375,000 tonnes in March. This can’t be explained by Chinese industrial demand, since exports fell by 17 per cent in March.