Chinese sovereign wealth fund dumping dollars for strategic investments like gold

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Morpheus's picture
Morpheus
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Chinese sovereign wealth fund dumping dollars for strategic investments like gold

 

Dollars are coming home.

Wonder what this will do for prices. Think more dollars chasing fewer goods will cause deflation?

Quote:

Chinese sovereign wealth fund dumping dollars for strategic investments like gold

Reports suggest that China's main sovereign wealth fund and other state entities are under pressure to invest in strategic Western assets as the country tries to offload its dollars for firmer-based wealth including gold and oil.

Author: Lawrence Williams
Posted:  Thursday , 03 Sep 2009

LONDON - 

Several reports are coming out of China that there is pressure on state-controlled organisations - notably the country's main sovereign wealth fund, China Investment Corporation (CIC) to rapidly build investment in non-Chinese enterprises.  While the CIC itself, with apparent access to some $300 billion in funds - and the possibility of more from the government - may be concentrating on hedge funds and other investment entities, there is another sector for Chinese state-owned companies looking at major investment in commodities.  Indeed with the funds available as China seems to be dumping its US dollars in favour of more concrete assets, virtually no minerals sector is safe from Chinese participation.

While CIC was set up only two years ago, funded with $200 billion in initial capital, a report to the U.S. Congress noted that according to top Chinese officials, it was created to improve the rate of return on China's $1.5 trillion in foreign exchange reserves and to soak up some of the nation's excess financial liquidity.  Depending on its performance with the initial allotment of $200 billion, the CIC might be allocated more of China's growing stock of foreign exchange reserves - and this has already proved to be the case.

Probably the most interesting of the recent reports of what is happening with Chinese sovereign wealth fund investment outside China has come from Paul Mylchreest's Thunder Road Report where an ex-U.S. intelligence service member is quoted.  He reports that he has a friend who is in the Chinese Sovereign Wealth fund sector who says - hearsay I know and it wouldn't stand up in court - indicated  that  the wealth fund analysts were working all hours of the day and night trying to put investment deals together - particularly in the oil and precious metals sectors.  The conclusion is that China recognises that the U.S. dollar is going to tank and it wants to convert as much of its trillions of dollars of holdings into strategic assets as possible before the collapse really takes hold.

The trouble is there is too much money available chasing too few assets - and too little time available - or such is the conclusion.  As a result the Chinese government seems to be doing its utmost in trying to persuade the Chinese public to buy gold and silver by relaxing the restrictions - it's now easier to buy precious metals in China than in the U.S. - and by pushing gold and silver investment on state-owned television.  If this continues the likelihood is that China will permanently overtake India as the world's biggest buyer of gold and silver, while the country's store of wealth will help shield it against further western economic collapse.

If this is indeed the case then it must be likely that the country is also building its own gold reserves - perhaps surreptitiously - through creative accounting by buying by a state entity, but not through the Central Bank itself where such sales would need to be reported.  Positive for gold looking forward.

Returning to the Sovereign Wealth Funds angle though, CIC's chairman, Lou Jiwei, is reported by the WSJ as saying that investment in CIC's global portfolio for "one month this year equalled that of the whole of last year" and that given that the fund is expecting a positive return on its investments this year it may well ask the government for additional funding.  Where it is going to place additional funding, who knows but there seems little doubt that China is using the western recession to buy up assets on the cheap and the funds available to do this are virtually unlimited by Western standards.  But the Chinese won't buy up any old rubbish.  They'll be looking for the crème de la crème.

Already CIC has bought 17% of Canada's last real remaining diversified miner - Teck Corporation - smartly buying when the latter was only just beginning to recover from last year's collapse and it has to be likely that more minerals-strategic investments are on the cards or being negotiated, either by CIC or other state organisations.  Chinalco's ultimately thwarted move into Rio Tinto would have been another such instance and the Chinese investments and takeovers of Australian miners and promises of huge funding for minerals rich African countries are other examples.

Some reckon that China will be the world's second biggest economy, overtaking Japan, within the next couple of years and will overtake the U.S. by 2030.  If it continues the way it is going and the U.S. continues the way it is going, this could happen much sooner.  Communism, Chinese style, is winning the war of economic dominance and soon the world will no longer rely on the dollar as its reserve currency, but the renminbi!

In an interesting, but perhaps disturbing footnote to the Thunder Road Report mentioned above, Paul Mylchreest comments that in Latin America, where he has been living for 25 years, for the first time he can remember, locals are now preferring their own currency to U.S. dollars.  He goes on to finish with this comment: "If a fellow with no education, a poor diet, and inadequate medical treatment living at 3,500 metres above sea level can figure out that the US dollar is undesirable as a store of wealth, how much longer do you think it can last as the world's reserve currency."

Your point to ponder for the day!

http://www.mineweb.com/mineweb/view/mineweb/en/page67?oid=88400&sn=Detail

DrKrbyLuv's picture
DrKrbyLuv
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Re: Chinese sovereign wealth fund dumping dollars for ...

Morpheus,

Thanks for this important news.  How can we continue to sell our accelerating debt while our creditors are finding better and safer returns elsewhere?

Larry

 

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Morpheus
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Re: Chinese sovereign wealth fund dumping dollars for ...
DrKrbyLuv wrote:

Morpheus,

Thanks for this important news.  How can we continue to sell our accelerating debt while our creditors are finding better and safer returns elsewhere?

Larry

 

I'm worried about them buying up commodities and driving living prices through the ceiling. Food is already expensive enough and as a PM bug, I don't want Au and Ag prices going up now (I actually want them to crash short term). China is a hungry nation.

And they've also been buying up the world's gold and silver at a record rate. But think about this hypothetical. Suppose China accelerated it's PM buying and demanded delivery of a massive quantity of PM's on the COMEX or an OTC agreement with one of the big Wall Street houses.

I mean instead of taking the profits in dollars, what if they said "I'd like my 10,000 contracts paid in bullion please"?

I wish that it would happen in a year or two but heck, I'd take that event now. I'll get that property in Montana or New Hampshire tomorrow.

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cipher
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Re: Chinese sovereign wealth fund dumping dollars for ...
Morpheus wrote:

I wish that it would happen in a year or two but heck, I'd take that event now. I'll get that property in Montana or New Hampshire tomorrow.

Way things are going,  China is not only moving towards gold but asking US to pay the debt back in their currency surely leads to one conclusion and the window of oppurtunity or should I say escape from it all is narrowing fast!

Once they feel that US can no longer serve as market to them anyways, they would not worry about US anymore....

Regards

mayankpj

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investorzzo
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Re: Chinese sovereign wealth fund dumping dollars for ...

Posted this on the wrong poster forum. Belongs here.

http://www.financialsense.com/fsu/editorials/willie/2009/0903.html

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Farmer Brown
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Re: Chinese sovereign wealth fund dumping dollars for ...

I really do not see anything new in this article.  There had been reports as long ago as last year that the Chinese were diversifying their portfolio.  Even well before the bubble burst, the Chinalco/ BHP Billiton / Rio Tinto  story was huge news.

I do not deny the Chinese diversifying away from the dollar is an important trend.  I'm just saying let's keep things in perspective.  This has been going on for a while and will go on for quite a while longer.  One does not allocate $300 billion easily, and we may be talking about much more than that.

The really big news to me is the threat made not to honor derivative contracts.  That should send shivers up some spines, or in the case of invertebrates like Bernanke, up some cartilage.  

Lastly, Morpheus:  Nobody, especially not a large purchaser like China, buys gold or any other commodity on the futures markets.  Commodities are transacted directly between buyer and seller.  Futures are just hedging mechanisms to protect against risk.  Very rarely is delivery the intent of the trade.

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investorzzo
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Re: Chinese sovereign wealth fund dumping dollars for ...

I really do not see anything new in this article.  There had been reports as long ago as last year that the Chinese were diversifying their portfolio.  Even well before the bubble burst, the Chinalco/ BHP Billiton / Rio Tinto  story was huge news.

I do not deny the Chinese diversifying away from the dollar is an important trend.  I'm just saying let's keep things in perspective.  This has been going on for a while and will go on for quite a while longer.  One does not allocate $300 billion easily, and we may be talking about much more than that.

The really big news to me is the threat made not to honor derivative contracts.  That should send shivers up some spines, or in the case of invertebrates like Bernanke, up some cartilage.  

Lastly, Morpheus:  Nobody, especially not a large purchaser like China, buys gold or any other commodity on the futures markets.  Commodities are transacted directly between buyer and seller.  Futures are just hedging mechanisms to protect against risk.  Very rarely is delivery the intent of the trade.

[/quote

What I want to know is if gold is really going somewhere or not?

 Both Marc Faber and Robert Prechter are calling for the markets to drop soon, dollar to rise and gold to fall. Any ideas felllas. Jon

 

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