Chinese team: We treasure resources or foreign, or domestic subsidies

Election: Treasuries U.S. Chinese Natural Resources International or domestic subsidies

Vinod Dar, in February 2009

The Sino-US relationship is without doubt the most strategically vital to the global economy today. The link involves China buying U.S. debt, in particular the Treasury, Americans can continue buying products Chinese manufactured consumer goods in particular. It is the vendor financing on an epic scale. The relationship depends on the assumption that the U.S. China no better alternative for foreigners to buy excess U.S. Treasuries and assumptions that Chinese Americans keep imports rising China and the U.S. Treasury is a house built of granite and the safest place to store large amounts of surplus money. These assumptions are becoming questionable.

The vast majority of Americans with discretionary income are the conservation of the species by reducing consumption, including consumption of Chinese goods because a lack of confidence. So anxious are Brazilians and Indians and Russians are desperate (last economic calamity a decade ago) and Europeans nervous and pessimistic Japanese (I live in the memory of the stagnation of the 1990s decade, things are worse today in Japan, which goes into what, in an informal conversation anyway, is depression), and even Chinese are eager to significantly increase their savings because they have no safety net. There is no global erosion of trust, compounded by each new stimulus program, the U.S. is an income transfer program production wise unproductive and irresponsible. U.S. Treasury not rise and down significantly, according to many U.S. investors (including the author). Chinese have two new alternatives for their money.

China's foreign exchange reserves continue to grow strongly compressed global trade itself but this expansion is more a reflection of China's economic weakness rather than strength …. Exports are declining rapidly as domestic consumption of imports are in freefall.

China lost 20 million jobs in this cycle now. You must create 11 million new jobs each year to absorb costs in its labor force. Reverse Migration Back to China's cities to villages faster unemployed villagers return to subsistence, or worse, Agriculture (China and the U.S. are about the same amount of arable land, but more than 700 million unskilled general often physically fragile and Chinese who work the land), a source of stress in rural areas and poverty skyrocket, which is a requirement for dispersal, but the endemic rural unrest. collapse of China's urban housing markets causing financial difficulties within the middle class is born. medium-sized Chinese companies seem take interest rates too low for not investing in facilities, equipment and development products, but to speculate in the stock market (loans to 3%, the hope obtain fast switching 10% of 20 populations of pocket to victory again ….. Who needs money managers). The Chinese Communists do not can curb the rural-urban movement. They know that if the population is pacified with jobs and opportunities for wealth creation, they will lose their political monopoly. Force food of the Chinese economy and infrastructure more generally underused, making it easier for developers to borrow money, grant loans to farmers and agricultural businesses that seem to have much capacity to service debt, the expansion of the Navy, was the reaction domestic consumption China to grow taller. This feeding has the political advantage of being very visible, party leaders kept the corrupt and dishonest developers well fed, soothed and the military can absorb hundreds of billions of dollars very easily. It's a choice between the U.S. loan money to buy Chinese products or Chinese loan money to buy Chinese products.

The second and more powerful is the choice for Chinese to participate in the financing of global natural resources and increase "internalize" the Chinese supply chain resources, strengthen China's geostrategic position and mark and the policy of increasing foreign influence in several nations. China has the cash, industries in the world of natural resources in need. The adjustment is higher. China allows, potentially, transform its model of passive investor Government investment / financial aggressive junk exporter / importer of receipt. There little risk of marketing in China since its appetite for natural resources is very high. It is easy to consume the production of their investments. Nor is technology risk. China has multiple paths available for state-owned or controlled companies SWF international companies domiciled in China, where the government acts as banker to the government in direct transactions of government.

These days, the Chinese have invested through Chinalco, more than 19 billion dollars (companies mixed and convertible bonds) in one of Australia and the world, most major resource companies (active in all continents of aluminum, copper, iron ore, minerals industrial, gold, diamonds). The Chinese also put a few billion more in other Australian companies and natural resource projects. The biggest deal, however, is the agreement of $ 25 million with two of the largest Russian oil companies. The agreement gives China 300,000 barrels of oil per day for 20 years. The Russian companies will use the money to develop oil fields and prospects of Eastern Siberia (huge, high quality, exploration potential), the refineries and build a pipeline. This transaction is a volumetric production payment (VPP) that allows producers and financiers to make a transaction, Despite large differences in their views price as the two sides have different discount rates adjusted for risk. The quantities, bonds and delivery (daily, monthly, yearly, the duration of the contract), guarantees, performance bonds and penalties are part of the contract, but the price is not. U.S. oil and industry gas is very familiar with pay channels, which are often seen as a lender of last resort for small and medium sized E & P generally excluded from conventional finance. The money (no debt, not capital) is usually paid in advance as oil and gas is delivered in a number of years. The base gas oil reserves (proven and proven undeveloped production for the most part) is the warranty. PPV require extensive due diligence and close monitoring and reports often, as the hype, fraud, corruption, etc., are not unknown. They have been regarded as a kind of joint funding E & P companies. The IRR of PPV author is familiar with a variety of high single digits to high teens, sometimes in the lower 20% interval the default rate was low and the capital risk has been mitigated by the seizure of the underlying assets that can be easily exploited by others or sold.

For China, have individual attractions PPV is highly scalable (expandable) and diversified. If the Chinese can get TRI average 6-8% in PPV with security is no worse than bonds U.S. Treasury and several strategic advantages, of course, Treasuries yield of 3% in the bubble and the substantial risk of rates become very attractive. Certainly research, transaction costs and monitoring of the PPV is much higher than Treasuries, but the Chinese can afford to rent or cultivate talent and infrastructure necessary for the execution of operations throughout the world.

The world could easily absorb $ 200 to $ 300 billion by PPV year in China. For example, Canada's oil sands (Athabasca) and Venezuela (Del Orinoco) are excellent candidates: the resource is large, highly capital intensive, unusually long life and production is a manufacturing process mines / instead of a drilling process. Venezuela in particular, are salivating over a transaction from $ 10 to $ 30,000,000,000 with PPV China. Other prospects are PPV oil on the ground in Sudan and Colombia, oil in deep waters in Brazil from natural gas in Iran, Myanmar and East Timor, Guinea and Jamaica bauxite, coal in South Africa and Colombia, the uranium in Kazakhstan.

China a decade to become a world power and serious rival to the United States. It remains a poor, unskilled, and the demographic profile of the second worst country (Russia has the worst) in the world among the nations of the sequence (more on this in another article: China's population will increase by ten years, a quarter of all people around the world more than 65 years will be Chinese in 2025, but only one fifth of the workforce is Chinese, the increase in 'crisis' of women, India should become in the most populous country in 2025). Time is not on the side of China. It should be a thorough and correct strategic decisions, otherwise their national aspirations can be met. Your window of opportunity is surprisingly close. We can not afford to waste your time or treasures.

If the Chinese come to believe (The author does not know what the Chinese believe) that the U.S. Treasury is a house built of limestone, granite not protectionist U.S. increase, U.S. consumers participate in months of cash conservation for years, no, then the relationship between the U.S. and China will collapse and with it will collapse the U.S. Treasury. The application of a former Chinese central bank adviser, that the U.S. security debt to the Chinese while the Chinese are protected as "irresponsible policy" is a signal. Freedom is about choices. Chinese options may be growing while ours can be reduced.

China has the cash to buy U.S. debt at the current rate or increase in the power of its own economy or to pursue international investment resources on an epic scale. He has no money to do the three things well on a large scale. The Chinese are cautious and patient, but are not dilettantes. If the Chinese, over the next 2-3 years for the conclusion that Strategically, the rapid growth of local consumption and international capitalism resources are large and attractive options and decide to gradually lower the investment significantly in U.S. debt, then this will be the U.S. response se?

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