Friday, June 12, 2009

Stockpiling Commodities - What is China doing?

China stock-piling commodities or buying US assets seems useless to me. If US dollar were to loose value and commodities / dollar assets were to retain value – then technically Chinese Yuan should also retain same value. US dollar starts loosing value means commodity prices start shooting up. Meaning, in technical terms, US will then export its inflation to the rest of the world. There are few responses to this –
  • the world keeps global exchange rates constant
  • The world let dollar go down alone
  • Some allow exchange rate changes some (like china) dont
If everyone keeps exchange rates same – we will have another recession and commodity prices will come down. And whatever you do this cycle will repeat itself till world is sick of the pain. The fundamentally sound parts of world can recover if they let currencies appreciate.

Holding commodity assets signals the Chinese intent to keep the Yuan (RMB) hard pegged to the dollar. This is clear signal of pushing towards "status quo". The stockpile will help China reduce the inflationary impact on its economy while US recovers. But ideally this should require inventories equal to the expected duration of such inflationary scenario.

The only other reason could be - China expects disruption is supply chain. Such disruptions occur in crisis - so China might be preparing for crisis possibly even a war.