Uh Oh....China is Buying Commodities

From the Wall Street Journal:

Crude oil imports jumped 18% from a month ago to 19.63 million metric tons last month, or about 4.8 million barrels a day, according to monthly data released by China's General Administration of Customs. Iron ore imports rose 5% to 58.08 million metric tons.

There is nothing sinister about this, China wants to build up it's strategic reserves. While not sinister it is problematic for the good old US of A. This is how the business cycle has run for the past decade or so: WalMart buys thousands of containers of cheap...errrr...inexpensive Chinese goods and sells them to you and I. They take there proceeds and pay them in dollars. It would seem that this would strengthen the Yuan and make their products less competitive relative to ours. This is how trade imbalances come into balance, one party buys too much and because of this their currency is devalued and they just can't afford to buy as much. The workaround for this problem was for China to take all their hard earned dollars and buy Treasury Bonds, this allowed the Yuan to remain undervalued relative to the dollar and for them to continue their industrial expansion unabated.

Funny thing is you can't trick basic economic principles forever. It is quickly dawning on China that they have lots and lots T-bills redeemable for US Dollars. If you are worried about the long term health of the dollar, which is a pretty valid concern, you would look to get rid of as many of them as you could, preferably on the down low. If you have warehouses of Dollars you have to spend Dollars, which is thankfully the world's reserve currency. You could be buy more T-bills, which they are doing in hopes that they can pull out slowly drawing out the collapse. You could buy American Companies, not as likely because of the high profile nature of this. Finally you could take your dollars and buy commodities, ditching their rapidly devaluing currency and picking up something they can use like copper, aluminum or oil.

As they continue to divest from T-bills into commodities we as US citizens are going to get hit by supply and demand on two fronts. First Gasoline (and Doritos for that matter) are going to get more expensive as more dollars are chasing fewer goods (more dollars because the Chinese aren't locking them up anymore in T-bills). Secondly, without Chinese and other sovereign wealth funds buying our treasuries (Demand) the interest rate will have to rise to lure dollars back into this market.

This is bad times. High commodity prices and high interest rates do not a recovery make. On the plus side we won't be able to afford anything imported so our trade deficit might actually turn into a surplus as we ship out all our raw materials to be turned into finished goods in other lands.