China’s Moving in for the Kill
In case you hadn’t noticed, China is beginning to play hardball with the rest of the world.
As the largest creditor nation, with over $3.2 trillion in reserves, it’s clearly in a position to do so.
It’s no secret that China holds a big chunk of its cash in U.S. Treasuries.
But while that may look like a threat, it’s really not. Why?
Because if China were to “unload” Treasuries, en masse, prices would fall, and the result would be a huge fiscal loss for the nation.
Nevertheless, believe me when I say that China will start to diversify out of Treasuries during this decade.
You see, there’s new prey on the horizon: Europe. And China will undoubtedly pounce on the opportunity.
Here’s how I see the action unfolding…
The Great Euro Shopping Spree
China’s about to embark on a massive European shopping spree. While it won’t be bidding for Greece or Italy, you can bet your bottom euro that it will be buying European debt and euros.
It makes complete sense, too. Especially since the move quietly accomplishes several of China’s goals:
Goal #1. It allows China to become Europe’s largest creditor nation and ensures that Europeans will become hooked on Chinese goods.
Goal #2. It allows China to diversify outside of the U.S. dollar, and, in effect, puts a floor under a wholesale euro collapse.
Goal #3. It forces Europe to get onboard the China train politically by giving it “favored nation” trade status earlier than it otherwise would have. It also gets greater access to European markets.
Goal #4. It solidifies China’s position as the global economic engine of this century – and it buys the nation pride.
Goal #5. It increases China’s political standing in the world and deflects some of the criticism it faces regularly about human rights abuses, free speech restrictions and other morally reprehensible actions. After all, it’s not wise to criticize your lender.
Unfortunately for Europe, though, it’s not even a question of if they should ask the Chinese for help.
Last week, Italy crawled on its hands and knees and basically begged the Chinese to buy its sovereign debt.
But China said, “No thank you.”
And why wouldn’t it?!
The move puts China in a great position to begin the Grand Bargain with Europe.
Come on… the Chinese aren’t stupid. When a borrower comes begging, you can always drive the harder bargain.
In it for the Long Haul
We need to remember that China isn’t the most skilled short-term player…
Its short-term record for investing in foreign assets is horrible.
When China bought shares in companies like private equity firm, The Blackstone Group (NYSE: BX), at its highest levels, it lost 50% on the purchase in less than five years. (Ouch.)
China’s also watched the yuan appreciate against the U.S. dollar by 20% in the past 10 years, losing 20% on its money and locking in a 2% to 4% coupon for interest. That’s just not smart investing.
So let’s not even talk about China’s precarious position of holding so many U.S. dollars!
No, China is in it for the long term.
It’s looking to win the whole relay race, not just the first or second leg.
And the way to do it is by first owning the United States and then owning Europe.
Such a strategy allows China to capture the two biggest markets in the world for Chinese goods.
But the funny thing is, both of those regions will be the ones helping to finance China’s operation!
Bottom line: If you’re looking for a solid investment for the longer term, you may want to consider buying the Chinese yuan on any dips – because it appears it’s well on its way to becoming the strongest currency on Earth.
Ahead of the tape,