China Now Tells You How Rich You Are

Kitco links to a Toronto Globe and Mail article that says that today's fall in the price of gold and the stock market and rise in the dollar is due to a speech by Pen Junming, who works in China Investment Corp., a sovereign asset fund. The Globe and Mail quotes Junming:

“'I think the dollar is at its bottom now. There will be very limited space for the dollar to drop further,' he told an academic forum. 'The yen is what, I think, has the worst outlook. The yen will continue to drop, unlike the dollar, which will not serve for long as a source of funding carry trades.'"

Carry trades involve hedge funds borrowing at low rates in the US and investing around the world at higher rates. Hedge funds have used much of the new money pumped into the economy by the Federal Reserve bank during the Bush and the Obama administrations in this way.

When, later that day Junming said that these views were not official and were strictly personal, the dollar gave back some of its gains. Mr. Peng added:

“'China should have the right attitude about investing in gold. There is no urgent need for China to increase gold buying for now, because prices are high.'”

Yesterday, I bragged of my coin flip method of deciding how to invest in the short term. Today I have a more substantive explanation for staying in dollars for now. Please note, however, that I do not think that Chinese bankers are particularly adept at investment (no more adept than Americans, anyway). They bought into US bonds when the dollar was far stronger than today, and rode a Cyclone roller coaster ride down. The article states that two thirds of China's sovereign assets of 2.27 trillion dollars are invested in dollars.

"Lou Jiwei, CIC's chairman, has been careful not to say much about how the fund invests its money. In October 2009, he said the fund was putting more money into commodities, real estate and infrastructure to hedge against medium- and long-term inflation and a fall in big currencies."

Thus, Pen's statement might reflect a change in position associated with last year's increase in the gold price. The article goes on to say that US asset managers continue to dominate the fluctuations in the dollar. Nevertheless, the Chinese have so entwined themselves in the dollar that their opinion matters. If the US ignores their advice, then we risk a sell off.

I have previously blogged about my fear of a major confrontation with the Chinese occurring in the next (22nd) century. I don't think the dollar will last that long. It should give Americans pause that the purchasing power of their dollars has, under the Federal Reserve Bank's and banking system's regime, become dependent upon the opinions and desires of foreign governments. Unless you idiosyncratically believe that the motives of the Chinese government coincide with your interests, you might wonder about the desirability of a system that has made you dependent on the opinions of a dictatorially and still-communist run nation with a culture very different from our own. I have always loved Chinese culture and the Chinese people, but frankly, I think the Americans have lost their minds.