Is China Ever Going To Stop Buying Treasuries

Recently I received an interesting newsletter describing why China is where you should be investing…I have edited the newsletter to focus on the main story…

America’s biggest benefactor—the Chinese government—is about to pull the plug on the U.S. markets. The giant sucking sound you hear will be what’s left of your wealth going down the drain! If you don’t reposition your assets now, the shockwave could wipe out what’s left of your wealth.

Here’s why…
The banking crisis, the liquidity squeeze, and the collapse in home prices has sent China fleeing U.S. stocks as if being chased by the running of the bulls in Spain.

They hold trillions in U.S. debt that’s worth less and less every day. Their investment in Blackstone is down 84%, not to mention the shellacking they’ve taken on Morgan Stanley. Across the nation, China investors and workers are “mad as hell” as they see layoffs mount as China Investment Corporation executives are attacked in newspapers and blogs across the nation.

And the Chinese government is listening carefully. They know more than any other nation that financial instability can lead to political instability. Which is why they are taking their money out of U.S. Treasuries and using their trillions in cash reserves to corner the oil markets while prices are low and the returns are much greater. Why, in the last 30 days, $39 billion earmarked for U.S. Treasuries were diverted to buying huge stakes in Russian, Brazilian and Venezuelan oil companies. At the same time, they lent Brazil $10 billion in return for a pledge for 160,000 barrels of crude per day.

As Jiang Jiemin, chairman of PetroChina, said in the China Daily: “The low share prices of some global resource companies provide us with some fresh opportunities.” And they’re not only using their money to lock up oil reserves, but also commodities as well—all to fuel their only infrastructure stimulus. In the past 30 days, China Development Bank grabbed a 18% slice of Australian mining giant Rio Tinto for $19.5 billion. That’s not only $19.5 billion that’s not going into U.S. Treasuries, but just one of many deals in the works that the Chinese have in play designed to increase their investment returns and lock up the world’s oil and commodities markets for their own benefit.

Here are two that most investors haven’t heard about:
1. China Petrochemical’s purchase of Canada’s Tanganyika Oil, and
2. A bid by China Minmetals for OZ Minerals, an Australian zinc producer on the verge of bankruptcy.

Squeezed between falling profits and the credit crunch, a growing number of troubled corporations and countries are turning to cash-rich China for a bailout. And with foreign assets cheaper than they have been for years, Beijing is on an international spending spree. “The international financial crisis…is equally a challenge and an opportunity,” China’s energy czar, Zhang Guobao, wrote recently in the official newspaper People’s Daily. “The slowdown … has reduced the price of international energy resources and assets and favors our search for overseas resources.”

The trading of U.S. Treasuries for global oil reserves will only get greater. Luo Ping, a director-general at the China Banking Regulatory Commission (CBRC) essentially told the U.S. that last week on a visit to New York that, “Once you start issuing $1–$2 trillion…we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

Don’t be fooled. There is much that they are doing. And they are showing the world by running from U.S. investments and cornering energy and commodities markets. This is why the $200 billion China had earmarked for overseas investments will now be plowed back into China Banks… and why the nation also plans to spend another $586 billion on new highways and railroads. That’s why they are pulling back from the world market and investing domestically.

As Obama economic advisor, Laura Tyson, put it, “It’s going to accelerate the move of economic power to Asia.” Do you realize what this means? The inevitable shockwave will not only send the dollar south… but also drive more investors out of U.S. stocks and into China where they will profit not only from internal economic growth but also from currency appreciation and domestic spending as well. And the result will enrich those investors who understand that capital ALWAYS flows to the highest return in good times and bad…

The shocking truth is that the U.S. monetary policy and the Fed’s bailout plan has flattened economic growth like a mud hut in the middle of a hurricane. The long-term results are so disastrous for U.S. markets that China now has pulled the plug on further U.S. investments. “Thanks, but no thanks” to U.S. stocks. China’s brain trust knows the U.S. stock market won’t rebound for some time. They know that layoffs in the U.S. manufacturing jobs will result in new hires in their country. They also know that as U.S. growth slows, China growth will drop too—but to nowhere near U.S. levels. China’s move to corner oil and commodities markets and grow internally is an extremely shrewd move. After all, China’s growth will hit a mind-boggling 7% in 2009.

To be sure, that’s less than the sizzling hot years of 11% annual growth, but compared with the U.S. growth of 2%—you don’t have to be a computer scientist to know where the big money will be made in the next two years. What’s more, China strategists also know something that President Obama, Treasury Secretary Geitner or Bernanke would never admit: that unlike the U.S. banking system, the Chinese banking system is much safer—with none of the exposure to the subprime mess.

In fact, most U.S. investors don’t know this, but the Chinese banking system is dominated by four big state-owned banks—banks that can write a check anytime they want—and without Congressional approval or bickering. And with close to $2 trillion dollars sitting in their banks, there’s no liquid crisis in China. The Chinese government can write a check anytime they want—and it will clear. And that’s exactly what they’re doing—buying up global oil and commodities assets instead of piling on more U.S. debt.

The smart money is flooding into China at light speed, with investors cherry-picking world-class Chinese companies for pennies on the dollar. And if Warren Buffett’s $230 million investment in China’s leading battery company is any indication of the opportunity at hand, this is a situation you can’t ignore.

The Obama proposed bailout plan is going to send the dollar crashing and U.S. stocks into the tank. The giant sucking sound you hear will be foreign investors who are fleeing U.S. markets in search of safer and higher returns. The result has slowed U.S. and global growth, forced energy prices to fall to eight-month lows, and triggered a global rate cut of epic proportions. Not to mention a Chinese buying spree for global oil assets. The chain reaction will make the U.S. stock market even less attractive to U.S. investors…as the combination of low energy costs, low interest rates and a stable banking system drives more investment into China.

A recent report by McKinsey Global Institute says,
“In 20 years, China’s cities will have added 350 million people—more than the entire population of the United States today. By 2025, China will have 221 cities with more than one million inhabitants—compared with 35 in Europe today—and 24 cities with more than five million people. By 2030, 1 billion people will live in China’s cities…170 mass-transit systems could be built…40 billion of square meters of floor space will be built in five million buildings—50,000 of which could be skyscrapers.” In other words, as China transforms itself from a nation of farmers to a nation of urban dwellers, the equivalent of 10 New York cities will need to be built, and in doing so will richly reward U.S. investors who invest now.

With 7% growth, China’s economy is still growing like a weed. Its standard of living is on the rise. And its people are spending like there’s no tomorrow: buying into a much richer lifestyle, filled with cell phones, big-screen TVs and cars—the same things we Americans take for granted. When you consider that by the year 2025 China will have 221 cities with more than one million people living in them, you can only imagine the kind of money that is going to be made as China’s newfound consumer class enters the marketplace and replaces the American consumer as the supreme driver of world growth. All thanks to the infusion of cash from foreign investors that’s going on behind the scenes now.

Tragically, the financial media is missing this investment story by a country mile. That’s because they’re blinded by the daily ups and downs in the Dow and simply can’t see beyond U.S. borders. When you consider the U.S. economy is projected to contract next year while China is on track to grow at 7%, you don’t have to be an Einstein to know that the surge in China stocks will form the foundation for a turnaround in the U.S. stock market as many leading China stocks are traded right here on the NYSE and NASDAQ.

In a world that’s been crippled by the U.S. financial crisis, the Fed bailout, and collapsing consumer and investors confidence, the flood of capital pouring into China will not only put powerful upward pressure under the stock prices of companies that are fueling China’s new growth…but also change the face of Wall Street forever.

(Source: China Profit Strategy with Robert Hsu)