China To Follow In America’s Oil And Gas Footsteps

Dollarcirculation

By John Richardson

DURING the economic Supercycle it all worked beautifully, as the above picture indicates.

China sold stuff to the West and then bought lots of US Treasuries from their earnings in order to keep US interest rates low. This enabled US consumers to buy even more shirts, washing machines, refrigerators, TVs etc from the West and the cycle continued.

China’s purchases of US Treasuries provided even more support for exports  by suppressing the value of the Yuan.

This all made fantastic sense when the demographics in the West provided tremendous support for China’s exports. No longer as the US, and Western populations in general, are ageing and so demand  is undergoing a secular downturn.

In addition, China’s position as the low-cost manufacturer of the world is being challenged by  its own demographics. 

China needs to instead turn inward and focus on boosting its domestic demand rather attempting to live primarily off exports.

Not surprisingly, therefore, this editorial in the China Daily signals that the country’s foreign reserves, which totalled $3.95 at the end of March, might in the long term be lowered to $1 trillion. The China Daily is a state-owned newspaper and so its commentary section is often a reasonable indication of government policy.

If such a drastic reduction in China’s foreign reserves occurs this could have a huge impact on the value of the dollar, as most of these reserves are held in the form of US Treasuries.

Might this sell-off also eventually lead to the Yuan replacing the greenback as the global currency?

The last line of the China Daily editorial is also interesting as it refers to China diverting a lot of this $3 trillion reduction in foreign reserves into “outbound investments”.

More and more oil and gas assets overseas seem certain to be a major target as China accelerates to efforts to substitute lack of energy resources at home through acquisitions in other countries. This might well be backed up by ever-expanding armed forces.

The history of America, as detailed in Daniel Yergin’s fabulous book about hydrocarbons, The Prize,  could end up being a template for China’s future.

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