China is buying commodities & heading for super-power status?

After a terrible performance last year, the Baltic Dry Index seems to have bottomed and shows signs of strength. This index of global raw-material shipping cost might provide an interesting clue: China (and other nations) might be making use of today’s low commodity prices to stock up.

China by the way has already been putting some of its gigantic cash pile to work. Today China’s Minmetals corp announced to buy debt-laden Australian OZ Minerals Ltd., gaining copper, zinc and gold mines in Asia. This only a week after that China announced to take on assets from Rio Tinto Group.

The recent strength in the Baltic Dry Index suggests that commodities prices are likely to get a spot in the sun near-term, as this index has historically been a leading indicator for commodities. Also it might be an indication that commodity currencies are bound for a rally. As Bloomberg reports:

The 147 percent jump in ocean-transport prices is evidence that China’s $580 billion stimulus plan will lift raw materials, said Ihab Salib, who oversees $3 billion at Federated Investments Inc. in Pittsburgh. That would benefit countries exporting them, so Salib is “actively trading” Norway’s kroner and Australian and Canadian dollars, nicknamed Aussies and loonies.

According to a recent piece in The Financial Times, Luo Ping, a director-general at the China Banking Regulatory Commission, recently stated that China would continue to buy U.S. treasuries as those were the only safe haven out there, ‘the only option’. Ping however also said:

“We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

Well actually there is something China can do. Instead of putting their foreign reserves in U.S. government paper, hardly a bargain at these yields, better start buying real assets which give you access to stuff the Chinese will needs bulks of. So that’s industrial and agricultural commodities, oil and the likes. But it would make sense as well to pick up some ‘knowledge’ in the field of infrastructure providers and alternative energy companies. And the beauty for the Chinese is that all the commodities and companies are currently available for deep-discount prices.

It’s obvious that the Chinese don’t want the world to think they are on a real asset buying spree. That would only hurt their bargaining power. considering the financial mess the West is in though, even that assumption can be questioned.

It is clear in my view that the Chinese (along with other cash rich nations) will emerge from today’s battle field as the winners if they are willing to put their reserves to work and foreign governments allow them to buy their real assets. Especially the latter might become problematic down the line, so there’s no time to be wasted. When the Chinese succeed, we’ll be witnessing one of the biggest wealth transfers in our time.

Jim Roger’s daughter, fluent in Mandarin, will be nicely positioned to operate in such a new world. Although the rest of us can start grammar lessons as well of course, it might be more feasibly to position financially for the ‘Age of China’. Being long commodities and Chinese equities makes a lot of (long-term) sense to me against this background.

—— This is an opinion on the state of financial markets and the opportunities it provides by quirijns.com. It is not investment advice and not a substitute for your own judgment. When taking on any investment, make sure to have a first aid kit at your disposal that is jammed with tranquilizers and sleeping pills, as you’ll need it. It also comes in handy for other possible disappointments in life. History is not a guide to the future, nor is anything else. Any sane person knows that there’s no sure thing except death and taxes. Fortunes are made and lost each day in this arena. If you can’t stand that heat, please stay out of the kitchen.