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Texas Hedge Report

Texas Hedge Report

Todd Stein & Steven McIntyre are internationally known analysts and editors of The Texas Hedge Report, a market newsletter that highlights under and overvalued securities…

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China's Foot on America's Throat

The Chinese ambassador to the United States was in our hometown of Dallas last week giving a speech, so we decided to pay him a visit. Ambassador Yang Jiechi, who speaks impeccable English, gave an interesting speech concerning the current and future state of U.S.-Sino relations. The topics that he brought up included the war on terror, reunification with Taiwan, a nuclear-free Korean peninsula, and (of course) economic growth in his native land. The Ambassador did not say anything about his country's monetary or foreign exchange policy in his prepared remarks.

As the speech concluded, the crowd jumped to its feet and offered a rousing applause. Not being able to help ourselves, our hands shot up the minute the ambassador offered to take a few questions. After a few questions dealing with cultural issues, we finally got to ask him the question that has been on our minds for the past several years.

Texas Hedge: Mr. Ambassador, we would like to ask you a question regarding your currency reserves. The huge pile of U.S. Dollars your country has accumulated as a result of its trade surplus with America has been reinvested time and time again in U.S. Treasuries and GSE debt. We know that there is a tremendous amount of international pressure on your country to revalue the Yuan; but we understand why you hesitate to do so because this could cause your domestic economy to slow and unemployment to rise. We also know that your country, which is facing a shortage of several critical natural resources, has recently established a strategic petroleum reserve. So our question is why you don't diversify your foreign reserves out of dollar-denominated treasuries and into other stores of value such as Euros, Francs, gold, silver, oil, aluminum and steel?

Yang Jiechi: (Paraphrasing) Our goal with our exchange rate and economy is to move to more market-oriented policies over time. But you must understand that many companies in China are owned by American and other foreign entities. Furthermore, the Dollars that China accumulates are re-invested back into U.S. Treasuries, which is good for America. You also should know that while China enjoys a surplus with the United States, we have large trade deficits with many of our Asian neighbors. But to answer your question regarding diversification out of dollars, we are moving in that direction.

Obviously, the Ambassador wasn't prepared for our question so he went straight into his standard defensive posture about his country's exchange rate policy. This is quite understandable as he is probably used to being grilled by American politicians who are upset about the exporting of American jobs. But the fact that he openly recognized the need to move out of U.S. Dollars tells us that a massive Dollar decline is not a matter of "if", but "when". The largest beneficiary of this will be the precious metals - gold and silver - make no mistake about it. The recent launch of the first U.S. gold ETF (ticker: GLD) has already shown incredible demand and we surmise it will only grow from here.

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