Chinese takeaway is paid for with American dollars

Earlier this year, I spent a bit of time in China filming a new documentary and it is obvious that the Chinese realise the next big struggle will be the war for resources.

The Chinese understand the “peak everything” argument. They are not just worried about peak oil, they are concerned about the fact that the world has run up against the limits of its resources. Their officials were shaken by the spike in oil and food prices last year before the financial crisis hit. In comparison, they seemed to be quite unfazed by the financial crisis. They were much more concerned with the prospect of the world — and therefore China — running out of the hard material which makes the economy tick.
Speaking to some of its top officials, it was evident that they had thought about how they might secure resources and after a few hours talking to them, the strategy became clear.

Many well-placed commentators, particularly those in the financial markets, have been constantly bemused as to why the Chinese would keep lending to the Americans. China is now America’s banker; it holds close to $2 trillion of American government IOUs. It also has the world’s biggest stockpile of dollars in its reserves.

But why would this nation of smart gamblers hold the currency of a country that is busy inflating the value of that currency away?

The answer became clear to me as I walked around the desolate harbour of Port Hedland in the Pilbarra, Western Australia, a few weeks after my visit to China (the documentary is an ABC Australia/RTE co-production). The Pilbarra is the world’s largest iron ore mine. The scale of the place is mind blowing. You can almost taste the industrial economy here in the dust at the back of your throat. This is where China’s iron ore comes from and it is here that we begin the raw material journey for the steel which will end up in cars with ‘Made in China’ stamped on them.

The Chinese used to be happy buying the ore but now they want to own the mines. China realises that it has everything except resources, and in order to secure supplies in the future it must buy the mines not just the materials. So the Chinese government, via its big state-run commodity companies, is buying up mines all over the world from Brazil to Canada, Australia to Africa. And what are they using to pay for these assets? US dollars, of course.

If you talk to anyone in the commodities business, they will tell you that the Chinese are always paying “top dollar”, outbidding all others. Why would they do that?

They do this because the Chinese know the dollar will fall in value over the coming years. They look at Mr Obama’s bailouts and the associated money printing that is going on and they realise they have to lay off their exposure to American risk.

The Irish Independent