China's stockpiles seen as new sovereign wealth strategy

By Kevin Hamlin
Bloomberg News
Monday, May 18, 2009

http://www.bloomberg.com/apps/news?pid=20601009&sid=a5yhtDZx75kw

BEIJING -- China is stockpiling commodities such as copper and iron ore as part of a reallocation of its sovereign wealth amid concern that the value of its dollar assets may decline, according to the Royal Bank of Canada.

"It's part of an overall desire to decrease its exposure to dollar assets," said Brian Jackson, senior strategist at Royal Bank of Canada in Hong Kong, in an interview today. China fears that the hundreds of billions of dollars the U.S. is spending on bank bailouts and stimulus will cause "higher inflation and a weaker dollar," he said.

Premier Wen Jiabao has said he is "worried" about the safety of the nation’s $767.9 billion in holdings of U.S. Treasuries and called on the U.S. "to guarantee the safety of China's assets." Central bank Governor Zhou Xiaochuan has proposed a new global currency to reduce reliance on the dollar.

"Increased spending on commodities represents a reallocation of China's sovereign wealth away from the accumulation of financial assets," Jackson said in a May 15 research note.

China, the world’s biggest consumer of iron ore, boosted imports of the material to a record 57 million metric tons in April. China’s purchases of copper and copper products reached a record 399,833 metric tons last month, compared with 374,957 tons in March.

Oil rose to a six-month high on May 12 after China, the world's second-biggest energy-consuming country, increased crude imports by 14 percent in April.

China will expand purchases of important resources while prices are at their lowest in seven years, Wen said in March. The country will increase emergency stockpiles, the National Development and Reform Commission, the country's top planner, said at the same time.

Domestic oil stockpiles should meet 90 to 100 days of demand, Zhang Guobao, the head of the National Energy Administration, said in April.

"We don't have exact numbers on the oil stockpile but most estimates put it around 30 days now so they're talking about a pretty significant increase," said Jackson.

Increasing volumes of imports of iron ore, copper, and refined petroleum by the government and state enterprises are a "deliberate reallocation of China's sovereign wealth," said Jackson.

Without this stockpiling of strategic commodities, China's trade balance likely would have risen in the first quarter instead of falling $51.8 billion to $62.51 billion, he said.

"Every dollar spent on increasing these reserves of physical resources is obviously a dollar that cannot be spent on accumulating financial assets," Jackson said.

China's foreign reserves total almost $2 trillion.

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