Chi-Merican seesaw

This is a tussle for power worth mentioning. It is a seesaw which requires players on either side, America and China, such that neither player can evolve into a world power single handed. China had recently disclosed its decision to acquire nearly a 3 trillion dollar worth of natural resources majorly in crude oil, gold, natural gas, copper, iron ore, etc. On the face of it, there seems to be working on in securing the nation’s supply of raw materials for the nation’s growth. Due to China’s huge demand the copper prices are pushed up. Also the natural resources too are not left alone in the Bull Run. But when the purchase is viewed from the point of view that these are the resources most fought for and with limited supply, the issue becomes severe. It becomes more severe when the acquirer is the biggest holder of dollars outside USA.

It is the making of the perfect battle of supremacy. The Chinese are looking forward to two things by this purchase. Firstly they wish to reduce their US dollar dependency as a reserve currency. Keeping these reserves with very high dependency will be detrimental to their growth of international power because of the volatile world political environment. It is a double edged sword with China. While it gives China a good leverage and a say on the American policy decisions, but a prejudicial step taken by any nation to reduce the utility power of USD will reduce the value of Chinese foreign reserves. America on the other hand needs the utility value of USD to decrease to pay off its mounting debts and also help its exports to be more competitive. And here is the making of the first centre for power struggle between the two nations.

But China wishes to use the devaluation for its own benefit. How?
If the USD is devalued it will also force the Chinese to shell out bigger sums to acquire the natural resources reducing the USD reserves. To counter this they are buying in resources which contain real value with them like gold, silver, metals, etc. Another aspect to the devaluation row is that US wishes to reduce its dependency on imports from China. This requires the Chinese goods to cost more in that case Chinese yuan should be valued more. With Chinese not willing to do so, US got an (probably) unintentional opportunity because of the financial system failure. It has taken lot many steps to devalue its dollars including the quantitative easing.

Secondly China wishes to promote its currency to be used in the international settlements. To be able to do this they will require the gold backing for its money and also decontrol its currency. Taking a step forward into this move China is said to have planned purchase of gold worth 1 trillion dollars. And as can be seen in the current market scenario where the price of gold is touching new highs every month, the purchase of gold is helping China to get rid of the dollar and showcase that its currency has more real worth backing. But the irony is gold is still valued in dollars.

Direct fallout of this power tussle is in the commodity markets. The prices of silver (considered to be poor man’s gold) have touched levels never seen before. The other metals are also not left behind in this bull run. This has made more number of speculators jump into metal trading. The Chinese intention of creating an improved GDP to gold reserve ratio has become well known in the commodities market. The gold market which is already being bullied is getting a further fillip due to the Chinese intentions. Currently it holds around 1-2% of its forex reserves in gold but wishes to increase it to 4-5%. This will mean China buying in nearly half the world gold production in a year pushing up the prices to the sun. I believe that the run in the silver market might also be used as a deception to fulfil this Chinese dream, shrugging off more speculators from the gold markets.

But in this geopolitical war the one’s suffering are the retail investors around the world. The bigger the player, the better it is safeguarded from the policy shocks. The interest rate changes in China in recent times pulled down the commodity markets essentially filtering off the small speculators and the bigger players brought up the prices again. The Chi-Merican seesaw will continue swinging. On every volatile spike it is the retail investor who is thrown out while the elders benefit. So for whose benefit is the battle being fought? Is it a national pride or the citizen’s benefit?