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China Quietly Increasing Its Global Dominance
Stephen Leeb: “In a fairly lackluster week for the markets, the only news that seemed to arouse any response was China trade data. The headline numbers reported that, contrary to expectations, both Chinese exports and imports had declined in September compared to year-earlier levels, with exports dropping by more than 10 percent in dollar terms. Stock and commodity markets in the West fell in response, believing the numbers signified Chinese weakness that would hurt global growth…
But when you look more closely, things weren’t quite what they seemed. One clue: Western markets fell more than Chinese markets. If the trade news really was so bad for China, you’d expect the reaction in China would be far worse than in the West.
Moreover, the higher-than-expected decline in trade came when you looked at monthly results. But the quarterly figures told a different story: both exports and imports in the third quarter were higher than in the preceding quarter, the first time this year to see a quarter-to-quarter rise.
A Worrisome Message For The West
In other words, the trade data doesn’t depict a China that is faltering. Ironically however, they do, nonetheless, convey a worrisome message for the West, but for a very different reason.
The really pertinent news is that exports from China to countries along the “Silk Road” have exploded this year. On an unweighted basis, exports to Pakistan, Russia, Poland, Bangladesh, and India increased by over 11 percent, a remarkable number, especially in a world with barely 3 percent growth. Moreover, barring a massive economic accident, China’s trade with Silk Road countries will amount to more than $1 trillion in 2016, accounting for more than 25 percent of its total trade compared with less than 20 percent conducted with the US.
The undeveloped Silk Road encompasses nearly 4.5 billion inhabitants when you include China. By steadily creating land and maritime routes linking those vast populations, China is laying the groundwork for burgeoning trade. Through its policy banks and several dedicated development banks, including the AIIB, China will be front and center in developing infrastructure within this enormous region. According to Oxford Economics, infrastructure spending in the East will amount to over $5 trillion a year. Such spending will hand China a key lever for controlling what are still the building blocks of world growth: commodities, ranging from the very scarce, like heavy rare earths, to ones that are seemingly more plentiful, such as iron ore (see iron ore chart below).
China’s 10-Year Iron Ore Imports
If that sounds farfetched, look at the chart above, which even surprises me. As it shows, China’s iron ore imports have continued to gallop forward. If we look at four-quarter moving averages, we find that over the past five years, which cover the 2011 peak in commodities, China’s iron ore imports have grown at a 9.3 percent annualized rate. The story is similar for oil, copper, and most other major commodities. China continues to accumulate them like they are going out of style – and, you know what, maybe they are, at least when it will come to the West’s ability to get enough.
China To Control World Commodities
I would be the first to agree that China itself still needs to build massive amounts of infrastructure within its own boundaries. Nonetheless, a sizable chunk of the commodities China has been accumulating will go to building infrastructure in the 40 or 50 countries that comprise the Silk Road (also known as “One Belt, One Road”). The bottom line is that China will end up controlling a vast portion of the world’s commodities along with a vast portion of world commerce. And this will give it a massive, unassailable lever for controlling the world’s monetary system.
So let me rewrite the headlines from the September trade report as follows: “China’s trade data shows continued burgeoning growth of trade along the Silk Road, with China’s surging imports of critical commodities moving it closer to world dominance over major commerce.”
A Yuan Oil Benchmark And A Golden SDR
The next step will be the trading of oil futures in Shanghai, which will establish an Eastern benchmark for oil. Through, among other things, its oil-refining and steel-making capacities, China will serve as the center for adding value to most commodities. China’s massive stockpiles of bulk and base commodities will ensure that it will always have access to adequate supplies. The oil benchmark will be denominated in yuan, as will other commodities that will be traded on the Shanghai exchange.
As I’ve argued before, China will then bring gold into the equation, either by backing the yuan directly with gold or by backing the SDR with gold and establishing the SDR as the currency for trading commodities. Or – and this would be the most complicated but perhaps the best solution – gold might become the sixth component of the SDR.
But if you’re a gold investor, the exact method doesn’t matter. They all point to the same outcome: gold and all gold correlates from gold mines to silver are embarking upon an historic ride to the upside.”