Economic Crisis

Here is an article I sent to CIC on Jan. 5, 2009 in which I asked China to sell T-bills and got into US equity and corporate bond markets, each of which has ytd return of about 50% plus. I also urged China to sell US dollar and buy C$, A$ and Brazilian Real but not Russian Ruble. Here were my other two forcastings in Jan.: Oil price will be between 70-80 by year end and US economy started to recover in 3-6 months.  In March or May (I forgot precisely which month), I urged China to buy commercial real estates in US, in a fax sent to NY consulate.  Anyway, Happy New Year to you all and have a nice trade in the new year. Below is my original article (sorry, it is a little long):




The Economic Crisis and its Opportunity for China

January 5, 2009



China should take an advantage of the current economic crisis in the worldwide economy. First of all,  the Chinese government should use its foreign reserves to establish a strategic oil reserve immediately to take an advantage of the current drop in the oil price.  More importantly, China should build reserves for other metal materials like copper and aluminum. The prices of raw materials like these metals have dropped by more than half from their peak due to concerns in worldwide economic slowdown. China can use this opportunity to sign long term supply contracts with corporations in Australia, Brazil, Canada,  and Russia. These economies have suffered due to the drops in prices of raw materials. Such contracts will benefit China not only in the price front but also in the diplomacy, which will benefit China even more in the long run.   

Secondly, the Chinese government should use this opportunity to reallocate its foreign reserves away from the US dollar and the dollar denominated assets like T-bills.  The crisis has created a price bubble in the T-bill markets pushing the yields of T-bills to the historical low. Such a bubble will  burst as the equity market recovers, which should be expected in three to six months.  The price performance of this last week in the T-bill markets showed that this bubble may burst sooner rather than later. The Chinese foreign reserves will suffer in a great deal by then.  

Where to invest the reserves then? China should get into the US corporate bond market and purchase the preferred stocks. The US corporate bond market has dried up due to the crisis pushing the yields high. Even though major US corporations are suffering at the moment, the big picture is not going to change any time soon. As the worldwide economy recovers, major corporations in USA will still dominate the world economy. Meanwhile China should diversify its reserves into currencies like Brazilian real, Canadian and Australian dollars, except Russia, and their denominated assets.  These currencies have depreciated against the US dollars by about 20% or more since the last July.   The rebound in dollar should be a short term phenomenon because the US budget deficit is not going to improve anytime soon.  Once the equity market recovers in these economies, fund will flow into these markets once again. By that time, the dollar should follow its modest depreciation path again against these currencies.  The weakness of the dollar the last six weeks starting in the middle of November 08 has shown the signs that some funds start to move once again away from the USA.
  
Domestically, China should use this crisis to have a major structural change in its economy towards to a more sustainable and energy-efficient one.  By doing so, the governments should use taxes rather than spending as a major fiscal policy. While an increase in the government spending has an immediate effect on the real economy, it will not do much better for structural changes than a favorite tax policy. In China, local and central governments have controlled so much national wealth as a whole.  This creates a big government which has been proved in Economics to have a detrimental effect on its long run growth of an economy.  Moreover, a big government also encourages corruption. By cutting taxes, personal or corporate, the government redistributes the wealth to the public. This will encourage personal consumption. It is in principle wrong to have governments spend so much wealth created by people. Wealth created by people should be earned by people.