Is China stockpiling oil? Get ready for the real currency wars
Signs that China has been using its FX reserves to hoard crude could change the dynamics of the currency market.
China’s trade deficit rose to $31.5 billion in February, its highest since 1990, thanks to a drop in exports and a surge in imports as China bought commodities. Although the figures are distorted by the Chinese New Year, some see the rise in demand for oil in particular as less a sign of domestic demand and more a change in strategic direction from Beijing.
Indeed, China’s demand for crude oil hit a record 5.95 million barrels per day last month as reports emerged that China had started filling its emergency petroleum reserve at Lanzhou in the north-west of the country.
Maurice Pomery, chief executive at Strategic Alpha, believes the trade figures support the view that China is shifting its massive $3.2 trillion in currency reserves away from US Treasuries and into oil.
“There is a very real danger that other countries will follow suit and sell US Treasuries to stockpile energy products,” he says. “To be honest, why wouldn’t they? The Fed is debasing the dollar and energy can be used.”
Energy stockpiling, Pomery says, could lead to a situation in which the world is bidding for raw materials such as oil while exporting less. This, he says, will derail many central bank policies as most, if not all, are basing policy on unattainable growth outlooks.
That could lead to an escalation in the global currency war as policymakers fight to insulate their export sectors.
“The surge for raw materials and energy stockpiling for the future makes sense but changes the whole complex of the global growth story and indeed global unity and safety,” says Pomery.
“A falling dollar as US Treasuries are shunned for energy will have an impact on the balance of global growth and see massive interventions in local currencies as protectionism soars.”