Look Who's Printing Money Now

07/27/2009 9:42 am EST


Gregory Weldon

President and CEO, Weldon Financial

China's money supply is exploding as auto sales boom and exports to the US recover, all bullish signals for commodities, writes Gregory Weldon of Weldon's Money Monitor.

Something is happening that few are talking about amid all the focus on US financial firms, earnings, Federal Reserve policy minutes, bank lending, the US consumer, and political finger-pointing: Chinese interest rates are soaring.
Chinese yields are rising across the maturity spectrum. The People's Bank of China is "sopping up" excess liquidity in the banking system—no small job, since there is a tsunami of money and credit.

June's data [revealed] growth of more than $1.5 trillion in "domestic" Chinese bank lending. Similarly, the broad money expanded by more than two trillion yuan in June alone, for a massive single-month nominal increase of 3.8%. Indeed, since the end of 2008, [China's] M2 has expanded by 9.37 trillion yuan, a nominal increase of 19.7%, or nearly 40% annualized.

And while we may be witnessing a mini-credit bubble, one that has the implicit support of Chinese officialdom as per the government's fiscal package and the Central Bank's easy money stance, there is a huge difference between the government-sparked credit expansion in China and the dominant situation as it relates to the intensifying US bank lending credit crunch: Simply, China's credit expansion is fully supported by growth in bank deposits, growth that is acutely lacking in the United States.

Custody holdings of US Treasury bonds (by foreign central banks) have soared to yet another record high, nearing $2 trillion, as official foreign accounts eat an increasingly large piece of an increasingly large pie [of US debt], much of which is held within China's official foreign exchange reserves—which also soared to yet another record high in June, now far in excess of $2 trillion.

Indeed, since January 2007, China's reserves have nearly doubled, rising by more than a trillion dollars over that single 18-month period to the current total of $2.132 trillion. Since the end of March, Chinese FX reserves have expanded at their fastest-ever three-month pace.

While Chinese exports remain far below their secular peak and remain more than 20% percent below year-ago levels, the seasonal rise in exports during the four months since February has been the largest ever, nominally.  Moreover, Chinese exports to the US hit their highest level of the year during June, increasing by 6.2%, or $1.03 billion, versus May.

China's domestic automobile demand, an annualized 9.9 million, now exceeds sales in the US, last pegged at 9.6 million annualized.  China produced more than one million vehicles during June (the third consecutive month above a million), with output pegged at a 28.2% year-over-year rate of increase. The Chinese are now producing vehicles at a 13.78-million annualized pace of production, far exceeding output in the US.

In other words, this is not a bubble but a secular-generational trend. [Therefore], we remain bullish on copper and other commodities, specifically cotton, sugar, platinum and gasoline. We might look to add other industrial metals, particularly aluminum and nickel.

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