China's use of dollar reserves for oil?

J asks a question in the comment box in the post below this one:

Energy Bulletin has this:

Anyone care to speculate what China trading their dollar holdings for oil reserves or future production quota guarantees might do to the dollar?

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I've been wondering about this one. The implications are not immediately obvious, but I suspect that due to the Law of Unintended Consequences, it may have some large implications. A big piece of the puzzle is probably what happens to those dollars after they pass from China's central bank to the ownership of the oil producing nations.

On a separate note, China establishing a petroleum reserve is likely to push up oil demand (and therefore prices) while they are in the process of filling it. Playing with a few numbers illustrates this point:

If they establish one the same size as the U.S. has (700 million barrels), and assuming they use all of the world's spare production capacity to do so, and assuming that the spare capacity is 2 million barrels per/day, that results in a solid year with no excess capacity to cushion the shock of other events. Anybody who has been following the Oil Drum will realize that this sort of tightening is not a recipe for global stability ...

Depends what they use to buy the oil.

If they use just dollars, nothing will happen, the dollar just gets a new owner.

If they sell off US treasuries to get the dollars to buy the oil, once again, they are demanding dollar redemption which increases dollar demand. This would normally have an effect on increasing US interest rates which again makes the dollar more attractive, but not necessarily the US treasuries (after all, bonds and their underlying currency are two seperate things).

Both export-oriented Asian nations and oil producing nations have more US dollars than they know what to do with. They would like to diversify, but can't diversify too much beacuse they don't want to bring the whole house of cards crashing down.

However, since Asia has too many dollars, and needs oil, and oil is traded internationally in US dollars, they should be able to make a deal.

If China decouples the yuan from the dollar, that would shift things. Dollars would fall in value, no matter who owns them (Americans, Chinese or Saudis). Oil would rise in price. As the dollar goes down, oil goes up, independant of any supply and demand issues. Then China and the OPEC nations might find a reason to trade oil for yuan instead of dollars. And that would be a huge blow to America.

My blog on peak oil and investment issues:

China will have their oil reserve - I know enginers who have been involved in surveying prospective fields to inject.

Neontetra -

what does the US purchasing its own bonds foretell, with respect to the dollar and the economy in general?

see 'Economic Strength' and beyond...

Everyone, please, take a deep breath.

The article says that they're considering using some of their foreign exchange reserves, which total only $659 million. China's current holding of US Treasury securities, by comparison, is approx. $200 billion (someone please correct me if I'm wrong on that second number), or 300 times larger, just for comparison.

It might be a sign that China is interested in filling their petroleum reserve, but in terms of the absolute number of dollars sloshing around, it's a drop in the barrel.

I'm far more concerned about the mysterious monetary shenanigans going on with investments in US securities from Caribbean banking centers:

Me too, Lou!!!

Can all this simply be hedging?

Lou -

This from the article:

In March, Guo Shuqing, director of the State Administration of Foreign Exchange, suggested China could use some of its foreign exchange reserves to purchase imported oil.

He also said at that time: 'Such a move would not cost us too much of our foreign exchange reserves... Purchasing 100 mln tons of oil would require only some 30 bln usd.'[emphasis added]

I think there is some confusion here about whether the reserves under discussion are forex reserves (dollars) or central bank reserves (treasury bonds). The confusion may extend to the guy that wrote this article, btw. If in fact we are talking about 30 billion dollars of central bank reserves, that is about 1/6 of China's holdings, which is not insignificant.

You might want to glance at

I don't think China have been making much of a secret of their plans, since, in hunting back over our site for the reference to this, Chinese activity seems to be pervasive.

As I noted in an earlier thread, China is in the process of establishing its own SPR, which is to be much larger than USA's. Given the dynamics of petrodollar recycling and current US monetary policy, the effect will be inflationary and soon become impossible to control through monetary policy. This will further exacerbate the decline of real wages and jobs and eventually puncture the debt bubble. When? Lags abound, but I would say that the problem will be pronounced by the political conventions prior to the 2008 election.

How Much GOLD does china have?

If China revalues the yuan upward by 10%, imports to the U.S. will increase in price (not as much as 10% IMO), but their oil costs will drop by 10%. And if oil costs drop for China, they will be in a better position to compete vis-a-vis the U.S. in the oil marketplace. This should have the effect of raising oil prices.

The yuan will be revalued higher by the process of China not purchasing as many U.S. treasury securites as usual. Where will the U.S. get the capital to finance its trade deficit in this scenario? I am not an economist, but my guess is that interest rates in the U.S. would need to rise in order to attract the capital to make up for the Chinese (and perhaps other Asian country) shortfall.

Some traders are saying that a revaluation of the yuan is imminent.

Here is an article from Sept of 2003. Things could be different now.

karlof, grinzo, neontetra -

what do you guys think of this economic model:

J did you see this article

Rajiv -

I've read it. But it implies a multi-generational cabal with an actual plan, and I find that tough to swallow. Hindsight can attribute motive and method where there is none. Oh the rich will get the blame, maybe be drug through the streets if this happens. And "sweeping up the mess" is not something that will be easy to do here in Texas, and other places, where gun-toters outnumber the sheep.

I think it more likely that this is simply penultimate greed coming home to roost on our society. And as always, the rich can surf above the fray, unless the commons are taken back by force. There are many more of us than there are of them, but are we strong enough to do that or will greed win out again, and the people get bought off by their financial betters?

It all depends on how hard we hit, and what remains after. To me, it is just support for Kunstler and Heinberg...


I agree with you on that. You should also see this article " Why it is hard to share the wealth"

rajiv, karlof and others -

send me an email so we can stay in touch

our corp IT dept is about to block all blogs


The above article in conjunction with makes for an interesting juxtaposition. The implication is that the richest 0.1% of the population's income is described by Pareto's Law -- meaning that if you're born into that kind of money, you'll only get richer, no matter what you do. And the poorest 99.9% of the population's income is explained by Boltzman's Law -- describing random movement of gases in an enclosed area, and meaning that even if you've struggled up to the left end of the Pareto curve, you're far more likely to get poorer than to make it to the 0.1% elite. So much for the American Dream.


I could have told you that just from personal experience... But it's nice to see it put in physics parlance!