China Is Hoarding Commodities

The Russia–Ukraine war is strengthening China's economic power
(https://bit.ly/3MM16fr). America and Europe surprised Chinese
and Russian bankers. In retaliation against Russia’s invasion of
Ukraine, they froze about $630 billion worth of Russian foreign
reserves on Feb. 26.
Moscow suddenly couldn’t utilize the hard currency reserves it
thought it possessed. It likely planned to use the billions to defend
the ruble on international markets. Instead, the ruble fell about 30
percent against the dollar on Feb. 28.
Beijing is taking notice. Confronted with the potential lack of value
of its $3.2 trillion worth of foreign exchange reserves, the regime
is quietly offloading dollars by purchasing assets globally,
including most recently through an energy and commodities push.
Driven by compounding geopolitical instability from the Russian
invasion, sanctions over the Uyghur genocide, pandemic supply chain
dislocations, trade disruptions in the Black Sea, the Australia trade
spat, and skyrocketing maritime freight costs, Beijing is acquiring
critical commodities such as oil, gas, iron ore, wheat, barley,
corn, and gold.
Price appears to be of little relative concern to state-owned buyers
purchasing materials to prepare for increasing expected commodity
scarcities. Many commodities are already jumping in price over the
past few days by 3 percent to 8 percent due to the war. Sanctions on
potash from Belarus pushed China to pay 139 percent more for the
fertilizer ingredient, now sourced from Israel and Canada.
On the other hand, the war sometimes helps China’s competitive
position. With Russia’s new pariah status, Beijing has the bargaining
power to denominate commodities contracts with Russia in its own
currency, the yuan. Dollar and euro-trades with Russia are now
increasingly illegal due to international sanctions over the war, so
China’s banks happily comply by shifting to the yuan. Russia has
few other places to sell energy, so Beijing enjoys a buyer’s market.
China previously purchased about 1 percent of its coal from Russia
(about 30 million tons), for example, but if the Ukraine invasion
continues, Russia will be forced by sanctions to attempt to shift 38
percent of its coal exports (about 76 million tons) from Europe and
Ukraine to Asian markets.
But two of China’s largest state-owned banks now limit foreign
currency loans for the purchase of Russian commodities. The offshore
unit of the Industrial & Commercial Bank of China Ltd., for example,
stopped the issuance of U.S. dollar-denominated letters of credit for
the purchase of Russian raw materials. However, yuan-denominated
credit is still provided to some clients.
China purchases approximately $60 billion of energy annually from
Russia. Chinese steelmakers and power plants, which normally import
extensive quantities of coal from Russia, are looking for alternative
suppliers, as their bankers advise halting purchases due to the risk
of secondary sanctions against China.
China’s increased purchases of grain and soybeans put upward pressure
on world prices, which are now becoming unaffordable to the world’s
poor. As reported by Bloomberg on March 3, China imported $34
billion in agricultural products from the United States in 2021.
Since November, in part as a result of what a December Nikkei report
calls the regime’s “hoarding,” the price of soybeans increased almost
50 percent. Grain exports from Russia and Ukraine have ground to
a halt because of the war and sanctions, increasing prices even more.
China, which has about 18 percent of the globe’s population, has
stockpiled over half of the world’s grains, increasing prices so much
that it’s “dropping more countries into famine,” according to Nikkei.
While the rest of the world descends into war and chaos, China has
wheat stockpiles for a year and a half, an official at China’s National
Food and Strategic Reserves Administration told reporters.
China is buying not just foodstuffs, but also entire companies,
including a European meat processor in 2021 and a leading dairy
in New Zealand in 2019. Between 2020 and 2021, the United Nation’s
food price index increased 30 percent.
The Beijing regime is also a gold bug. It mines much of its own, and
purchases more on international markets. While officially Beijing
holds 1,948 tons of the precious yellow metal, most analysts estimate
reserves of between 10,000 and 30,000 tons, well above U.S. reserves
of 8,133 tons. With so much gold, China could in the future back
the yuan with gold, displacing the nonbacked U.S. dollar.
China needs food and commodities for its economy, as do all
countries. Its demand is a pull factor for more supply to emerge,
which means more jobs globally. But China’s approach is
unscrupulously competitive, deceitful, and authoritarian, including
through attempts at stealing natural resources and monopolizing
the scarcest commodities, for example.
If the world allows the regime to continue down its unethical path
of self-aggrandizement, we do so at our own future peril.