Putting that in further perspective, consider in comparison the sum of other equivalent U.S. benchmarks as reported in Wikipedia. The concern quickly morphs to panic when considering just China’s foreign exchange reserves. At $1.5 trillion, these dwarf by an order of magnitude or so, the “combined” U.S. foreign exchange reserves ($63 billion) plus gold reserves ($160 billion) plus strategic petroleum reserve ($55 billion), the latter two categories not even included in China’s number.
The gold reserves, maintained at the United States Bullion Depository (USBD), a huge vault-like building structure within the sprawling U.S. Army reservation called Fort Knox, have a somewhat floating value. The valuation reported by Wilkpedia is a function of both real time inventory and spot gold market pricing. It would therefore vary with inventory changes which generally have been stable, and fluctuate more so due to gold market pricing, quite volatile of late. That said, and for purpose of this analysis and comparison purposes, a range of $150-200 billion in value (call it $175 billion for discussion purposes) at a market price of $800-$900 per ounce is reasonable. In the scheme of things then, this government backstop is neither impregnable nor really potent as most would previously have deemed to be the case, based on the embedded grammar school “Fort Knox” myth. Debunking that myth and false sense of security embodied in the “Fort Knox” brand name, consider how even $175 “billion” in assets compares to a U.S. federal deficit which recently crossed $9 “trillion”. Doing the math, the gold reserves at Fort Knox are therefore a mere pittance, just 2% by comparison. In other words, Fort Knox is publicly perceived, if not revered as huge in size and backstop ability, but now seen as really comparatively small, if not insignificant in the overall U.S. economy, much less the global economy. Cause for concern? Indeed, if the public is “banking” on the myth that Fort Knox is stronger than the Great Wall. Time for the U.S. to take new and substantive economic security/back-stop driven measures (see Commulism Crisis Response Framework later in a later Part in this article).
Interestingly too, a comparable amount of gold bullion in the United States is held in the Federal Reserve Bank of New York's underground vault in Manhattan, which holds that inventory in trust for many foreign nations, central banks and official international organizations. Again, one must look at this being a relatively small amount in the big picture.
Alternatively, think of it this way, China’s foreign exchange reserves are almost ten times the U.S. gold reserves in the USBD at Fort Knox. In fact, China’s soaring trade surplus (foreign exchange reserves) is essentially creating a new “Fort Knox equivalent” every 175 days or less, more than 2 per year.
The question then becomes through what vehicle(s) will this expertise and impressive financial might be deployed by China? Perhaps the biggest and most overt indicator yet that China is positioned to take its Commulism global economic domination game plan to the next level is the establishment and opening Sept. 29, 2007 of its Sovereign Wealth Fund (SWF), known as China Investment Corporation (CIC). Adding more concern to this development is that it was immediately and lavishly funded with $200 billion of the foreign exchange reserves, resulting in CIC overnight becoming by a wide margin, the de-facto largest SWF in the world, dwarfing all others, albeit many like Dubai for example still second tier significant. Incredibly too, this first forex reserve infusion is but a tiny fraction of the exploding foreign exchange reserves pool of the government. Again for direct comparison purposes, the Chinese SWF initial deposit of $200 billion is more than the Fort Knox, and represents just 13% or so of total Chinese foreign reserves.
For a point of important reference, Wikipedia defines a SWF as a fund owned by a state…..broadly defined as entities that can manage the national savings for the purposes of investment. It too notes two supporting major concerns and pertinent to the case made in this article:
First, as this asset pool continues to grow in size and importance, so does its potential impact on various asset markets.
Second, and relatedly, some critics worry that foreign investment by sovereign wealth funds raises national security concerns because the purpose of the investment might be to secure control of strategically-important industries for political rather than financial gain.
As Robert Rennie, chief currency strategist at Westpac Banking Corp. was quoted on Oct. 17, 2007 in Bloomberg.com, “Asian central banks are becoming more conscious of increasing returns…..We're seeing moves to create sovereign wealth funds, which by definition suggest a structural shift away from Treasuries.''
The move to a Sovereign Wealth Fund and China’s shift from predominantly buying U.S. Treasuries is even more intriguing from the standpoint that as is the purpose of a sovereign wealth fund, these moves further evidence the real endgame. The Chinese are now setting their sights much higher, ready to cast their net by aggressively and broadly buying into U.S. and WEAST corporate and global finance infrastructure.
Here too is a different yet supporting viewpoint when assessing the concern. Until just recently, countries like China were considered emerging. The paradigm is now shifting, not slowly but like a tidal wave. Luca Silippo, an economist at investment bank Natixis, notes "What is new is that countries that we have the habit of considering emerging are now pressuring to buy". This Aanalyst adds, in other words, the heretofore hunted are becoming the hunters, and ironically those previously hunters, now the hunted.
Clearly this new SWF development, is beginning to sound alarms in WEAST. The October 15, 2007 Taipei Times article “Europe Fears Sovereign Funds' Clout” states “Germany and France are worried that funds such as China's CIC might be making purchases based on political strategies”. While the alarms are sounding on the China SWF, the bells still have not gone off as to Commulism in the aggregate, of which the SWF is but a component or but one Commulism puzzle piece.
The article adds “This has caused concern in Western countries with German Chancellor Angela Merkel saying in July 2007 that the power of the funds had reached hitherto unknown dimensions."
That concern is mimicked by the French government, specifically the President of the French Senate’s finance committee, Jean Arthuis who echoed Merkels concerns by stating "Do they (SWF’s) act according to prudent management principles or according to political strategies that could end up in forms of ... economic wars.” And finally the same article notes McKinsey stating ”that while the funds (Analyst note: China effectively just started) have so far obeyed strict economic criteria for their investments, political motivations could disturb the functioning of the markets.”
The concerns by the parties referenced above were effectively provided “before” China was even out of the gate with its brand spanking new SWF, yet the concerns remain fully founded, if not now exacerbated. Arguably the Blackstone investment by Jianyin, which utilized $3 billion in foreign exchange reserves, yet recently absorbed into CIC may be its first assault, albeit not under the CIC name. The true first tapping the $200 billion under the CIC umbrella being the Dec 19, 2007 announcement by CIC that it has invested $5 billion in Morgan Stanley to help replenish its capital, decimated by sub-prime credit losses. That investment equates to as much as 9.9 percent of Morgan Stanley once it converts to common shares in 2010.
Here again the myopic reaction, or rather general blind hoopla, in the global financial markets and political circles was a resounding “this is great”. Senator Schumer of New York State lead the way proclaiming this is helping to prop up a major New York City employer. He and the others seemingly lost in the surface appeal of the deals, failing to see the true insidious nature of the intent behind them.
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