Mark Lamb | Sunday, 12 July 2009

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Refining the Dollar

Weekly international investment round up to 7th July 2009

Venezuela to intensify loan-for-oil strategy

China’s continuing love/hate conundrum with the USD

Fresh from taking control of his country’s third largest bank controversial Venezuelan President Hugo Chavez is set to sign a new loan-for-oil agreement with the Chinese.
Following other such nationalization projects in the steel, cement and oil sectors this latest acquisition of the Banco de Venezuela takes control away from its previous Spanish based shareholders and returns it to full government control continuing President Chavez’s decade long socialist strategy of shifting away from the established Western power blocks of Europe and America.
And this latest proposal with the energy hungry Chinese follows on from similar agreements whereby China offers billions of dollars in loans which are then used to improve the country’s infrastructure while they in turn are repaid in oil. According to a recent report issued by Petroleos de Venezuela the Chinese currently receive 230,000 barrels of oil a day in payment for past loans and President Chavez is on record as stating he believes oil exports from Venezuela to China will rise to a million barrels a day by 2012. Just as this fits into his longer term plan of trying to redraw the economic and political map of South America by aliening itself more with the growing power blocks of China and Russia, which also helps cultivate his own modern day Che Guevara image, this strategy also suits China perfectly well.
With an estimated two trillion US dollars in reserves China is worryingly over exposed to the greenback therefore receiving payment in commodities rather than dollars makes a great deal of sense. Back in February China agreed a similar deal with the Russians. In return for a $25 billion dollar loan the Russians have agreed to supply the Chinese with 300,000 barrels of oil for the next twenty years while Kazakhstan agreed a similar deal back in April.
China’s love/hate relationship with the US dollar is an interesting conundrum, as the world’s most important currency the Chinese need it to trade while on the other hand their growing wealth would appear to be over reliant upon its stability over which they have only limited control. But the signs are growing that China is not only trying to move itself away from the US Dollar but that they are also encouraging others within their region to do the same and with an estimated $4.5 trillion dollar reserves tied-up in the Asian region any shift would have great consequences for the American currency.
Chinese news media has reported that within the few weeks a number of large import and export contracts with customers in Hong Kong and Indonesia were settled in the Chinese yaun for the first time while leading Chinese State Government figures are openly calling for an alternative currency to the US Dollar.
The British Pound was once the strongest currency in the world, which certainly isn’t the case today, while just a quarter of a century ago not many actually believed the French Franc, Italian Lira and German Deutschmark would soon only be exchanged between numismatics (coin collectors). Could the dollar’s day as the world’s currency of choice really be numbered?

Mark Lamb is Head of the Life Dept. at Citadel Insurance plc which is authorized to carry on general and long term business of insurance under the Insurance Business Act, 1998 and is regulated by the MFSA. Contact by email; mlamb@citadelplc.com Tel; 25579000. Website; www.citadelplc.com
This article does not intend to give investment advice and its contents should not be construed as such. Information in this article has been obtained from various public sources and is given by way of information only. Readers are always encouraged to seek financial advice before making any investment decision.

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