China's Next Big Rare Earth Move

Written by Gerardo Del Real
Posted June 3, 2019

For at least the last two years, I’ve explained that confidence in governments is dying around the world, that central bankers are losing control, that global growth is slowing, that the next financial crisis would come as a result of a bond blowup, and that China would be the largest beneficiary of this crisis as a bond market blowup has the potential to cause institutions to fall, power to shift, and a realignment of the financial pecking order.

It is curious and alarming that all of those themes seem to now be playing out on the global stage simultaneously.

The simultaneous part is important because tossing around one live grenade can easily lead to an unpleasant accident, but tossing around multiple live grenades at the same time almost ensures an unpleasant accident.

You all know I believe volatility is here to stay and that volatility will be a major catalyst that sends gold and commodities into a historic bull market.

china us bonds

There is now a very serious and new potential secondary catalyst: China withdrawing from the WTO.

While U.S. bond holdings are a weapon, they are not what will lead China to withdraw from the WTO, but it will be the death blow in the long run.

China has always had leverage with rare earths pricing. It has flexed that leverage by charging much less for rare earths in China than it does for rare earths outside of China, forcing manufacturers (think high-tech, not industrial) to set up shop in China while China picks off the technology, reverse engineers it, and uses it for its own purposes.

china battery materials

It did this in 2012 when the WTO intervened and put a halt to the practice. I remember those days clearly because of the mania surrounding critical metals, specifically rare earths.

What if China decides to withdraw from the WTO? Deciding it is no longer beneficial or even necessary for it to advance its goals.

It’s easy to speculate on the next move. China has a dominant stranglehold on the rare earths market.

The U.S. relies on China for about 80% of its rare earths. It’s why Europe is in such a rush to establish an independent supply chain. It’s why Leading Edge Materials has always been an important company in Europe’s development — even if the market (for now) doesn’t get it.

It’s not hard to imagine a scenario where China pulls out of the WTO and immediately decides to slash rare earth prices within China to 1/5th or 1/10th of the rare earth prices outside of China.

china new silk road

The move would bankrupt outside rare earth competition — remember Molycorp? No? Google what happened to it — and force manufacturing giants (think high-tech, not industrial revolution manufacturing) that require large amounts of rare earths to move operations to China.

I’ve mentioned that it is eerie how all these events that I’ve cautioned about are playing out simultaneously. Remember the Belt and Road initiative I wrote about over a year ago?

That project may very well be the fire to the match that allows China this course of action.

The Belt and Road initiative is not just a massive infrastructure project, it is China’s shot across the bow to implement the Renminbi as the world’s dominant currency within the next three decades. Maybe sooner.

Take a second and look at the graphic below to grasp the breadth of scope of the Belt and Road initiative.

Yahoo recently reported that according to a Silk Road Vision and Actions document from 2015, China’s official stance is that “financial integration is an important underpinning for implementing the Belt and Road Initiative. We should deepen financial cooperation, and make more efforts in building a currency stability system, investment and financing system and credit information system in Asia.”

It also hopes to “support the efforts of governments of the countries along the Belt and Road and their companies and financial institutions with good credit-rating to issue Renminbi bonds in China.” Indeed it does.

The biggest threat to the U.S. from the Belt and Road initiative is that it involves over 100 countries. Countries that are having infrastructure, ports, bridges, and technology developed by China.

Countries that, in the future, could look to China for credit instead of the U.S.

As I said earlier, Chinese ownership of U.S. bonds will not be the enabler of China pulling out of the WTO, they’ll be the death blow... later. Decades from now.

In the meantime, China curiously decided to sell the most U.S. treasuries in nearly two and a half years.

China sold $20.45 billion in treasuries in March, the most since October 2016, following $1.08 billion in purchases the month before.

Many speculate that China may sell its U.S. debt in retaliation for increased tariffs on $200 billion of its exports to the United States.

The selling was a subtle reminder of Chinese options.

I actually believe that China will continue to accumulate U.S. bonds over the next decade or so, adding to its arsenal. It’ll do so while hedging with gold purchases (among other instruments... yes, even Bitcoin) until the time comes for the endgame.

Let’s assume that this project achieves its aim and spreads Chinese influence to over 100 countries. Decades pass and the U.S. deficit finally begins to affect credit ratings as more and more states go bankrupt.

Now imagine that countries that once looked to the safe haven that is the dollar in times of crisis begin to question the sustainability of the dollar as it currently stands.

Remember that graph I showed you where China holds 7% of total outstanding treasuries?

Imagine in that time of doubt or a crisis, a seller (hi China) that floods the market with cheap treasuries until all confidence in the U.S. bond market is gone. Checkmate. That’s how you play the long game and China is playing.

The U.S. better hope that it has addressed its infrastructure needs, its health care needs, and the host of critical issues that face us right now, because it’s not going to get easier.

To your wealth,

gerardo-sig

Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

*Follow Outsider Club on Facebook and Twitter.

Investing in Marijuana Without Getting Burned