Once again the world's commodity markets are swirling with rumours that the mainland is strategically stockpiling commodities. Beijing, experts say, is diversifying a portion of its huge accumulation of foreign currency reserves to build up enormous strategic reserves of copper and oil.
For many people, this may make sense. Not only is the mainland hedging its future commodity needs by locking in today's low prices, they argue, but this is also an excellent way to protect itself from the risk of a decline in the value of the US dollar.
However, both arguments may be wrong. Take the second reason. If Beijing's policymakers are worried about the dollar, they should certainly encourage a shift out of dollars into an asset whose price is not nearly as risky. But commodities hardly fit that bill. Commodity prices are incredibly volatile.
The real reason Beijing should be cautious about taking on too heavy an investment in commodities is that the nation is naturally hedged when it comes to most commodity prices, and the more commodities it stockpiles the more it unwinds this natural hedge. By stockpiling, the mainland may be implicitly increasing the bet it makes on the performance of its economy.
If it wins, it wins big. But if it loses, it loses big.
The mainland's natural hedge in commodities arises from the fact that growth in its economy, along with that of the US, is one of the main determinants of global commodity prices. And, given the huge economic, investment and trade links between the two countries, growth in one over the medium term is likely to be positively correlated with growth in the other.
This means that if mainland growth were to accelerate in the next few years, commodity prices would almost certainly rise as the nation's manufacturers sharply increased their purchases. If its economy were to slow sharply in the next few years, however, the global demand for commodities would decline even as supply stayed unchanged.
This would put heavy downward pressure on commodity prices.
This is a natural hedge. The mainland effectively has to pay more for commodities when it is doing well, and in exchange when conditions are at their worst and mainland manufacturers are struggling, commodity prices will be much lower. This kind of relationship reduces the underlying volatility in the economy by penalising mainland manufacturers when they are doing best and subsidising them when they are doing worst.
But stockpiling undermines the quality of this natural hedge. As the result of current purchases, if mainland economic growth surges, the nation will have acquired commodities at current, lower prices, and of course its manufacturers will benefit.
But if growth on the mainland and global economies slows significantly, commodity prices will decline even as manufacturers will have locked themselves into higher commodity prices. The effect on the economy will be to increase the reward if the mainland wins and to increase the penalty if it loses.
It is unquestionably a good idea for the mainland to diversity its foreign currency reserves away from the dollar. But Beijing cannot diversify heavily into other currencies without wreaking trade havoc on the countries whose currencies they buy.
From a prudent risk management point of view, the best thing for Beijing would be to buy foreign assets whose value is either negatively correlated or neutral to the nation's economic performance. Perhaps that is property or stocks abroad, but given the country's size and importance, it will not be easy to find such assets.
Michael Pettis is a professor of finance at the Guanghua School of Peking University and a senior associate at the Carnegie Endowment