China to deploy foreign reserves

Discussion in 'Economics' started by Illum, Jul 22, 2009.

  1. Illum


    Ok, this is pretty big, and I just got really bearish today, maybe a mistake?? Need to get in front of this somehow....any ideas? Dollar pain? Aussie index up and away? Commodity companies?

    Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

    “We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

    Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.

    The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

    Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets.”

    China’s outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.

    Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency.

    “This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.”

    State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis.

    China Investment Corp, the $200bn sovereign wealth fund, has been buying stakes in overseas resources companies and has taken a 1.1 per cent stake in Diageo, the British distiller.

    In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

    “Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”
    And on another note, are we in deep sh.t? Who is a good chess player? One step ahead of this and I can supersize my value meal, thx.
  2. xenix


    How exactly is this bad?

    China spending down reserves seems like the proverbial win-win. Prices on everything from capital goods to real estate are depressed, so they will be getting some very good deals. It will make Buffets investments in GE and Goldman look like amateur hour.

    $3T in real money flowing into the world economy will be like the mother of all stimulus packages.

    If their foreign reserves are not disproportionately in dollars (and for all I know they may be), then the influx of currency will depress the value of each currency involved. The net effect should therefore be more or less neutral and not have a huge effect on the value of any one of them - relative to each other.

    If it does cause the dollar's fall however, that can be both positive and negative. It will boost commodity prices in the short term, but it will also stimulate US exports, especially to countries whose currencies are not affected.

    This is classical Keysnian economics at work. Any imbalance in the value of competing currencies is self correcting. If a currency is over valued, foreign goods look cheap and that results in net outflows. That means more dollars in international circulation and that means the value of the dollar declines.

    Similarly, if the dollar is undervalued. Then American goods seem cheap. That means a net inflow of foreign exchange and fewer dollars in circulation globally. That in turn results in a rising dollar.

    Whether intentional or not, this might be the biggest favor China could possibly do for us.
  3. It's not terribly bad when the chinese reserves are recycled, which strengthens liquidity.

    However, this simply means they will own more and more of the world. The strategy is completely consistent with first becoming really competitive. Kinda like Coca Cola that first becomes #1, then buys out any competitors that could emerge.

    And when you're controlled by foreigners, that also happen to buy a very old fashioned culture (violence), then things might be worse.

  4. Why no Wall Street?

    Ahhhh. Maybe it's because he doesn't trust "America's Wall Street."

    Maybe Wall Street has less credibility than a jonesing coke addict.
  5. indexer


    Wall Street encouraged the hollowing out of America in order to get the money flows from Asia. It looks like the benefits of that bet are coming to an end.

    In fact, the hollowing of the US is causing the hollowing of US banks as unemployment and wage deflation cause higher defaults.

    It would not surprise me if Wall Street found religion in the idea of in-sourcing production to the US.

  6. Getting close to "cherry picking" time....

    Brilliant strategy....

    The US has options....but either does not know how....or refuses to use them....

    Actually.... brilliantly played by the Chinese....