China's Acquisition Strategy: What I'm Focusing On

Apr.24.11 | About: iShares China (FXI)

An article this past weekend once again raises the question of China's strategy with respect to acquisition of world assets it considers strategic to it. Written by the well-followed blogger 'Mish' (Mike Shedlock), the article is titled 'What China Will Really Do With Its $3 Trillion In Reserves' (reading time 3 minutes). Mish says that China will use its U.S. dollar reserves to buy U.S. assets, and will use its euro reserves to buy eurozone assets.

I am less focused on which of currency China uses to buy 'what'/'where', and more focused on what China will purchase over time. I am focused on:

  • What I see as the 'cat-bird seat' China currently occupies in the context of its ability to purchase world assets it sees as strategic. As I have said in previous e-mails, I think many of the world's resource assets will meet China's criteria. I also, like Mish, see existing infrastructure and new infrastructure projects in the developed countries as potentially strategic for the Chinese in a 'control' context;
  • How current large corporate cash and equivalents holdings will bear on the prices China will have to pay in a possible competitive environment for the assets it wants. In this regard, Bloomberg estimated in early 2011 that the world's 1,000 largest companies, excluding financial-services firms, collectively held (a second) U.S.$3 trillion in cash and equivalents;
  • The difficulty for China of finding a home for a significant percentage of their U.S. dollar equivalent holdings. To put U.S.$3 trillion in perspective, the following table shows how many 'acquisitions' China would have to make to spend only U.S.$1.5 trillion, or approximately 50% of its reported holdings:

    Average Deal Size (billions)

    # of Deals Required











    Click to enlarge

    An impossible task? Perhaps not. (In February the market capitalization of all companies on the New York Stock Exchange was U.S.$23 trillion). A practical task to achieve in a comparatively short time frame? I think it is improbable in the next 3 to 5 years;

  • The likely roadblocks faced by proposed Chinese strategic investments by many of the developed country governments, for as long as those developed country governments are economically able to put such roadblocks in place. For example, witness the recent turndown by the Canadian Government of BHP Billiton's (NYSE:BHP) bid for Saskatchewan based Potash Corporation (NYSE:POT), which by any measure is a 'world strategic asset'.

That said, I think that any strategic 'out of China' acquisition made by the Chinese government for Chinese business will do nothing but continue to tip the U.S./China economic teeter-totter further in China's favor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.