China's Trillion Dollar Question

China's foreign-exchange reserves surpassed Japan's last year and also topped the $1 trillion level. In fact, China reportedly adds about $20b a month to its reserves. An article in today's Wall Street Journal says China is considering ways to more advantageously use some of its hoard. Such a move to invest even a quarter or third of its reserves in non-traditional ways could have profound implications for U.S. capital markets. The argument rages on however, whether a shifting away from U.S. Treasury notes for example, will have as detrimental an impact as some think, since funds could instead be invested in U.S. corporate bonds and stocks. Other possible investment targets include commodities and real-estate. The WSJ says countries such as Singapore, South Korea and Norway already invest reserves more aggressively in search of higher returns. China has not publicly discussed its strategy for its reserves, but scholars think a new agency will be created to manage a portion, while it seems certain a good chunk will still be invested conservatively in case there are any urgent domestic needs.

Sources: The Wall Street Journal, Forbes-XFN newswire
Commentary: No Slowing of China's Trade Surplus • Supply and Demand: If China Wants It, You Should Buy It • Making Sense of Chinese Markets
Stocks/ETFs to watch: iShares Trust FTSE-Xinhua China 25 Index Fund (FXI), PowerShares Golden Dragon Halter USX China Portfolio (PGJ). Bonds: iShares Lehman Aggregate Bond (AGG), iShares Lehman 1-3 Year Treasury Bond (SHY), iShares Lehman 7-10 Year Treasury (IEF), iShares Lehman 20+ Year Treas Bond (TLT), iShares Lehman TIPS Bond (TIP). Currency: PowerShares DB G10 Currency Harvest Fund (DBV), Euro Currency Trust (FXE)

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Comments

[Jameswg]

This trillion dollars in reserve could be an interesting Africa play. I think since its holdings are in the hands of the government, it will be used politically. Surely, much of it will continue to be put into "safe" U.S. Assets, but the U.S. is no longer interested in preserving the strength of its currency. I know Africa may be one of the few contrarian international plays left, but I would like to hear ideas on how individual investors could front-run Chinese attempts to secure their supply chain with "aid" to resource countries with bad government such as Iran, Venezuela, Nigeria and the Sudan.

2007 Feb 16 12:44 PM