Perhaps you recall that Chinese foreign exchange reserves recently topped $2 billion? It seems that China will not be sitting on those resources indefinitely. Instead, they're going shopping for undervalued assets.
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...
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...
“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.”
As cheap as many American assets may look right now, it's difficult to argue with the Chinese strategy. China was burned badly by its decision to begin increasing American equity purchases shortly before the recent crash. It seems fairly clear that China also has plenty of exposure to America, and indeed, to export markets generally, as it is.
And investing in natural and energy resources is a nice way to hedge against future increases in commodity prices, though large-scale resource investment may make some in developed nations nervous.
The shame of this is that the government has essentially depressed domestic consumption to generate these reserves in the first place. Better to let Chinese consumers choose how much they'd like to devote to consumption and how much to investment.
This article originally appeared on The Economist.com