A Chinese Foreign Ministry spokeswoman let it be known a few days ago that Beijing is looking for new ways to diversify its monumental cash reserves. The amount of money in play approaches $3 trillion, taking into account all of China's foreign holdings.
Previous talk about Chinese diversification has sparked worries about the stability of the U.S. dollar. But that doesn't seem to be the target this time. In fact, China continues to buy billions of dollar-denominated assets. The difference this time is in the investment potential.
For the first time, Beijing says China will use part of its foreign exchange reserves to help domestic firms expand their business ventures abroad. Considering the amount of money available, this could be a game-changer for target companies.
The Chinese call it their "go out" policy and it has been sputtering along for more than ten years. Now, it's about to shift into high gear.
The point of "going out" to acquire foreign companies has always been to get a firm grip on foreign resources and technology. China's failed bid to buy the U.S. oil company Unocal in 2005 was seen as an attempt to acquire badly-needed modern drilling technology. Political opposition killed that deal.
More successful was Lenovo's purchase of IBM's personal-computer business for $1.7 billion in 2005. Lenovo has had a hard time making a name in the cutthroat PC business, but it has acquired knowledge, access and expertise in foreign markets with a mainstream product.
These few examples are only a hint of what China's buying binge might look like. In 2008 Beijing slapped $40 billion on the table. When BHP Billiton tried to take over the Australian mining firm Rio Tinto, the Chinese government made $40 billion available to the Aluminum Corporation of China to outbid it. The Chinese company wound up with only a minority stake, but it did defeat a takeover that could have driven up resource prices.
$330 Billion Already in Play
The China Investment Corporation was set up in 2007 with an initial capitalization of $200 billion. The CIC lost money on early investments in the Blackstone Group and Morgan Stanley. But during 2009 the CIC enjoyed a 17 percent return on its foreign investments and it reportedly now has over $300 billion under management.
China is trying to get state-owned enterprises into an outgoing mood. China's State Administration of Foreign Exchange says it will allow Chinese companies to lend capital of up to 30% of the value of their equity to their foreign ventures. That puts another $30 billion into play.
Even without the giant reserve fund contribution, China's outbound investment is already starting to surge. China's outbound overseas direct investment (ODI) to non-financial sectors totaled $216.6 billion from 2006-2010.
That's more than triple the government's target. The annual growth rate was 38.8 percent during the period!
Chen Deming, China's Commerce Minister says China's overseas investment will surpass $50 billion in 2010. The target for next year is $55 billion.
What's on the Shopping List?
China's past purchases give us a good idea of future targets. Resources are the obvious number one item on the wish list. China needs to lock in reliable supplies of most mineral, food and fiber commodities of or a lot of reasons. Secure supply of essentials is crucial to Beijing. Cheap commodities are just as important.
An analysis by Bank of America listed some other key acquisition targets. "China prefers to cherry pick relatively small-scale companies or operations with key technologies rather than wholesale takeovers of total business," according to B of A.
China's shopping list included some heavy industry specialties. The study found that China also desires high-grade steel production technology so that it can feed its ambitious infrastructure upgrading plans. It wants to be able to produce high-speed steel for railways, high-strength steel for autos, and extra-heavy steel for nuclear power plants.
Other targets: include sectors such as textiles, consumer goods and mechanical manufacturing, according to the ministry of commerce.
If a picture is worth a thousand words, a visual showing China's past investments may be useful. This chart from China Daily shows the pattern of Chinese investments in Africa, a continent long ignored by the west.
An announcement was made recently that China surpassed Japan as the world's second largest economy, right behind the U.S. as the strongest on the planet. Chinese companies are making money hand over fist, and will continue to do so for years into the future.
For now, the Chinese stock markets are taking a break from their recent torrid pace. That won't last much longer.
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