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The New Investment Power: How Will It Affect Your Portfolio?

|Includes: ACH, BHP, C, HSBC, Rio Tinto plc (RIO)
The dragon rears its head again! China has once more come roaring out of the shadows as a powerful force on the world investment scene.

I believe China will become a key factor in your own portfolio.

The world already knows about China's vast appetite for outside investment. Foreigners building factories in China have played a huge part in the Chinese economic miracle. Even during the worst of the economic crisis in 2008, foreign direct investment in China rose 27 percent.

That year, foreigners poured more than $111 billion into the mainland.

But what about outbound Chinese investments? How much money is China pouring into the worldwide capital pool?

That flow is growing explosively.

China's outbound foreign direct investment (OFDI) barely registered on the global radar during 2008. Back then China ranked as a weak twelfth in the world. But look how quickly that is changing:

The New Investment Power: How Will It Affect Your Portfolio?

This chart went stratospheric this year as estimated foreign investment jumped to $60 billion. China suddenly jumped to number five in the world.

By 2013 China's foreign investment could hit the $100 billion mark.

Where Will the Money Go?

Resources have always been the key target for China's foreign investment. Recently I discussed China's huge potential in the oil market. But the China syndrome will reach far beyond. Here's why.

China is still on a path to move hundreds of million of people into cities. The Petersen Institute estimates that a stunning 600 million Chinese could eventually migrate to urban areas. This trend has been underway for three decades and it is constantly accelerating.

Every Chinese who moves to the city makes new demands on the world's resource stockpile. Iron, copper, cement, timber, aluminum and other resources will face skyrocketing demand thanks to China. China already uses twice as much steel as the United States, Europe and Japan combined.

But Beijing knows it makes the most sense to buy crucial resources outright.

Here's a look at China's global investment targets:

The New Investment Power: How Will It Affect Your Portfolio?

Although China's direct investment in North America and Europe seems small, it is booming. During the first half of the year, China's OFDI to the United States rocketed by 360 percent. Investment in the European Union jumped by 107.2 percent.

China's investment picture goes well beyond buying raw resources like oil fields in Africa. China is looking to buy control of key companies like Rio Tinto.

China is Rio Tinto's biggest customer and biggest investor. Aluminum Corporation of China owns 9 percent of the global mining giant. A $20 billion attempt to double that holding failed for political reasons.

Rio Tinto's CEO says China's resource demands will grow for another 20 to 30 years.

China is trying to expand its resources holdings in countries like Canada and Australia. The U.S. may be tougher to penetrate because of political pressures that blocked an attempted takeover of Unocal in 2005.

The attempted takeover of Canada's Potash Corporation by BHP Billiton is a prime example of future trends.

Beijing has ordered state-owned companies to find ways to block BHP Billiton's $39 billion takeover bid. The most likely new bidder is Sinochem, which is holding meetings with Citigroup, HSBC and Morgan Stanley. Sinochem might also team up with sovereign wealth fund China Investment Corp (NYSE:CIC).

Future Trends

China's future investment goals are surprising. Due to a shortage of agricultural land, China may actually buy up farmers' fields in foreign countries. And that's just one of the unexpected trends in a study by the Petersen Institute.

The report says China may start buying up foreign heavy industry. The reason? China is approaching the limits of its ability to build new smelters and power plants. In effect, China will be forced to outsource its pollution producers.

With almost $2.5 trillion in foreign reserves, China has the financial firepower to act. But so far much of that reserve money has wound up in U.S. treasuries.

Chinese sovereign funds like CIC have the ability to invest billions in foreign corporations. Although CIC is fairly new to the game, it is producing impressive results. Profits last year almost doubled, topping $41.7 billion.

Beijing's mountain of money won't be the only source of Chinese cash flowing abroad in future. Increasingly, Chinese firms will be permitted to use more of their dollar income to invest abroad.

Look for future Chinese investment and takeovers in light manufacturing. China wants to move up the industrial value chain. Heavy industry and export industries just don't produce big enough profit margins.

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Where will China invest? Look to the solar industry as an early example of China's move into more sophisticated and profitable fields. China has also become a formidable competitor and investor in wind turbines.

China may face hurdles investing in strategic industries. But look for China's wealth to go increasingly global in coming years.

We're seeing a trend that will only accelerate. As the investment surge out of China increases, your portfolio should be poised to take advantage.

Committed to your Global Profits,

Jim Trippon

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