Not much remains in HK. QE2, will only hasten China's rush for hard assets .
HK will divert that capital to new places. We are waiting for this gush of moollah!
The era of hogging is over. TJ must stay there and watch the divettion from U.S. government bonds into hard aseets.
The Big Shift
China's purchases of hard assets topped its purchases of U.S. government bonds in the first half. For the year, it may be a tie.
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China's Sure Bet
By LESLIE P. NORTON | MORE ARTICLES BY AUTHOR
As the dollar wobbles, China is pulling back from U.S. Treasury securities and buying up hard assets around the world.
THIS YEAR, FOR THE FIRST TIME EVER, China has been investing more overseas in assets like iron, oil and copper than it puts into U.S. government bonds.
China in this year's first half spent $31 billion on hard assets, compared with $23 billion on Treasuries and other U.S. government bonds. Experts say China's investments in each of these asset classes will total about $55 billion for the full year. But even a tie marks a major turnaround from China's previous practices. For many years, the mainland spent next to nothing on hard assets abroad, while its purchases of U.S. government debt ranged as high as $100 billion a year.
Why does China now have such a voracious appetite for hard assets? The most frequently cited reason is its need to feed its rapidly expanding industrial base. True enough. But it's also important to see China's reduction in Treasury purchases and its sharp increase in hard-asset deals as part of its currency strategy. It's widely accepted that the Chinese currency, the yuan, is undervalued against the dollar, perhaps by as much as 40%. Based on moves made in the past few years, it seems likely that Chinese officials will let the yuan, which is pegged to the dollar, rise by 2% to 3% against the greenback each year.
In the face of such a weak dollar, it doesn't make much sense to keep investing heavily in Treasuries or any other dollar-based asset. The annual interest payments can easily be outweighed by the loss in the dollar's value. There are serious concerns in Beijing, too, about the creditworthiness of U.S. debt. The smarter bet is to invest in assets that are likely to hold their value, or even increase in value, as the dollar continues its slide.
Iron ore in Sierra Leone. Mines in South Africa. Coal and gas in Australia. Oil in Brazil and Venezuela. Even Canada's timber industry is reviving as a result of demand from China. Just last week, China jacked up estimates for how much uranium it will need for nuclear power plants (see story, "Uranium's Unhealthy Glow.")
The recent move by the Federal Reserve to start buying $600 billion of government bonds, known as QE2, will only hasten China's rush for hard assets. Because it amounts to printing money, "QE2 makes the dollar even less attractive," notes Jim Lennon, head of commodities at Macquarie Bank in London. "It's certainly a policy orientation of China to diversify, and they are buying commodities as a strategic investment, and opportunistically."
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John Patrick
China's preference for hard assets over Treasuries, taken by itself, is sure to put upward pressure on U.S. interest rates and make U.S. economic growth somewhat more difficult than it would be if China went back to its previous policy of buying heftier amounts of U.S. government debt each year. Lately, however, any "China effect" has been overwhelmed by Treasury purchases by the Federal Reserve.
For its part, China must maintain a balance between investing wisely and making sure the U.S. remains economically healthy enough to absorb Chinese exports. That consideration will become less important as China further expands its own domestic market and becomes less reliant on exports.
CHINA HAS BEEN ACCUMULATING hard assets at a rapid clip for several years. Among this year's biggest deals, CNOOC (ticker: CEO), China's largest offshore oil producer and one of its most powerful state-owned companies, is spending $2.2 billion for shale acreage in the U.S. owned by Chesapeake Energy (CHK) and $3.1 for 50% of a unit of Argentina's Bridas Energy. State Grid Corp. of China plowed $1 billion into Chilean copper deposits. Sinopec (SNP) coughed up $4.6 billion for 9% of ConocoPhilips (COP)—and another $7.1 billion for 40% of Repsol's (REP) Brazilian unit.
When China can't buy the business, it buys the underlying commodity. China's Sinofert, after weighing and dropping a bid for Potash Corp. (POT) to counter BHP Billiton's hostile offer, announced last week that it would buy $2.2 billion of the key fertilizer ingredient from Canpotex, the monopoly whose three members include Potash.
Chinas's investments in hard assets are growing quickly. In June, even as the mainland dumped a net $15.6 billion of U.S. Treasury and agency bonds, it also bought $1.1 billion in Canadian minerals and Mozambique coal deposits. "China is upgrading its industries, and all are very heavy users of these materials," explains Lu Kang, deputy director general of the Ministry of Foreign Affairs in Beijing.
Adds He Ning, director general of the Ministry of Commerce in Beijing: "China is starting to make overseas investments as a return to the world. It's just a start." As such deals become more numerous, says He, "people will no longer pay attention."
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