How Far Will China Go?

Rumors in financial circles have it that China Construction Bank (“CCB”) is in talks with Bear Stearns that could ultimately result in CCB owning a piece of the well-known Wall Street firm.

CCB is one of China’s big four state-controlled banks with CCB 70% controlled by the Chinese government. If CCB and Bear Stearns finalized a deal, CCB would end up with about 15% of the well-known Wall Street firm–making CCB Bear Stearns’ single biggest shareholder.

While the two financial firms are in early talks and with regulatory approvals required, if the deal goes through it would give a Chinese government controlled bank a strong foothold on Wall Street. Less than 100 years ago, J.P. Morgan himself would have thought this impossible.

But, thanks to a booming economy which continues to post year- after-year growth of about 10%, China is in the enviable position of being able to make sizeable investments in strategic American companies. With the number of employees close to 300,000, CCB dwarfs in size compared to Bear Stearns’ 12,000 employees. There is no doubt CCB has the financial resources to get the deal done.

What does this really mean for you and I, the small retain investor? Today, it means very little. Long-term, for our children and their children, it could mean a lot. As China’s growth continues to outpace U.S. growth yearly, eventually the tide could turn–with some saying the U.S. could possibly lose its world economic dominance. Yes, it will take many years. And yes, China has severe social problems to deal with. However, and only eventually, it is not far fetched that China could become the world’s next economic superpower.

That’s why I believe the U.S. dollar is weak. Could the markets sense the growing economic dominance of China in the world? Is that why U.S. dollars have not moved up even after 15 interest rate increases? Unfortunately, I believe this is the case.

The next big question: Is your portfolio structured to take advantage of the growth in China? There are many American companies that have established divisions in China. Because we don’t know how far China will go economically, it may be wise for your investment portfolio to have at least some exposure to China’s economic growth.