America has a national debt that is nearing $17.0 trillion. The Chinese own a good portion of this debt. The country also has about $3.5 trillion in foreign exchange reserves at its disposal, according to the South China Morning Post. (Source: “Beijing to create forex investment agency,” China Economic Review, August 7, 2013.)
That’s a lot of money that needs to be invested. But according to the article, the People’s Bank of China (PBC) is looking at the development of a new unit that will help to invest the funds. Currently, investing the reserves is the responsibility of China Investment Corporation, which has invested about $480 billion.
What I see is this: the continued movement of invested capital into foreign countries by China is a strategy for diversification and a means by which the country can get its hands on raw materials and intellectual property. We saw this with the acquisition of mining and oil companies in North America, along with major investments in the oil fields and mines in South Africa.
Call it the “Red Invasion,” but I expect foreign acquisitions to pick up going forward, especially with the creation of another agency by the PBC. Of course, China has its eyes on many companies, but receiving approval for the takeovers is another question.
Even the proposed takeover of pork producer Smithfield Foods, Inc. (NYSE/SFD) by Shuanghui International Holdings Limited was met with some resistance, but now it looks like the deal will go through.
I expect China will focus on acquiring raw materials with its reserves—iron, copper, oil—along with agriculture and industrial outlets. I wouldn’t be surprised to see a rise in shopping trips by the Chinese around the world, especially in resource-rich regions, such as Canada, Australia, the Middle East, and Africa. There’s already talk of building a massive pipeline on the bottom of the Pacific Ocean to carry oil from the tar sands in Alberta to China.
The reality is that $3.5 trillion is a lot of money. With this amount of cash, you could buy Apple Inc. (NASDAQ/AAPL) 8.3 times over, or Wal-Mart Stores, Inc. (NYSE/WMT) 13.8 times over. But don’t worry; the country doesn’t want these kinds of investments. It wants the raw materials and industrials. Plus, there are already many Chinese manufactured goods on the shelves of Wal-Mart.
It will be interesting to see when the buying activity picks up from China—and it will come very soon. The newly formed government is aggressive and open to the West. (Read “China: The New Breeding Grounds for Capitalism.”)