For over a decade, China has kept its currency weak while soaking up foreign money to drive its gargantuan economy. As a result, the People’s Bank of China today holds a colossal $1 trillion in foreign currency. Now, China is taking part of this money from under the mattress—making enemies and friends around the world in the process. In this List, FP looks at what’s on China’s shopping list.
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Hard assets
The Reward: Global reach. In the last 10 years, Chinese state companies have set up shop in developing countries from Brazil to Sudan in a drive to secure raw materials—especially oil—to feed the economic demon. Now China will have a new resource with which to make friends and influence people: ready money to fund huge infrastructure projects in underdeveloped nations. And the ball is already rolling. Last year, for instance, China agreed to completely revamp the railway networks of both Angola and Nigeria. Not only does this type of investment tend to win the loyalty of local governments, it also helps China get its goods out of the country and on the boat to Shanghai in record time.
The Risk: Developing country resentment and developed world fear. The kidnapping of seven Chinese workers in Ethiopia last week showed that China’s economic expansion into Africa is fraught with peril. Meanwhile, Europe and the United States are alarmed by China’s growing sway in the developing world as well as its willingness to shake hands with questionable regimes such as Sudan’s. And as evidenced by a 2005 flap over a thwarted Chinese bid to take over Unocal, a U.S. oil company, China will raise nationalist hackles in the West if it tries to lock up strategic assets. Expect the Chinese to learn a lesson from this experience and avoid trophy purchases like Rockefeller Center, which a Japanese investor acquired in the 1980s.
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Booming Asian stocks
The Reward: Big returns. Investing in Western stocks and bonds is losing its appeal. The marketplace is crowded, interest rates are low, and there just aren’t enough returns to go around. Stocks in the developing world, on the other hand, let you tap into robust economic growth, zesty risk and tasty rewards—if you have the stomach for it. Whatever the hopes for Latin America and the potential of Islamic finance, Asia remains the jewel in the emerging-market crown.
The Risk: Angry neighbors. Asian nations are wrestling with the same issues that dog China—high domestic savings, pressure on the currency to appreciate, and more foreign money than they know what to do with. Chinese investment would only add to the glut of foreign green, aggravating an already tricky situation. China risks undermining its careful regional diplomacy if Asian countries become furious at China for solving its economic problems at their expense.
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Commodities
The Reward: Get ’em while they’re cheap. Prices for commodities—such as oil, gold, copper, and wheat—are at or near record highs across the board, but prices are only expected to rise. Every smart investor wants to ride the wave, and China can outdo them all. The nation’s demand for foodstuffs and raw materials is the crucial factor behind the price spike, making China uniquely well placed to play the market.
The Risk: A bureaucratic nightmare. From the industrial cities of the southeast coast to the agricultural heartlands of the Yangtze River valley, China has countless commodity needs, and even with its billions, it can’t buy everything. Every interest group in the country will be lobbying for its preferred resource to top the list. Once the goods arrive on Chinese soil, the battle between the local governments over who gets to store and distribute them will be long and bloody. And abroad, expect China to get blamed for everything from rainforest destruction in Brazil to thefts of copper pipes in the United States.
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Non-dollar denominated bonds
The Reward: Ditching the dollar before it’s too late. China holds 80 percent of its reserves in dollars, at a time when the greenback is sliding down the currency scales. These days, a dollar will barely buy you half a British pound. With the Chinese yuan steadily gaining value as China’s economic muscle develops, the central bank is in the worst possible position: Its reserves are losing value while the currency they back is worth more and more. Shifting into euros, British pounds, and yen spreads the risk and opens up a new world of returns.
The Risk: The market moves with China. Eight hundred billion dollars is serious cash for a single market player to hold. If China drops dollars too quickly, it might spook other investors and cause a disastrous run on the U.S. currency. This would leave any greenbacks China holds onto almost worthless. China will then have to face the wrath of a United States whose prestige has taken a knock and an international community whose goods can’t compete with suddenly cheap American products.
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