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Friday, March 09, 2007

Will China Buy the World?

China is setting up a managed fund to handle its more-than $1 trillion in currency reserves. This will be Asia’s biggest government controlled fund. China has to do something – 70% of its currency reserves are in the US dollar and the greenback could get creamed as Chinas currency, the renminbi (or yuan) appreciates. China is already losing money on the deal, writing off $3.4 billion in exchange-rate losses in 2006.

Bloomberg says that the fund’s creation “may prompt a flood of Chinese investments in overseas technology companies, mines and oil fields to support an economy that grew 10.7 percent last year. ‘Global investors will be getting nervous,’ said Tim Condon, chief Asia economist at ING Bank NV in Singapore. ‘They'll have to compete with the new boy on the block with billions on his hands. There aren't that many targets when you're looking at deals of that size, so expect political tussles to come as China goes shopping.’ ”
Let’s consider that China's outbound direct investments (ODI) rose from US$590 million in 1999 to $12.26 billion in 2005. If you think that’s a lot, just wait. Jun Ma, chief economist for Greater China at Deutsche Bank, recently said in press reports that China's ODI is likely to grow by over 20% annually in the next five years. By 2011, Chinese ODI could reach $60 billion, becoming Asia's largest source of outbound investment.

Big targets for that outbound money include resources and infrastructure. Basically, China needs developing nations to have good infrastructure so they can move raw materials to its markets. For China, the primary goal is to have access to iron, oil, copper, gas, etc., to feed its ravenous economy, which is growing at over 9% a year. China is now the largest importer of copper and it also imports large quantities of iron ore and lumber from developing countries – from Asia to Latin America to Africa.

For that reason, China is very interested in the expansion of the Panama Canal; the Chinese are talking about creating an Inter-Oceanic canal in Nicaragua. In Argentina they are investing heavily in one railway project, and they are also investing in a trans-Asia railway project. China is not basing its policy around the needs of countries, but wants to extract raw resources for its own benefit.

China is making oil and gas deals with one country after another in order to maintain a stable supply of oil and avoid buying all of its oil at higher prices on the open market. These countries include Indonesia, Uzbekistan and other energy rich states in Central Asia, Ecuador and Columbia. China will also make deals with countries that the west shuns (and for good reason) like Sudan. China has also signaled its intentions to invest in exploration and development in other countries that have proven oil reserves.

In its quest for oil, China competes with the United States and Japan, and also with South Korea and India. India and China just signed an economic cooperation agreement designed to smooth over their energy disputes. Don’t believe for a minute that this is anything more than a marriage of convenience.

At the 2004 annual gathering of the Association of South East Asian Nations (ASEAN) in the Laotian capital, the ten ASEAN member statkes signed a free trade agreement with China. Both tariff and non-tariff trade barriers will be cut under this 10 + 1 = 11 free trade pact. It is the world's largest free-trade area covering 1.8 billion people and has provided even more opportunities for China to expand trade and investment ties with the ten ASEAN countries.

By the end of 2006, Southeast Asia’s total trade with China probably hit $130 billion, which is close to the $150 billion US-ASEAN trade in 2005.

This pact is a huge success for China on many levels. "We are very happy to have China as our big brother in this region," Philipines President Gloria Macapagal Arroyo said at the opening ceremony of ASEAN summit meeting.

China is making a whirlwind of trade deals – Australia, New Zealand, Brazil, Venezuela, South Korea and more. The signing countries often think they will be able to sell more than raw materials to China – that they’ll be able to sell finished goods as well. But in each case, the trade in finished goods is overwhelming one-sided, with cheap Chinese goods flooding local markets and often driving local producers out of business.

The China Center for Economic Research says that China will become the world's largest economy by 2030. Things rarely work out as predicted. Still, the way things are going, it wouldn't hurt for your children to study Chinese.


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