Will China go on a buying spree?

In 2007 the UK’s then chancellor, Gordon Brown, sold half of his country’s gold reserves in a botched fire-sale that cost the country over $3 billion.  By selling so much at the bottom of the market he had not only sold at a bad time but had driven the price down even further.

One of the problems for many investors is that the bigger their movements in the market the more those movements create waves.  If other actors in the market sense that you need to buy or sell then they attempt to take advantage of that need.

China is sitting on $3 trillion of US securities and treasury bonds. This is a massive trove of cash; however it is also dangerously exposed.  The US is quite happy to drive down the value of the dollar as it attempts to inflate away its debts.  The appropriate response for the Chinese is to sell on those dollars and spread their risk a bit.

However, what should they buy?  Gold is already in a bubble as the weakening dollar has driven it to unprecedented levels.  Buying now only to watch the value deflate would leave them worse off.  How about buying other currencies?  The Chinese could buy European bonds but that would simply drive up the value of the euro while pushing down the value of the dollar further.

The Chinese wouldn’t be able to spend that $3 trillion all in one go so would be left in a situation where what they want to buy increases in price exactly as their savings depreciate. 

Chinese-owned firms have been looking to buy major stakes in large global corporations.  There is form for this.  The Economist points out that, at their height of power and influence, the British empire was responsible for 45 percent of global trade.  The US reached 50 percent.

China only makes up 6 percent of global trade.  Still plenty to play for.

The question is: will anyone let them?

Both Canada and Australia – usually rather relaxed about who buys local companies – have blocked attempts by Chinese companies to purchase local firms.

Certainly, China is not the most effective of acquirers.  Brazilian mining firms have discovered that their new Chinese bosses are not interested in increased profitability so much as increased production of commodity extracts.  For the moment, Chinese firms see their new acquisitions as a source of extractive inputs to the vast factories back home.

As long as there is free competition then it should not matter who owns a company.  If the Chinese are attempting to gain control over markets they can only do so with the collusion of others.  If Chinese telecommunications firms buy a local mobile phone company it doesn’t have to be a security issue if there are good local laws regarding competition policy, privacy and intellectual property.

Many governments see the Chinese as a threat and are moving to block these purchases.  They should rather be seeing this is a massive opportunity for inward investment.  As the Chinese buy local firms they are exposed to a wider variety of social and economic systems and this creates a great deal of two-way traffic.

Some of this may also lead the Chinese to acknowledge the need for global stability and consistent rules of engagement.

There are almost no equivalent investors to the scale of cash which China has to spend.  Extractive countries are likely to see most of the early efforts by China to move its cash into more reliable investments.

It’s easy to think that those with superlative quantities of cash are somehow protected from the world.  It’s exactly the opposite.  As China buys more and more in the rest of the world, so this behemoth becomes more reliant and integrated with the success (or lack thereof) of everyone else.

We should accept the investment, and welcome them.