A few weeks back, I kicked off the Intelligent Investor Series as part of my weekly commentaries. Th...
Trading Idea: Buy Whatever China Buys!
07/29/2009 12:01 am EST
Last week, China reported that their foreign exchange reserves exceeded $2 trillion and it is under this environment that the US and China will begin their economic and strategic dialogue on Monday. As traders and investors look for opportunities in the second half of the year, we encourage everyone to buy what China buys. On Tuesday, Premier Wen Jiabao pushed Chinese companies to hasten their “going out strategy” and for the first time ever, he said the government could use foreign exchange reserves to help companies invest abroad. In other words, the Chinese government has basically given domestic firms the political and financial support to go on a spending spree. Although they won’t be spending the entire $2.132 trillion, even 10% of that would be substantial. With this mandate from China, we explore what areas of the world and sectors of the global economy could benefit the most from a Chinese shopping spree.
First, let’s take a look at what China is importing. Based upon the following table, in 2008, China’s top imports were electrical material and equipment, followed by mineral fuel, oil, ores, slag, and ash. Commodity imports have seen the strongest growth, and with their investments into infrastructure, we expect this trend to continue.
Although the US is China’s number one trade partner, it is not the country’s top imports supplier—this title belongs to Japan. However, what we think is more important are the countries that have seen the most significant growth in their exports to China. Based upon the tables below, imports from Brazil and Saudi Arabia have grown by more than 60%, while imports from Australia rose 45% in 2008. China buys products like crude oil from Saudi Arabia, iron ore from Brazil, and copper from Australia.
Since China likes to take stakes in companies that meet their resource needs, then we would expect their domestic firms to look for investments in companies that produce electrical machinery, power generation equipment, and commodities in countries like Saudi Arabia, Brazil, Australia, and even Japan and/or Germany. So from that perspective, we believe that for currency traders, this would provide opportunities in the Brazilian real, Australian dollar, and Japanese yen. In terms of resource demand, we also believe that China will increase their holdings of gold.
Based upon the World Gold Council’s March 2009 data, China’s gold holdings on an absolute and percentage basis pale in comparison to the holdings of major European nations and the United States. Gold’s share of China’s total forex reserves is only 0.9%, compared to a share of 76.5% in the euro zone and 78.9% in the US. On an absolute basis, China owns 1.054 tons of gold versus the euro zone’s 11,065 tons and the US’ 8,133.5 tons. If China is seriously worried about the safety of their investments in US dollars, then we strongly believe that they will continue to accumulate gold, which would be positive for Australia. China is the world’s largest gold producer, so they do not need to import gold from Australia, but if gold prices rise, so should the Australian dollar.
China also invests heavily into Africa and we expect this trend to continue. By 2010, China’s business interests in Africa are expected to reach $100 billion. Their investments are in products such as oil, lumber, refining, agriculture, mining, textiles, and banking.
China’s aggressive stimulus plan to jumpstart the economy has also been focused on infrastructure projects. Therefore, companies that provide basic materials to serve the construction sector will also benefit.
By Kathy Lien, Director of Currency Research at GFTForex.com
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