Wednesday, July 22, 2009

What Can China Get For Its $2 Trillion?

From the Wall Street Journal's Real Time Economics blog:

Originally posted on China Journal:

With the continued growth in China’s official foreign-exchange reserves now having pushed them past the $2 trillion mark, the debate over what to do with them shows no sign of dying down.

There’s an increasingly strong sentiment in China that these funds should be used to benefit the nation, rather than being lent to the U.S. and other rich countries. Premier Wen Jiabao said earlier this week that China should “combine the use of foreign exchange reserves with the ‘going out’ strategy of enterprises” (in Chinese here). That echoed earlier government statements — a deputy administrator at the State Administration of Foreign Exchange, for example, also raised the idea in February of using the reserves to support Chinese companies’ growing outward investments.

Despite such high-level official backing for this idea, there’s no evidence that China has actually done anything about it. China Investment Corp., the nation’s sovereign wealth fund, does own shares in several foreign companies. But it has been careful to present itself as a financial investor uninterested in operational control and its deals don’t seem to be coordinated with those of ordinary Chinese enterprises.

The sheer size of the reserves does give a daunting impression of China’s financial firepower. As Eswar Prasad and Isaac Sorkin note in a new piece for the Brookings Institution, $2 trillion is equivalent to:

  • all the land and property in New York City, Los Angeles and Boston
  • 73% of the market capitalization of the Dow Jones Industrial Average at the end of June
  • 25% percent of the market capitalization of the S&P 500 at the end of June
  • ...MORE
A slightly different view from the Financial Times:

China to deploy foreign reserves

Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country’s premier, said in comments published on Tuesday.

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China.

Qu Hongbin, chief China economist at HSBC, said: “This is the first time we have heard an official articulation of this policy ... to directly support corporations to buy offshore assets.”

China’s outbound non-financial direct investment rose to $40.7bn last year from just $143m in 2002.

Mr Wen did not elaborate on how much of the $2,132bn of reserves would be channelled to Chinese enterprises but Mr Qu said this was part of a strategy to reduce its reliance on the US dollar as a reserve currency.

“This is reserve diversification in a broader sense. Instead of accumulating foreign exchange reserves and short-term financial assets, the government wants the nation to accumulate more long-term corporate real assets.”

State-owned groups, particularly in the oil and natural resources sectors, have stepped up their hunt for overseas companies and assets on sale because of the global crisis....MORE