By the end of 2008, China's foreign exchange reserves reached US$ 1.95 trillion, its holding of US treasury US$696.2 billion, an increase of 44.9% from its holding by the end of 2007. Will the US see the same increase of China's treasury holding in 2009? I doubt it.
Chinese are going to spend, spend and spend. What are they going to spend it on? A big amount of money will pour into acquisition of natural resources. Chinese have suffered from soaring commodity prices and its dependence on other countries in the past decade due to its fast growing demand for resources such as oil and ores. The global financial crisis provides a perfect timing for China to acquire resource companies from overseas when everybody else is cash-strapped.
A few examples:
US $19.5 billion investment in Rio Tinto by Aluminum Corp. of China for 18% stakes
China Minmetals paying US $1.7 billion for Australia's OZ Minerals Ltd (pending)
- US $10 billion loans to BRAZIL in exchange for supply up to 100 million barrels of crude oil a day to China
- US $25 billion loans to two Russian energy companies in exchange for more oil supply
- US $2.23 billion purchase of goods and services from European countries
Total: US $58.43 billion
I am sure this is not the end of the list. More deals will follow and the total investment can easily top US $100 billion.
The financial crisis has provided China a new channel to release their foreign exchange reserves through acquiring natural resources and striking deals with suppliers, when the rest of world is struggling with lack of capital.
It is more than grabbing resources. We need to see beyond that.
Before the financial crisis China relied heavily on the purchase of US securities to channel out the increasing reserves of US dollars to release the appreciation pressure on Yuan, in addition to using it as an investment instrument. However, China has never been comfortable with the fact that a large amount of its asset is tied up to the U.S. Due to the financial crisis, the slow down of export to US will cause a reduction of US dollar reserves. On top of that, the increased spending of foreign exchange reserve will further reduce its pressure on the appreciation of Yuan and enable Chinese government's plan to stabilize the exchange rate between RMB and US$, even likely to push Yuan lower.China sees an opportunity to adjust its portfolio.Another implication is that China may start to loan US less, reducing its dollar-backed asset. Obama may not like this.
