China World Wide Investing Ushering in the Next Asset Model
Stock-Markets / Investing 2011 Feb 08, 2011 - 11:13 AM GMTBy: Justin_John
This is not a typical day trading article but rather medium term fundamental patterns which ultimately define every move including bond markets and currency markets.
The Heritage Foundation’s China Global Investment Tracker documents large Chinese investment overseas outside of bonds. The volume of this investment has exceeded $200 billion in the past five years. The tracker also contains information on nearly $100 billion in large construction contracts since 2005. These numbers will only rise as China seeks to find outlets for closing on $3 trillion in official foreign exchange reserves.
By year the amount are tracked here:
China has been increasing its overseas investments from 2005. Nearly $57 bn dollar of non bond investments were made in 2010.
So where is China investing? Well Take a Guess! IT IS EU.
Australia takes the cake as the single largest country with nearly $34 bn are invested. US is second with nearly $28 bn invested. But if we consider EU as a whole then EU beats the US and Australia handsomely with $35 bn investments. Brazil is the third-largest target for Chinese investment, trailing only Australia and the U.S., though Nigeria and Iran also boast large engineering contracts.
The growing traction between EU and China has been of tremendous concern in Washington though never spoken publicly. China move towards EU as its favored destination is a significant step in delevering itself from the US dollar.
China Investments by sectors
China has invested nearly $100 bn in overseas energy resources and $60 billion in the metals sector. That explains the overwhelming ride in the commodities market in 2010. And yet Gold is just at $1350/ounce. Hopefully Gold bulls will take note that Gold is way too over supplied in a world surrounded and ruled by bond markets.
Another line of thought….
The growing proximity between China and EU will ultimately take EURO to levels unforeseen. We have a long term and medium term bullish perspective on the EURO. What happens to the US ? Well US will crash down from a developed economy to a third world economy once China completely migrates its forex reserves away from the US dollar into EUROs. The process is progressing as seen above. Soon China will not need to buy any US dollar bonds to peg its currency and finally can sen its existing reserves as well as they would have been converted into other currencies.
China is really going to dump the US bond markets and we will see that long awaited bond market failure. The failure at first may not seem to be a failure as yields rise to a fantasy recovery which only the FED can understand, later on to be led by commodities and finally in the final stages when China, India and Russia will all dump the dollar bonds into an abyss of no return. We will not have a US dollar in about 2 years time. Looks aggressive? Wait for the unraveling to begin no later than October 2011 as 10 year yields will cross 4.5%.
We stand by our call that US economy is dusted and over. We are in the last few months of a massive bull trap before the asset re pricing that is to hit the whole world in 2011/12. Asset repricing is a painful process where sovereign debt and assets are restructred and written off as investors will take a hit on their holdings. Who will emerge as the new axis powers of this decade from Asset Repricing of 2012? China, India, Brazil and Russia. Countries who will dump the US dollars and migrate to the EUROs through FDI investments into EU and Asia-Australia. What happens to EU debt problem? Well the asset re pricing will write off a lot of debt in Europe but EU will be relatively stable cause of China holding and backing in the bond markets. Infact EU will raise rates even while asset re pricing process kicks-on which attract even further capital. The 2010 floated euro fund (EFSF) will serve as a proxy treasury for the new model to be ushered in.
But the scope of this article was not to discuss the asset re pricing model but rather to throw light on the Chinese strategic investments. The trend is to diversify Chinese reserves to acquire resources around the world with EU leading the path and attention of Chinese investments.
Source: http://dawnwires.com/investment-news/...
By Justin John
Justin John writes for DawnWires.com and is a Director at a European Hedge Fund.
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