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Buy What China Buys

Last updated 7/24/2009 11:13 AM ET (GMT -5) 5 Comments

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Kathy Lien

Director of Currency Research, GFT

Last week, China reported that their foreign exchange reserves exceeded $2 trillion and it is under this environment that the U.S. and China will begin their Economic and Strategic Dialogue on Monday. As forex 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 percent 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 U.S. is China’s number one trade partner, they are not the country’s top import 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 grew by more than 60 percent while imports from Australia rose 45 percent in 2008. China buys products like crude oil from Saudi Arabia, iron ore from Brazil and copper from Australia.

Resources

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 or Germany. So from that perspective, we believe that for currency traders, this would provide opportunities in the Brazil 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 pales in comparison to the holdings of major European nations and the United States. Gold& #8217;s share of China’s total forex reserves is only 0.9 percent compared to a share of 76.5 percent in the Eurozone and 78.9 percent in the U.S. On an absolute basis, China owns 1.054 tonnes of gold versus the Eurozone’s 11, 065 tonnes and the U.S.’ 8,133.5 tonnes.  If China is seriously worried about the safety of their investments in U.S. 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 that serve the construction sector will also benefit. 

Source: Wikipedia

Consumer Demand

From a consumer demand perspective, a growing middle class has boosted demand for luxury items and technology. Hermes for example reported surprisingly strong earnings in the second quarter. Everyone touted the company’s success to the recession proof part of the population in the U.S. economy but beneath the headlines we see that Hermes biggest success was in Asia. Sales to Asia excluding Japan increased 36.7 percent compared to a 13.5 percent increase in sales in America. In particular, they credited their earnings to growing Chinese demand.  The strength of Chinese demand has already been displayed in recent quarterly reports by companies like Intel and Cypress Semiconductors.  So we should invest in what Chinese consumers buy. 

Buy What China Buys

The sheer size of reserves that China has in its coffers makes for many new investment opportunities. For the individual, it is important to recognize China’s high demand for metals and their interest in technology companies. Furthermore, development in countries like Saudi Arabia and Brazil should create new markets of interest. As a savvy investor, China knows that it pays to diversify and therefore U.S. Treasuries will not be the only thing that China is interested in investing in. The best opportunities in the second half of the year could be to buy what China buys.

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Comments (5)

Qin

July 24, 2009 at 11:54 AM ET

Hey, Kathy
Last time, I asked you the question about Which country will be first out of rescission between USA and Canada, and you answer is USA.

Base on the report from Canada central bank, it said rescission is nearly end. Do you still think that US will faster out of rescission than Canada?

As you mentioned in the article that China may buy more oil, so oil price may rise, which is good news for CAD. Do you view CAD will break new high against USD by the end of this year?

klien

July 24, 2009 at 02:47 PM ET

The NBER will not announce when the recession has ended until well after the fact, so it may take time for us to really know. With a new year to date low in USD/CAD on 80 pips away, that could certainly happpen

sdg66

July 24, 2009 at 01:02 PM ET

Thanks for the informative article, Kathy. Since China is flush with cash, it will invest in material goods for the future. China has already concluded a 20-year oil agreement with Russia.
I have been propagating the same slogan: BUY WHAT CHINA BUYS in my circle for quite some time; now with the help of your article I'll have more facts to back my argument. Thank you once again.

Dario Fuentes

July 24, 2009 at 01:49 PM ET

Hi kathy,
Thanks again for the comments. I was wondering what Forex brokers offer transactions in Brazil Real, Cololmbian pesos or chilenian pesos. I have noticed that these three currencies have been going up against dollar. I will appreciate the information.
Once again thanks a lot.
Best regards
Dario

Eddie09

July 25, 2009 at 05:05 PM ET

Buy What China Buys

Last week, China reported that their foreign exchange reserves exceeded $2 trillion and it is under this environment that the U.S. and China will begin their Economic and Strategic Dialogue on Monday...
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Well, $2 trillion sounds big, but a big chunk of this $2 trillion has been going to the Fed (Well over $1 trillion have been spent to buy and hold the money losing U.S. bond and related US debts). Also a considerable portion of this $2 trillion USD was converted from Chinese Government debt not cash reserve.

According to the international capital flow report (TIC) by the U.S. Treasury Department on July 16, as of the end of May, China’s holdings of U.S. government debt exceed 800 billion USD, and are at the level of 801.5 billion USD - an increase of 38 billion compared to the figure at the end of April. The last 12 months alone China has purchased $297 billion US treasury securities, exceeding it’s a-lot-richer neighbor Japan as #1 US debt holder.

Chinese officials have said their policy of buying US bond will not be changed in the near future. Therefore, China’s buying power for commodities may not be as powerful as it seems under this situation.


Data of China’s US treasury securities holding
http://www.treas.gov/tic/mfh.txt

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.