In order to secure its standing in the commodities market when the economy does eventually recover, the Chinese sovereign wealth fund will be deploying up to $200 billion in new purchases.
A Great Move
China isn’t buying the minerals or commodities themselves, but instead companies that help find or refine the minerals for use. Remembering back to the Chinese boom in 2006 and 2007, the only problem China faced economically was its access to resources. The essential elements of production, including metals like aluminum and copper, rose more than 200% leading up and throughout China’s massive growth period.
Locking in Prices and Supply
As the rest of the world worries about deflation while systematically inflating the world through stimulus, China is sure to sweep in and lock in prices with its current surplus of foreign holdings. Rather than let its cash sit in cash and earn little return, there is far greater economic gain to be had in securing the necessary components of production. China took heat in 2007 as PetroChina snapped up oil reserves around the world that were then monetized at a lower price than the market value of oil. By doing this, China secured its supply of oil and did so at a price that the rest of the world could not beat on the open market.
Hedging or Thieving?
How China will deploy its new holdings is the most important. There are two ways that the Chinese can benefit from the purchase of commodities. The wealth fund could hold onto its share purchases to hedge the change in commodity prices. This way, it could boost its own cash reserves and pay higher market prices; either way, the change in price is partially hedged by capital gains. Or, China could act as it has in the past and instead use the commodities itself at a subsidized price to factories. Subsidizing the metals tends to work best for the Chinese economy by giving it a means to produce and also employ, while maintaining an advantage that no other country in the world can beat.
Bet on Exports
With greater access and lower prices for commodities, China is sure to begin increasing exports as the economy worldwide turns around. Export growth in China went negative for the first time this year, but the numbers will turnaround with time. The best way to play China might just be in dry shippers, like DRYS, or other stocks that have an interest in international shipping.