Back on June 16, Stuart penned a column entitled, China Frees Up Rules for Overseas Investments. In it, he identified a small clause in the new SAFE State Administration of Foreign Exchange that states, The new rules will also simplify approval procedures for outbound investment. This is the main intention of the change in the rules. It is not to support cash flow or plant expansion projects it is to free up Chinese industry to buy into foreign companies, sometimes in minority stakes, sometimes to buy outright.
But the official announcement came on Tuesday from Wen Jibao, China’s Premier who said, we should hasten the implementation of our Ã‹Å“going out’ strategy and combine the utilization of foreign exchange reserves with the Ã‹Å“going out’ of our enterprises. We first argued this would happen back on April 20 in a post where we stated that the fastest way for China to mitigate its risk in holding US dollars is to buy up other companies abroad (as opposed to stockpiling metals).
For hints on what China might buy and from where, pay attention to the large state-owned companies. In the case of metals companies, state owned Chinalco (aluminum) and Jinchuan Group (nickel) represent two such companies. As the Financial Times article suggests, the focus won’t just be on the west, it will be on resource-rich developing nations. (See our post on North Korea) In fact, we can expect outbound investment in rare earth metals companies as well. Recent investments include China Non-Ferrous Metals Mining (Group) Co., Ltd (CNMC) with a controlling interest in Lynas Corporation, a rare earth developer based in Australia, and the Jiangsu Eastern China Non-Ferrous Metals Investment Holding Co. Ltd (JIH) who recently bought a minority stake in Arafura Resources Ltd an gold and mineral company, according to Resource Investor.
And as we concluded back in April, If you really want to know China’s strategy for moving its reserves out of dollars, just watch which companies it buys and for how much. It’s much easier to spend your money on big-ticket items like entire companies than a few hundred thousand tons of raw material purchases.