Forget Investment Gurus, Follow China
(eToro Blog) In the minds of most investors, the U.S. Federal Reserve Bank assumes the role of leader of the world's economies, with the ECB generally viewed as its close second. This phenomenon becomes apparent whenever a policy or interest rate decision is announced, resulting in increased market volatility, whether the decision was in line with expectations or not. Market players sit up and pay attention when the Fed or ECB has something (or nothing) to say.
The markets' reaction to other central banks' decisions are usually of a more limited scope and duration and generally result in far less volatility. Of course, if that "other" central bank happens to be the People's Bank of China, then the reactions are often far different. Without directly campaigning for the position, the Chinese central bank has been assuming a leading role through their actions, and having a not inconsiderable affect on the financial markets in so doing.
As is well known, China's economic growth has been tremendous, and the government has been aggressively working to rein it in through monetary and fiscal policy. Over the last year the central bank has raised key interest rates four times, and analysts believe it likely they will do so a few more times before the year is out. Reserve requirements for China's banks have also been raised five times this year alone, following the 10 times they did it in 2010. Retail loan growth is half what it was, and corporate loan growth fell to 12% in the first quarter, from 30% last summer. The Chinese government has also attempted to dampen property markets through new regulations and increases to capital ratio requirements.
Across the world, developed economies have reported sharp declines in construction volume, as well as property sales and real estate price inflation, flattening of steel consumption and other key materials, significant declines in vehicle sales, etc.
Meanwhile, China's growth appears unstoppable. For example, they have a significant presence in South America, known for its vast natural resources such as oil, iron ore, copper. Several major deals have resulted in the Chinese government owning a large stake in Brazilian, Chilean and Argentine assets. Direct investment in Latin American, in fact, expanded dramatically last year, with Chinese investment amounting to some $15 billion. That is double what it was in the entire twenty years prior, and only a fraction of this year's $22.7 billion investment.
China is well on its way to gaining control of the world's copper market, in spite of its recent reemergence into that market. Some industry analysts predict that over the next 10 years, China's cable makers, now the worlds' largest, will double their demand for copper as urban migration leads to expansion of power grids. This event is already being seen in emerging nations of the world, especially in Africa and South America.
The gold market, too, is coming under greater control as a result of Chinese growth. It was recently reported that a consortium of investors from China (determined, ultimately, to be the Chinese government) recently acquired a large stake in a South African gold mine, effectively making them the majority shareholder in the firm. Industry experts point out that that mining sector, amounting to some $370 million, is but one of many such deals, and is considered pocket change compared to the billion dollar deals that have been negotiated. In the space of a single year, the country's holdings in gold reserves have allowed China to advance from sixth in the world to third.
The oil industry is also not without Chinese influence. China has taken a less obvious route to position itself as an industry leader, but it has done so nonetheless. Experts note that rather than an outright attempt at full acquisition, through its state-owned companies and sovereign wealth funds, it has rather chosen partial acquisition.
It's clear to most analysts that the Chinese government and central bank play a much more important role in the world's financial markets than they've been given credit for, and will continue to do so. China policy also has a tremendous affect on the currencies of those countries which are major trading partners. Any threat of monetary tightening by the fiscal bank sends shockwaves through the Aussie, Yen and Euro given their respective governments' major trading activities with China.
One might wonder when the growth engine that is China will ever peter out. But consider this, the enormity of China's wealth is staggering; a $3 trillion reserve fund - nearly the equivalent of Germany's economy - is at the government's disposal and control. Only internationally known Blackrock has more foreign reserves under management, but when you consider all of China's other resources, China could well be the biggest asset manager in the world. Looking for an investment guru? Look no further than China, the world's biggest trader.
Copyright 2011 eToro Blog
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