So China is busily trading valuable dollars for cheap commodities. It seems like a pretty good trade. There are many reasons to think the dollar will decline over time, and as the economy picks up again, resources could easily grow in value.
So the obvious question is: should you follow China’s trade? On the surface, this kind of dollar/commodities pair trade seems to make a lot of sense, but China’s recent investment record is pretty dicey. A year ago a lot of Chinese money went into buying stakes in Western banks, and the country probably thought it would become a major player in the pre-eminent global banks. Now those banks have either evaporated, or China is looking at deeply diluted stakes in second-tier players that may be on the verge of nationalization.
It’s not just that the banking collapse has caught so many by surprise, it’s that China’s investment-selection process is far from scientific.
Here’s what Mergermarkets wrote back in December, 2007:
An insider at Citigroup revealed that the US investment bank had first approached the China Development Bank (CDB) to see if it was interested in acquiring a stake in the bank. CDB had shown strong interests in doing so, the insider said, but told Citigroup that it would need three days to make a decision because it needed, as a state-owned bank, to get government approval. At that same time, Abu Dhabi was also offered the opportunity to invest and was able to move forward with the purchase right away. The insider added that it was for this reason that CIC didn’t hesitate when approached by Morgan Stanley about acquiring a stake, having learnt from CDB’s experience that it needed to act quickly.
Ha. Good to see the CIC really “learned from CDB’s experience that it needed to act quickly.” Obviously they didn’t quite get the lesson right.
So who knows what investment criteria China is using right now, as it buys up iron ore, gold and oil interests. While the dollar-for-resources trade might make sense, China’s own decision making could involve more geopolitics and internal, intra-agency politics that wouldn’t apply to a typical investor. They may have money, but it doesn’t mean it’s smart money.