China: Beating the Recession
There is little doubt that China is using the current crisis to bolster its economic and strategic influence. It is undertaking its own extensive economic stimulus package worth in total $587 billion. This is the biggest stimulus package in the world, most of it being invested in infrastructure. In the year to the first quarter of 2009 its economy grew by 6.1%. Impressive considering for example the US and EU economies are shrinking. China maintains it can meet an 8% growth target for 2009 (what would Gordon Brown give for 8% growth this year!)
China is also showing growing interest in using the depressed state of many company share prices to buy strategic assets at reduced prices. Of particular interest to HBS Financial Planning customers will be the offer by a Chinese company to purchase 20% of Rio Tinto, a large mining company. The Chinese sovereign wealth fund called the China Investment Corporation is once again returning to the market after lying low during the turbulence of last year. Its leadership is said to regard mining stocks in particular as safe and more in keeping with China’s strategic goal to maintain access for its industries to raw materials.
It has recently also been announced that a company called Chinalco, a state owned Chinese mining group, has signed a contract to build a bauxite mine in Vietnam. It is the first such contract involving the massive reserves of bauxite to be found in the central highlands area of Vietnam, containing what will be the world’s third largest reserves of bauxite (used in making aluminium). The deal demonstrates that China is still actively investing in raw materials in the expectation of better times ahead.
China can think in such terms because it is in such a different position to advanced western economies. It is still a country in the process of industrialising- even its current rate of growth would have to last many decades before it achieved a level of industrialisation comparable with the UK. 60% of its people still live in the countryside and still do not have access to electricity or medical services. China aims to complete its modernisation by the middle of this century- thus it has much work to do regardless of what is happening in the global economy.
China, which has no banking crisis, can afford to take a longer term view of the present economic downturn. It is using the downturn to expand its political influence. It has been active in the G20 and has pushed for an enhanced role in various world economic bodies. It has recently sent a naval taskforce to the Gulf of Aden to deter pirate attacks and its ships have already intervened to prevent attacks on international shipping.
China is chasing commodities and raw materials regardless of the downturn. This presents opportunities for investors in commodities. Chinese investment should bolster prices of companies in the sector as a whole as they respond to the influx of Chinese money and China’s clear commitment to economic growth (and a willingness to put together a massive stimulus package to achieve it) should also enable commodity prices to rise in the medium term.