Those who are effective investors are opportunists who are successful at locating investments that are doing what’s right, while too many focus on what is going wrong. These effective investors take a more forward approach, seeking future opportunities most of us fail to see. So I thought I would point out that there is potential good news for the equity (stock) markets that has not been getting the attention it deserves.
China, in recent years, has amassed huge foreign exchange reserves, currently topping 1.2 trillion dollars—almost as much money managed today by the entire hedge fund universe in the United States. This reserve is growing rapidly due to China’s huge excess of exports over imports. They have the ability to produce goods more cheaply than countries in the developed world, which in turn has given the Chinese tremendous growth. This has created wealth and an extraordinarily large excess in their reserves.
China currently holds most of its reserves in short and medium term debt instruments such as U.S. Treasury Bills and Bonds. Owning U.S. debt is important for them to help facilitate trade with the United States, but as their reserves continue to grow, their appetite for “safe” investments like Treasury Bills will lessen. One reason is that their foreign exchange reserve requirements in lower risk investments are currently funded. Most economists believe countries should hold at least one year’s worth of import income in lower risk investments. U.S. dollars are still considered the world’s most secure reserve currency because of the size of dollar holdings and their ease of liquidity. Thus, it is unlikely that China will liquidate their U.S. bonds, but it is likely they will buy other types of investments in the future.
China has recently announced that it will start diversifying its reserves and start investing in equities. According to the Wall St. Journal article, “China to Overhaul Management of Foreign Exchange Reserves,” minister of Finance Jin Renqing said China will divide the foreign exchange reserve pool into two parts which will be managed separately with different investment objectives. The Chinese investment plan will take on greater risks with its money and the size of reserves could swell to 2 trillion dollars by the end of the decade.
The question now is what types of investments will China buy? Where will they deploy their more aggressive pool of money? My guess is that the aggressive funds will be put into areas that can help their economy grow and build out their infrastructure.
I have been looking at companies that are involved in infrastructure, water, power, alternative energy, steel, aluminum and other natural resources. They are attractive because China currently lacks sufficient developed seaports, railways, pipelines and roads for anticipated economic growth.
Following the big money into a stock has always been a savvy investment strategy. Investing in a stock before the big money gets there, well, that would be even better.
References
“China to Overhaul Management of Foreign Exchange Reserves”
Wall Street Journal March 9, 2007
