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China: Positioning for Growth

I had some emails from people when I told them that the current economic meltdown marks a turning point in global economic power. A generation ago, we were worried about our banks and government writing down the defaulting third world debt. In the next generation, the third world (specifically led by China and Brazil) will be worried about defaulting G-7 debt. The developing world will hold the economic power due to their investment in growth and their position as lender to the West.

Why do I think that? In just a few years, China has become the world's top consumer of timber, zinc (with 30% of global demand), iron and steel (27%), lead (25%), aluminum (23%), and copper (22%), along with nickel, tin, coal, cotton, and rubber. And although China is the planet's second-biggest consumer of oil, behind the United States, it's gaining fast. In order to secure its access to resources, China is exchanging to increasingly devalued dollar for hard assets that it can use to continue its growth.

Here are a list of the investments China is making to secure its future:

1. Wall Street Journal reported that Chinalco is buying an 18% stake in iron ore producer Rio Tinto for $20 Billion

2. Financial Times reported that China Minerals is buying 100% of OZ Minerals for $1.7 Billion

3. Business Day reported that a partnership between China Investment Corp and China Shenua Energy purchased $2.9 Billion in Fortescue Metals for a 15.85% stake

4. Washington Post reported that China agreed to loan Russia $25 Billion in exchange for a 20 year supply of oil (15 million tons per year for 20 years) plus interest and principal repayment

5. Reuters reported that China Development Bank is loaning Brazilian oil company Petrobras $10 Billion in exchange for oil supplies plus interest and principal repayment

6. The Guardian reported several other resource acquisitions: (a) Copper mines in Zambia; (b) Offshore Oil Drilling license in Nigeria; (c) $3 Billion iron ore mine in Gabon; (d) Timber in Mozambique; (e) Aluminum in Russia; (f) oil fields in Yemen; (g) Offshore oil fields in Cuba, plus very likely others that have not been reported.

The exchange of dollars for hard assets and access to the building blocks of growth will make China into the worlds dominant economic power. Their stock market will lead the way for the financial markets' recovery followed closely by Brazil who is on a similar path. Both countries are making sound business decisions to grow their economies – contrast that with the West that is in crisis mode and seems to not have a definable plan.

So, the stark contrast between the focus on growth to pull through the world's economic crisis and the lack of focus on a solution in the West will certainly determine the future of the investment world.

If China has determined that the path to prosperity lies in commodities and securing a current supply to meet upcoming demand – and dumping their cache of devaluing dollars in the process – that seems to be the clearest guide to portfolio management that I've ever seen.

Mark