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China is on a buying binge that will last for many more years

Companies / Investing 2010 Jun 23, 2010 - 12:10 PM GMT

By: Tony_Sagami


Best Financial Markets Analysis Article"Wax on. Wax off."

That was my favorite line from the original The Karate Kid movie. That was way back in 1984 and the movie has just been updated and re-released with Jackie Chan replacing Pat Morita.

Moviegoers loved it and made it the #1 movie in America with an impressive $55 million of ticket sales in its debut weekend.

Other than the new cast, the biggest change of the new movie is the location, which has moved from sunny California to Beijing. Parts of the movie are filmed in the Forbidden City and The Great Wall of China.

It may not have been Columbia Pictures' intention when it made the movie, but the move to China also happens to coincide with the shift of economic power from the west to the east and highlights the new role that China has in the global economy.

That role is to lead the rest of the world out of its current economic funk and into global prosperity. James Bullard, the President of the St. Louis Federal Reserve Bank, expects China to drive the world economy now and in the future:

"China is a rapidly developing economy that is importing available production technology from the rest of the world, and creating its own as well, in a manner that leads to substantial gains in productivity, national income, and the national standard of living. Viewed this way, China has in the past year simply returned to its rapid growth path and is likely to remain on that path for a considerable period of time."

In short, what Bullard is saying is as China goes, so goes the rest of the world. And China is "going" just fine ... thank you.

For proof, I'd like to point out the $2.4 TRILLION of cold hard cash that China has in the bank. That amount seems to grow almost every month as China regularly runs a multi-billion trade surplus each month and adds to a staggering war chest of cash. In May, for example, China enjoyed close to a $20 BILLION trade surplus.

It is almost impossible to get a handle on those types of large numbers, so perhaps an easier exercise would be to ask: What is China doing with all that money?

What do you do when you bring in more income than you have expenses? You can do one of two things: (1) spend it on stuff like cars, jewelry, or bigger house or (2) invest it into real estate, stocks, savings, your retirement plan, or a business.

China is doing the latter ... investing it.

China is using the money it gets from selling us toys, clothes, and electronic doodads and uses it to buy foreign assets. China has been quietly but regularly making acquisitions in the Middle East, South America, Australia, and Europe.

Last year, China invested $33.5 billion in 166 foreign acquisitions and it is on track to invest US$35 billion into foreign companies in 2010.

The biggest deals last year were an all-cash $7.2 billion purchase of Switzerland's Addax Petroleum by China Petroleum & Chemical Corporation, also known as Sinopec (NYSE:SNP), and PetroChina's (NYSE:PTR) purchase of a 45.5% stake in Singapore Petroleum for $1 billion.

Talk about buying when blood is running on the street, just LAST WEEK, the Chinese government made 14 major but separate investments and acquisitions in Greece involving shipbuilding, ports, telecom, and tourism.

China is on a buying binge that will last for many more years.

China is on a buying binge that will last for many more years.

Given China's ravenous appetite for raw materials, commodities, natural resources, energy, and building materials, the Chinese buying binge will continue for many more years.

A very profitable move would be to get in front of that Chinese buying binge and wait for them to gobble up your companies. Of course, it is very difficult to predict what companies will be acquired, but it isn't hard to figure out what sectors China is the most interested in and then find the corresponding ETF of that sector, such as:

Energy ETFs

  • SPDR Energy Select Sector Fund (XLE)

  • Vanguard Energy ETF (VDE)

  • iShares Dow Jones U.S. Energy Index Fund (IYE)

  • iShares S&P Global Energy Index (IYE)

  • WisdomTree International Energy ETF (DKA)

Oil Services ETFs

  • Oil Services iShares Dow Jones HOLRDS (OIH)

  • U.S. Oil Equipment & Services Index Fund (IEZ)

  • iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO)

Base Metals ETFs

  • PowerShares DB Base Metals (DBB)

  • iPath Dow Jones-AIG Industrial Metals (JJM)

  • E-TRACS CMCI Industrial Metals (UBM)

Agricultural & Food

  • Market Vectors Agribusiness ETF (MOO)

  • Powershares Dynamic Food & Beverage Portfolio Fund (PBJ)


  • PowerShares Water Resources (PHO)

  • PowerShares Global Water (PIO

  • Claymore S&P Global Water (CGW)

Lastly, there is another way to hitch a ride on the China acquisition train. That is by investing in Blackstone, the leveraged buyout specialty firm that China's $300 billion sovereign wealth fund paid US$3 billion for a 10% stake.

China wanted a piece of Blackstone to take advantage of its tremendous experience, but more importantly to put the world's best takeover artist on its side while it embarks on its global spending spree.

Blackstone (NYSE:BX) has been struggling since the financial meltdown put a damper on the M&A industry. But when your minority partner has $2.4 TRILLION dollars in the bank and eagerly wants to spend it, you can expect business to improve.

Now, I'm not suggesting that you rush out and buy Blackstone or any of the above-listed ETFs tomorrow morning. As always, timing is everything and I recommend that you wait for them to go on sale. But the smartest investment move you can make going forward is to get "long" whatever the Chinese are buying.

Wax on, wax off, grasshopper.

Best wishes,


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