Sunday, February 20, 2011

The Art of War, or:How China plans to dominate the world economy

(This note was originally posted on Jan 31, 2011 @ StoneStreetaAdvisors)

“If you lay siege to a town, you will exhaust your strength and resources. Therefore, feed off your enemies and forage for their resources.”
~ Sun Tzu

With a war chest of $2.85 trillion, and a renewed swagger it was only a matter of time before China flexed its economic might by diving back into investing in western banks.  After ill-fated multi-billion dollar investments in Blackstone Group LP, Morgan Stanley and Barclays PLC, last week a Chinese bank agreed to buy a stake in the US arm of Bank of East Asia.

Industrial and Commercial Bank of China (I.C.B.C.), the largest of China’s “big 4” state owned commercial banks agreed to pay $140 million for an 80% stake in the United States subsidiary of the Bank of East Asia, which is based in Hong Kong and has 13 branches in New York and California. The rationale was:
“Chinese banks are aggressively seeking to expand overseas, hoping that they can support Chinese companies abroad instead of losing them to American and European financial companies.”
This was I.C.B.C.’s second investment in North America, after buying a 70% stake in the Canadian operations of the Bank of East Asia Last year. It’s most notable investment however, is the 20% stake in Standard Bank South Africa that provides it with access to mining, energy and other resource firms in Africa.
According to a recent PwC analysis: "China's appetite for overseas assets is insatiable, with natural resources remaining a key industry target, as the country aims to secure the resources it needs to fuel its engine of economic growth," Mr Brown said.  As predicted by PwC earlier in the year, apart from continued strong interest in natural resources, there has been an increasing number of acquisitions of high technology companies, as Chinese buyers look to bring know-how back to China to foster a developing economy.  There is also strong interest in machinery and equipment manufacturers, and the automotive sector.”
Nothing new there you might say, except with the Yuan appreciation, the stumbling Euro and the continued Dollar malaise, it seems outbound Chinese M&A is about to explode, after rising by more than 30% in 2010.
Two recent developments also give impetus for reassessment on how to play China:
  • Chinese financial institutions are pushing into Europe, opening bank branches(I.C.B.C is opening branches in Paris, Brussels, Amsterdam, Milan and Madrid this month), scouting for deal opportunities and even attending German banking classes(China Development Bank is one of four finalists bidding for a large stake in troubled German bank WestLB AG).
With the continent's banks in shambles and no viable alternatives, China’s quest to be the global powerhouse could very well be accomplished before it’s begun.
  • China Opens a Door on Currency Swaps, China will allow some banks to trade currency swaps for corporate clients starting March 1, extending the use of the financial derivative beyond the interbank market—a move that facilitates corporate foreign hedging as Chinese trade continues to expand and cross-border investments accelerate.
Letting corporate clients enter into currency swaps could also pave the way for China to allow foreign companies to issue Yuan-denominated bonds in China, traders said.  Could this be the precursor to letting the Yuan float (somewhat) against the Dollar?
I would keep an eye on $CNY, $CYB, $FXI, and $CHIX.
Could all these moves be the set pieces for the next phase of world war III mentioned by georgetownjack?
I know what I think!.
I will leave you with one final quote:
All warfare is based on deception. Thus:
When able, manifest inability.
When active, manifest inactivity.
When near, manifest far.
When he seeks advantage, lure him.
When he is in chaos, take him.
When he is substantial, prepare against him.
When he is strong, avoid him.
When he is wrathful, harass him.
Attack when he is unprepared.
Emerge where he does not expect it.
~ Sun Tzu

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