Marcus Cake

China has one trillion dollars in foreigh reserves. This has been accumulated over many years of patient and successful exporting. China earns US$140 billion per year from the United States alone. Apparently, most of the one trillion dollars is invested in low-yielding US bonds. According to the IMF, China only needs 650 billion (65% of one trillion) to provide a buffer to operate its economy. China is considering reallocating US$350 billion into other investments that may provide a higher yield. With ongoing trade surpluses, it could invest one trillion dollars over the next yen years. China could become the world’s largest private equity investor.
Some individuals plan for their future. Some do not and approach retirement with inadequate funds. Some countries plan for their future. Singapore has a long history of successful investment and after 70 years of hard work and focussed leadership, the nation of Singapore can retire. China, Singapore and Dubai serve as good examples of countries of different sizes, in different regions with different histories that have secured their future with quality fiscal management and vision. Dubai has also accumulated significant wealth and plans to invest a similar amount in the development of Dubai. Some countries do not plan for their future.

Dubai and China are the beneficiaries of exporting to the US consumer and savings funds for the future. The US may enter a recession, and some forecast a depression. The decline of the US dollar:, the rise of global capital markets, the rise of specialist financial centres, Peak Oil, Peak Food, the rise of online industry networks and competititon for minerals and energy will reshape the global economy over the next two decades. Many countries are highly likely to direct their investments toward advancing its economy. Those that have saved for the future and preserved quality relationships will be best placed. Those that have savings to invest will be able to advance their future through investment.
Please find below some extracts from different articles. I encourage you to read the originals.

China and the Hedge Fund Dragon, John Mauldin, Market Oracle 11th March 2007

Extract:

• China today has over $1 trillion in foreign reserves, much of it invested in low-yielding US bonds. This has served to keep US interest rates low and allow American consumers to borrow at cheap rates and not coincidentally buy a mountain of Chinese products. These reserves have mostly been managed in a benign fashion. But some recent speeches by high-level Chinese leaders suggest that period may be coming to an end.
• There are precedents for more efficient management of reserves by governments. Singapore invests its reserves in stocks and bonds, as well as the outright owning of a wide variety of businesses. Norway has US$289 billion in stocks and bonds under management in its Government Pension Fund. (Note that Norway only has about 4.6 million people.) The fund can invest up to 50% of its assets on the international stock market.
• It makes sense from a Chinese point of view to try and get a better return on its assets than US treasuries, especially given the fact that over time the dollar is going to depreciate against the Renminbi. The Chinese allowed their currency to start floating within a specified band in the summer of 2005. After an initial drop of a few percent, the dollar has slowly moved down since that time. If you are only getting a 5% yield on your US bonds and giving up 3% on currency depreciation for a net 2%, that is not a strong argument for continued investment in the dollar.
• $650 billion is a strong reserve cushion that would allow the Chinese to be more creative and long-term in their management. They would not need to necessarily only invest in liquid investments. As an example, the total foreign investment in all of Africa in 2006 was only $38 billion. China could easily increase that number by investing in oil projects, farmland, mining, and other infrastructure projects that would guarantee it sources for the materials, commodities, and food that a growing economy is going to need.
• But $350 billion is just the beginning. China is adding at least another $100 billion each year. How do you put that to work? Of course, you continue to invest in your own economy, but China is going to need a lot of material and food in the coming years. They will not only compete for resources with the slower growing economies of the US, Europe, and Japan, but with the rapidly growing economies of the developing world and especially Asia.
• What if China takes half its growth in foreign reserves and puts it to work? You could be talking US$1 trillion by the end of the next decade.
• But just as it is logical for individuals to plan for their future, it is also logical for governments to do so. Anyone with an Excel spreadsheet can predict the demand for materials and food for the total world at current growth levels. While I am a believer that the free market will find a way to supply that demand (of course, price is the issue), a reliable supply of energy, commodities, and food will be an increasing focus of attention on the part of many world governments. China’s huge reserves offer it a way to secure that supply line in a way not afforded to many nations. I see no reason for them not to use it. I would if I were them.
• Of course, that has ramifications for the rest of the world. I would not expect China to move all at once, as that is not the Chinese way. But over time the results could be significant.