When the Arab oil exporters amassed huge dollar accounts in the early 1970′s, they began to recycle those Petrodollars first through the banking system, and later through direct investments in Western real estate and companies. They spent a considerable portion of their over $400 billion in current account surpluses in theis manner. Similarly, Japanese firms went on an acquisition spree in the 1980′s in the United States, which utilized some of Japan’s vast dollar surplus in foreign exchange; by 1990, Japanese companies had spent at least $84 billion on US firms.

Now it’s China’s turn. China has almost $1.1 trillion in US dollar foreign exchange assets. But China does not apparently have a plan for acquisitions on the scale of previous accumulators of large dollar surpluses, at least so far. WSJ:

China’s decision to make greater use of its $1.06 trillion in foreign exchange reserves could fuel uncertainty about the dollar but is unlikely to result in any immediate selling of the U.S. currency by the world’s fourth biggest economy. In a speech Saturday at the end of a key financial working conference, Premier Wen Jiabao said China would “actively explore and expand the channels and methods for using foreign exchange reserves,” according to the official Xinhua news agency. The comment was the highest-level confirmation yet that China is thinking actively about how it can use the reserves, which have grown by more than six times since 2000 and made China one of the largest holders of U.S. Treasury bonds…

Wang Qing, an analyst at Bank of America in Hong Kong, said the message of the conference is two-fold: Beijing intends to encourage imports to erode its currency reserves, and it is planning to create an entity that will invest a portion of the reserves…Beyond his vague comment about expanding the use of the reserves, Xinhua cited Mr. Wen as saying China would also take measures to bring balance to China’s international payments, which are currently skewed toward absorbing foreign currency. He also reiterated that China would continue to steadily advance its exchange-rate reforms.

China has already used portions of its currency reserves to recapitalize big state-owned banks. In recent months, analysts have debated the possible use of the reserves for other purposes including investment in natural resources. But the reserves, which are held and managed by China’s central bank, don’t comprise cash that the government can simply spend as it wants.

One thing Beijing could do to erode its reserves, or at least slow their growth, is encourage Chinese companies to import more oil and other commodities…China could also shift a portion of the reserves into a new entity, like ones operated by the Korean and Singaporean governments, that invest in companies on behalf of the government.

So far China has been quite modest in its US acquisition strategy. Perhaps the reason is that, as in other parts of its economic development strategy, China has tried to benefit from the mistakes of others. After all, many of Japan’s US bank acquisitions, as well as the Rockefeller Center and Columbia-TriStar Pictures deals, worked out rather badly for Japanese interests.

We note that one factor that is probably at work is China’s missing generation of businessmen. The Cultural Revolution created a gap in education and experience for China in the managment group that would normally be leaders in a foreign expansion strategy.

This entry was posted on Sunday, January 21st, 2007 at 3:09 pm and is filed under business, China, General. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.