I am in awe every time I think about China’s market structure. In a country teeming with human life (over 1 billion more than the third largest country in the world) and not nearly as much developed infrastructure, not to mention a government-operated market system….well, the sheer logistics must be staggering.
The Chinese in recent years, have been rising up to the challenge, though. Partly through a mercantilist mindset, they have been hoarding up—and, incidentally, investing in US treasury bonds—in order to lower prices and remain competitive on the world market.
As China’s population begins aging, however, they have started running into the same issue that we here in the US face: how to pay for social security and medical care for the elderly? A big part of the answer in the past has been to trust in US t-bills, and still is, to some degree. However, a recent article in the Wall Street journals seems to indicate a change in policy.
With the turmoil in many world industries, the Chinese seem to realize that this would be an excellent time to invest while prices are temporarily lowered. Mr. Fang (a top Chinese official in the Chinese investment corp.) is quoted as saying, “China’s reserves are largely invested in safe government bonds like U.S Treasurys [sic], but they can be used to pay for imports or for foreign investment.” As Chinese foreign exchange reserves near $2 trillion, they have the potential to tip the scales in their favor all across the world.
Incidentally, these investments, so far have been in the arena of natural resources: Oil and steel being the biggest. I won’t pretend to understand why their focus has shifted to natural resources, but I could, in one word, take a guess: production. In a modern economy, though, the major factors of production are labor (which they have in spades) and capital (which they are working on feverishly), as opposed to “the bounties of the Earth” (especially if one is not overly concerned about pollution and the squandering of resources). I wonder if there might be another, ulterior motive there as well. Could China be hoarding more than simply wealth in anticipation of some crisis? Only time will tell, I suppose.