China’s Mountain Of Money Is On The Move; Where’s It Going?

Jim Trippon:  It had to happen. Even China’s incredible hoard of foreign reserves could only rise so high. Right now, Chinese foreign reserves are estimated at a mind-blowing $3.2 trillion dollars. And that’s not all.

Throw in China’s other foreign assets and the number is even bigger. How does $4.4 trillion sound? That includes Chinese investments and possessions abroad, a number that is also climbing rapidly.

In fact China’s wave of overseas investment is the next great financial phenomenon. After all, China has to do profitable something with all that foreign money.

China’s wave of foreign investment is changing world financial rankings. It is officially called “Outbound Direct Investment” or ODI. China (including Hong Kong) has jumped to become the world’s fifth biggest global investor.

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There is still “huge potential” for China to increase the flow of money and move further up the ladder according to the U.N. agency that prepared the report.

China’s outbound investment ballooned by 17 percent in 2010 from the year before to $68 billion. That outpouring of money grew even faster this year according to Chinese authorities who claim that outbound investment jumped by 36 percent last year.

Throw in Chinese mergers and acquisitions abroad and even more money is in play. In 2010 China’s M&A activity abroad came in at $29 billion, putting the nation at number four in global rankings.

AMAZING POTENTIAL

Compare China’s trillions in reserves to its current outbound investment and you can see what’s coming. Parking trillions of dollars in treasuries, greenbacks, euros and the like is not the most profitable strategy. Direct investment holds out the potential for bigger returns.

China’s economic momentum and growth together signal big changes ahead for the world according to James Zhan, the U.N. analyst responsible for the latest report. As Zhan puts it, China’s global investment picture still shows “amazing potential”.

So far this year China’s outbound investment has risen by 34 percent. The global average is for only 5 percent growth.

So where is the money going?

It’s not coming here, at least not yet. Seventy-five percent of China’s ODI has gone to its Asian neighbors. Another 12.5 percent has gone to Latin America. Africa and the European Union received the bulk of the remaining outbound investment.

It is worth noting that China has been busy forging trade agreements with its Asian neighbors through the ASEAN (The Association of Southeast Asian Nations) group of ten countries. China is apparently focused on boosting its markets and influence in its home region.

WHAT IN IT FOR US?

Even bigger than China’s outbound investment is the inbound flow of money. It is a torrent of investment from all over the world, exceeding $105 billion last year. The inbound money flow is on target to swell even further this year, with foreign direct investment (FDI) already up 18.4 percent.

Most of that money comes from the United States and Europe.

Ultimately China has no choice but to start spending and investing its money abroad…so says a leading authority on China, Patrick Chovanec a professor at Tsinghai University School of Economics and Management in Beijing.

“As long as China wants to sell goods for dollars, and decides to accumulate those dollars as reserves rather than spending them on imports or investments, it has little choice not only to hold the Treasuries it already owns, but keep buying more and more,” Chovanec explains in a much quoted article.

China would ultimately benefit by exporting much more capital. Professor Chovanec explains, “In the long-run, it would be to China’s advantage, by giving Chinese consumers greater buying power and a better standard of living. It would benefit the U.S. too, by directing the dollars that China has earned…towards buying American goods and investing in American industries, rather than shoring up American deficits.”

Fortunately, Chinese economists say that “going overseas” with investment money is part of a national strategy for the next five years. Right now China is lending to the United States to finance Americans’ purchases of Chinese goods.

That’s a situation that can’t last.

China has trillions to invest abroad and right now it is using too little of that reserve. Look for exponential growth of China’s investment beyond Asia as a major trend in the future.

Committed to your Global Profits,

Written By Jim Trippon From Global Profits Alert

Jim Trippon, founder of Trippon Financial Media, Inc., is a maverick that has dedicated his investment career to helping investors make smarter financial and stock selection decisions. Trippon, an internationally recognized expert on global and value investing, has a deep passion for finding hidden value in global equity markets. Trippon started his career as a financial statement examiner with Price Waterhouse which allows him to dissect a public company’s financial picture and better identify hidden gems. Trippon’s savvy approach to investing and personal finance makes him in high demand by major media who seek his unique perspective on stocks and global economics. He has been featured in top publications both in the US and abroad including Bloomberg, Investor’s Business Daily, The New York Times, The International Herald Tribune, Stock Futures and Options Magazine, The Bull and Bear Financial Report and he regularly appears on broadcast television including as an on air contributor to CNBC, CNN, Fox Business, and Fox News.

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