China is sitting on $2 trillion worth of Treasuries and other foreign paper that is becoming worthless with each passing day.
What's an ambitious, developing country to do? Put the dollars to work.
"We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” Wen Jiabao, the country’s premier told Chinese diplomats at the end of July.
"Going out" is China's slogan for acquiring abroad through its state owned corporations like PetroChina and Chinalco.
Last year China spent $41 billion on acquisitions, up from $143 million in 2002, according to the FT. Since December China has spent $13 billion on acquistions says Bloomberg. It plans on spending much more than that in the coming months. At the end of August, PetroChina announced it was looking for more acquisitions, wanting to cash in on “favorable opportunities.” CNOOC also announced the same at the end of the month.
This is a change of pace for the country. It was giving loans in exchange for oil last year. China made over $45 billion in loans to Russia, Brazil, Venezuela and Kazakhstan. In return it got long-term oil contracts.
The country abandoned that strategy when it realized it had a once in a lifetime opportunity to snap up deal after deal around the world. China saved up ahead of this downturn. Now it's running through the world cashing in on steep discounts left and right.
China's fourth biggest coal producer, state-owned Yanzhou Coal Mining Co. purchased Australia’s Felix Resources Ltd. for about $2.9 billion (A$3.5 billion). The deal was announced August 13th. Yanzhou had limited chance to grow its own reserves, so acquisition was the way to go says Morgan Stanley.
$17 Billion Bid For YPF
China National Petroleum Corp. and Ltd. put in a $17 billion bid for for all of Repsol YPF SA's stake in YPF, its Argentine unit. This would be the biggest foreign investment by China.
It's uncertain what's going to happen, as the Argentine government is wary of Chinese influence over the pricing, and supply and demand of oil there. Also, India is interested in the company as well.
PetroChina Buys Athabasca Oil Sands Stake For $1.7 Billion
China isn't just betting on Argentine oil. It's diversifying its oil bets, as you'll see.
PetroChina spent $1.7 billion to buy 60% of Athabasca Oil Sands Corp at the end of August. The chairman of Athabasca, Bill Gallacher was enthusiastic about the development. Oil sands are very expensive. Having a well financed backer will be key to future oil production.
Sinopec Spends $7.2 Billion On Addax
Sinopec acquired Swiss oil company Addax for $7.2 billion in June to gain access to Addax's contracts to drill for oil in Africa and Iraq.
This was the largest Chinese acquisition on record at the time, and a risky move, as Addax drills in the Northern regions of Iraq. Early reports indicated that Iraq might blacklist Sinopec. Reuters reported at the end of August that the deal received Iraqi approval.
$41 Billion For Natural Gas From Australia
Australia will export $41 billion worth of natural gas to China. In Australia's largest ever foreign deal, its Gorgon natural gas project will export 2.25 million tons of natural gas annually to China.
How did China get this deal approved, after a scrape with Australia over the Rio Tinto deal? By turning it into a "stimulus". Australia's resources minister said it would create 6,000 jobs for Australia and billions in spending.
$2.2 Billion For Singapore Petroleum
Petrochina paid $2.2 billion for Singapore Petroleum in May. According to an analyst interviewed by Bloomberg, “The deal gives PetroChina immediate access to increased refining capacity to take advantage of higher domestic prices down the road...On the flip side, if China fails to enforce the domestic product pricing reform, PetroChina can utilize SPC as an vehicle to sell fuel prices at international levels.”
$3.3 Billion For Kazakh Oil Producer
CNPC, in conjunction with the Kazakhstan's state owned KazMunaiGas, bought the Kazakh-based oil producer Mangistaumunaigas from Central Asia Petroleum for $3-$5 billion in April.
The BP-Iraq Tie Up
CNPC teamed up with BP to make a successful bid on Iraq's Rumalia oil field. The companies will be drilling oil, and paid $2 a barrel for every barrel above 1 million they sucessfully retreive. (They think they could get 2.85 million daily.)
It's not exactly the same thing as getting the entire resource, but it provides CNPC with an early in with the Iraqi government, and Iraqi oil fields.
$1.3 Billion For Offshore Oil
Sinopec and CNOOC bought a 20% interest in off shore Angolan oil from Marathon Oil in mid-July. They paid $1.3 billion. Bloomberg reports that Marathon wanted to sell for more than $2 billion, though an analyst said that price was much too high, and $1.3 billion was fair.
$877 Million For Emerald Energy
Sinochem paid $876.9 million for UK-based Emerald Energy, an oil and gas company with Middle Eastern and South American operations. Sinochem paid a 34% premium for the company's stock.
Its president said it was "another step in our strategy of building a global energy company". Sinochem is also reported be looking at a takeover of Gulfsands oil prodcution.
Buying A South Korean Refinery
No word on price here, but China National Aviation Fuel Holding Co.is looking at acquiring, a refinery in South Korea. This is keeping in line with China's intent to acquire from developing countries.
Billions In Loans
While we said China is mostly interested in purchasing assets, it was still interested in loaning money for oil.
Here's 24/7 Wall St's run down of some deals: Earlier this year, Petroleo Brasileiro SA in Brazil agreed to a $10 billion loan from the China Development Bank and to supply oil to China through China Petroleum & Chemical Corp. (NYSE: SNP). While this is at market prices, the deal does continue to secure more and more oil for China. Around the same time, China National Petroleum signed separate deals with Russia and with Venezuela where China would provide $25 billion to Russia and $4 billion to Venezuela in loans for long-term commitments to supply oil.
Clampdown On Rare Earth Metals
China doesn't need to buy rare earth metals--those minerals used in all sorts of high tech products from missles to Priuses--it mines 93% of them. So, it's locking them down.
China has reduced the amount it will export from 53,000 tons a year to 35,000 tons. It also added a 42% tax on dysprosium, terbium and others.
We don't have an exact dollar amount on this one, but writing in the Telegraph, Ambrose Evans-Pritchard says China is buying up gold:
“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” [Cheng Siwei, 'Economic Ambassador'] said.
In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.
The Next Stop?
Okay, it's not a natural resource, but there's one place where China's trade is weak: Arms. China Stakes reports "China's arms exports ranked tenth and accounted for only 1% of the world's arms trade, less than 1/20 of that of the US, 1/10 of Russia's, ranking below even Sweden and Spain."
Don't expect that to last forever. China's strong manufacturing base makes it a shoe in for some arms development eventually. It's just got to get around the US, France, Britain, and Russian, who are holding back its arms trade.