What US stocks China may want to buy with its foreign reserve?
China has decided to diversify away from US treasury bonds, and invest up to $200 billion of its huge foreign reserve in equities in order to boost the return on its foreign reserve holdings.
Making financial profits is certainly one of the major objectives of the foreign reserve managers, but it is also expected that Chinese government may want to create benefits for its own economy (and Chinese employment) as much as possible. In short, they don’t want too much net capital outflow. In any case, a poor country is certainly in greater need of capital. But how can Chinese achieve these goals?
One possible way is to link the portfolio allocation decision to US corporations investment decision in China. Chinese government may want to invest more in US multinationals that promise to invest more in China-based projects.
According to the Commerce Department’s “2007 Investment Climate Statement”, these large US corporations active in China include (ranking by their Chinese asset size):
Motorola, General Motors, Wal-Mart, General Electric, Kodak, DaimlerChrysler, Coca-Cola, Exxon Mobil, Ford, Intel, Anheuser-Busch, DuPont, Alcoa, United Technologies, IBM, Cummins, and Microsoft.
In any case, these are large and liquid US stocks and are thus perfect candidates for foreign reserve investments.
Moreover, strategically speaking, some of them can be very valuable for Chinese if the Chinese can acquire significant block of shares and have a say in the management.
Wal-Mart for example can give Chinese a perfect retail distribution channel in the US for Chinese products. General Motors, which has run into financial troubles, may help Chinese build up its domestic car industry, in exchange for financial injection from the Chinese. Motorola, IBM, and Microsoft can help Chinese upgrade their information technology.
It is predictable that there will be a huge political backlash in the US when the Chinese acquire significant share block in any one of these corporations. But who are you going to blame? If Americans save less than invest, and America has to let foreigners in to bring in the money.
