I was fortunate enough to hear professor Niall Ferguson speak sometime in early 2008 on the subject of the economic relationship between China and America.  Mr. Ferguson is the Laurence A. Tisch Professor of History at Harvard University and the William Ziegler Professor of Business Administration at Harvard.  In that talk Mr. Ferguson coined the phrase Chi-America when referring to what he termed, "the symbiotic relationship" between the two nations. 

 

The gist of the discussion was that China's embarking on creating a capitalist system is unlike any other.  America's economic development was under a democratic political system which invariably develops through trial and error.  China's on the other hand is being force fed by the government; in other words an autocratic policy leading to essentially a no holds barred strategy.  As such, China will become a Super Economic Power much faster than any society previous.

China's efforts to grow their economy is evidenced by the following news this week.  Rio Tinto Group, the third-largest mining company in the world, needed to raise nearly $20 Billion in capital.  Chinalco is a Chinese state owned company that entered into a tentative deal with Rio for the purchase of nearly $19.5 Billion of stock, which would have doubled Chinalco's stake in Rio.  The deal fell through.  The deal would have been the largest single foreign investment by a Chinese company.  A company owned by the Chinese government.

That sucking sound you hear is China consuming Oil, aluminum, steel, nickel and other commodities.  What we need to take away from the Rio deal is that China is on a path to consume commodities in great quantities as it grows its capitalist economy.  Oil is but one commodity and we are seeing oil prices rising again.  This week Crude oil rose again to just under $70.00 a barrel after analysts reported that prices may reach $85 a barrel by the end of the year due to increased demand as economies recover. If you haven't noticed yet, the price of gas is back up to $2.90 + for unleaded.  China's continued consumption of Oil and the plethora of other commodities presents an investment opportunity in commodity related investments.

In other China news, Chinese steelmakers are buying less iron-ore from Brazil as a way to force prices down.  In May Brazil ore sales to China were 15.3 million tons, down from 23.5 million tons in April.  A staggering amount!  The Chinese government is doing all it can to reduce its costs of building their capitalist economy as it has surely calculated the extent of its nation's commodity needs.  Stay tuned.

As for the Markets, the week was relatively uneventful.  The market gyrated within very narrow ranges all week.  In the end, the indexes closed higher for the week, albeit on lower volume trading.  Many of the stocks in our portfolio are Chinese stocks.  The reason is that the China theme is ever present as new players enter the fray heading into a recovery, and as we see older more established companies in the U.S. and other countries lag.

During the week I ran across a quote from a company spokesman in St. Petersburg, Florida which manages $18 billion in assets, saying that "We're seeing much more confidence in our client base in making asset allocation decisions to increase their equity holdings," He went on to also say, "There's a ton of un-invested money on the sidelines."

It appears that the game is afoot! 

 

Have a great weekend!