On Thursday, June 10, China announced yet another investment in a global partner. Going where traders and investors no longer dare to venture, the Chinese are making investments in Greece – putting money into the country’s ports, to be exact.
While it may sound like a surprise move, it’s just China’s latest investment play around the world, following investments in countries like Venezuela and Africa over the last year or so. The deal has many in the market wondering which country will be next in line to benefit from the country’s deep pockets. So it makes sense to examine the transaction a little closer, because it does have specific implications for the foreign exchange world.
Under the terms of the agreement, China will invest approximately $5 billion to build new docks and upgrade loading systems in Greece’s port city of Piraeus. The modernization plans will help the port compete with other major European maritime spots. Greek officials hope that this round of improvements will benefit surrounding areas, too, particularly Athens, which lies just east of Piraeus. And Chinese officials are hoping to expand their global reach, creating or improving access to major commercial markets. Both sides hope this agreement will boost bilateral trade – now worth about $3.5 billion – back to levels seen before the financial crisis of 2009.
Of course, this isn’t the first big economic investment undertaken by the Chinese. At the beginning of 2008, Chinese officials began courting African nations. In January, officials announced a $90 million investment through the China-Africa Development Fund. The fund is designed to improve existing production facilities in major cities throughout the continent. The high-price commitment helped China National Petroleum Corp. complete a $5 billion deal to develop oil reserves located in the Republic of Niger. And talks continue on a purchase of large oil-rich properties in Nigeria, just south of Niger, by China National Offshore Oil Company.
More recently, in April, Chinese officials inked a deal with Venezuelan President Hugo Chavez. Under the $32 billion agreement, China provides Venezuela with $20 billion in borrowed funds, while committing $12 billion to another bilateral fund. The fund will invest in the development of several Venezuelan infrastructure projects. In return, China secures access to a global oil player, earning it up to 400,000 barrels a day.
Given China’s consumption of raw materials, the spending binge is not likely to stop. Beijing needs access to things like metals and crude oil. And it has decided the best way to get them is to buy them directly. It’s a completely different direction from its old strategy, which involved acquiring stock of some of the world’s biggest companies.
China Investment Corporation, the country’s sovereign wealth fund, initially made investments in Blackstone Group, Morgan Stanley and VISA back in 2007 for a total of $8.1 billion. But stock market volatility and anti-China sentiment in Washington have limited those investments, forcing officials to seek returns from more stable and long-term alternatives. As far back as 2005, CNOOC Ltd., a Chinese offshore oil producer, made an $18.5 billion bid for Unocal Corp., a US-based oil company. But the deal caved under political pressure as US policymakers worried the merger would be a breach of national security.
So what implications do China’s Greek port deal and its other global investments have on the foreign exchange market? In the longer term, it will benefit the US dollar. That’s because the greenback is still the preferred medium of exchange throughout world. Countries big and small still prefer to transact with the US dollar as a base currency. As a result, Beijing will require more of the American currency to complete deals with foreign nations, increasing the demand for the dollar. These US dollar outflows will more than likely offset inflows of foreign investment, helping to alleviate some appreciation of the Chinese currency.
Foreign direct investment, speculative and long term, from countries like the United States have recently increased the value of the Chinese yuan. Large-scale commodity purchases of this nature by the Chinese are also likely to slow China’s purchases of US Treasuries, which has grown to as much as $800 billion, if the relatively fixed currency is able to remain stable on the balance of these flows. People often warn that China could revalue its currency, which would cause financial chaos. But China wants to ensure a two-way flow of currencies, so Chinese officials are likely to keep such speculation at a minimum as the currency continues to hover at a 6.83 to 1 ratio.
So as long as China keeps making international deals while keeping their currency under wraps, the US dollar will reap some nice long-term benefits.
for The Daily Reckoning
Richard Lee has been involved in the global financial markets for nearly 12 years, amassing experience with different instruments including equities, options and futures while specializing in foreign exchange. Before joining Agora Financial, Richard had held proprietary trading positions in various funds, with his current position being in an international Global Macro Fund. Additionally, Rich was a senior FX strategist for one of the largest retail brokers, helping to develop the firm's research web portal.
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