Money is flowing out of China, according to the People’s Bank of China, which, in a report, indicated that banks in China were net sellers of 3.8 billion yuan, equal to US$597 million, in July. The significance of this is that the data suggest China’s exporters and investors may be exiting the yuan; whereas, Chinese banks have been net purchasers of yuan in the past years.
The news indicates China may face hurdles trying to pump up the economy, given that with the outflow of capital, the country will need to ramp up its government spending.
Yet, instead of following the capital flow and in spite of the fact the country is slowing, China remains a resource-hungry country that’s hunting the world for resources to help fuel its expected GDP growth in the decades ahead.
For this to happen, ample raw materials are needed.
In the oil patch, Chinese energy firms made about $48.0 billion in acquisitions in North America in 2009 and 2010, according to the International Energy Agency. China is investing in the oil-rich Canadian tar sands, and I expect to see more Chinese capital flowing in.
In July, CNOOC Limited (NYSE/CEO), one of the three major state-owned oil stocks in China, announced it would acquire Canada-based Nexen Inc. (NYSE/NXY) for $15.1 billion in cash or $27.50 per share, representing a whopping 60% above the close of July 20. I believe the deal may not be accepted by the Canadian regulators, who in the past axed deals from China when pressured by the country’s conservative government. In 2005, CNOOC attempted to buy U.S. oil play Unocal, but the deal failed due to security issues.
China-based Sinopec Corp. also announced it would pay $1.5 billion for a 49% stake in the U.K. division of Canadian oil and gas company Talisman Energy Inc. (NYSE/TLM).
A growing area of investment by China is Africa. China recently funded Africa an additional $20.0 billion in loans. Of course, China is steadily increasing its access to African resources, according to my research. Armed with nearly US$3.0 trillion in cash reserves, China has plenty of cash.
China’s demand for raw materials will remain high across many sectors, from industrial, to mining, to technology. The country is the world’s largest consumer and producer of gold. In 2011, the country produced over 300 tons of gold—making it tops worldwide, according to research by precious metal consultant GFMS. Australia produced 270 tons in 2011, making it the second biggest producer. This is a big reason why China has been eyeing Australia for acquisitions. Newmont is one of the top players in Australia, as I recently wrote.
And while China is aiming to reduce its need for foreign sources of metals, the country continues to search the world looking at acquiring raw materials. Mining companies with large reserves are sought after. China has made numerous acquisitions, and I expect this to continue, especially as the country continues to grow and its appetite for raw materials rises.
My sense is that the proposed major acquisition of Nexen will not be the last, but will only be the start of an aggressive push by China to expand its access to global resources.