Western nations fret that China is engaged in a grand strategy as it snaps up natural resource assets around the world -- that it is seeking to control the supply of raw materials and dominate manufacturing processes. But could this be a misreading of its motives?
It might be that the Chinese just love hard assets. Moreover, resources, given their limited supply, are seen as the best asset to own right now.
Asians, particularly the Chinese, have traditionally favored hard assets such as property and gold. Rich Asians put almost half their investments into real estate, more than in other regions. Renting is often deemed unacceptable and that's why rental yields are only half those in the West.
It might be hard for Westerners, whose countries face the risk of deflation, to understand the current super-bullish mentality in China. With Beijing pumping money into the system and the economy growing fast, the average Chinese citizen is worried more about inflation than the opposite. This may be an error on their part. But it seems to be what they think.
Real assets in general, and commodities in particular, are clearly the way to play inflation. The resource buying frenzy comes from an opportunistic view that commodity prices are recovering and holding natural resources is in any case a sensible strategy for the long run.
With the government implicitly supporting the purchase of natural resources assets overseas, it is easy for buyers to obtain cheap credit to finance deals. Awash with cash, companies as well as wealthy individuals, feel this is a good time to buy, partly because many resource owners around the world have borrowed too much money during the good times to fund projects and are now strapped for cash. That said, the rush to do deals has inevitably pushed up prices for resources everywhere.
Another aspect of the eagerness to own resources comes from China's suspicion of the global market system. China is not known for having a rule-based system and there is deep-rooted distrust of relying on markets and the rule of law to deliver the resources that the country needs.
China's lack of pricing power in the market for raw materials, particularly iron ore, has reinforced this distrust and persuaded many that they cannot rely on the global system to meet their needs.
The other explanation for China's resource buying mania -- that it is part of a deep mercantilist strategy -- doesn't really stand up to scrutiny.
It is hard to see how China can secure the supplies it needs by taking minority stakes in resources companies, whose assets are often located far away in Africa and South America. True, some of these deals are linked to supply agreements. But the biggest deal of all -- the proposed investment in Rio Tinto (RIO.L) -- offered no supply guarantees to the purchaser.
It is also hard to see how China is hedging against raw material costs by purchasing stakes in upstream assets. Hedging doesn't make much sense anyway as commodity prices tend to rise when the economy is doing well, which is precisely when it is easy to pass on raw materials costs to consumers.
This is not to say that strategic considerations are irrelevant. Many in China feel that in the past they have been bullied by Westerners who scooped up their best resources on the cheap. They feel that there may now be an opportunity to do that in less developed and sophisticated countries. But China needs to be careful not to be seen as developing a latter day colonialism. That would cost China more than anything it would gain from higher resources prices.
-- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund --