China's twin-pronged strategy on commodities

It is becoming increasingly clear that China¡¯s political leadership - unlike that of some other countries - is astutely managing a twin-pronged strategy when it comes to commodities in general, metals included. The aim of this strategy is to fend off the worst of the current recession, but simultaneously to lift the focus to the distant horizon.

The short-term tactic involves state and provincial authorities stocking up on metal that was simply too expensive to purchase just six months ago, while the long-term strategy concentrates on state-backed companies buying international resource assets that have become cheap.

The short-term tactics have resulted in hundreds of thousands of tonnes of metal (along with stocks of agricultural commodities) bought by the State Reserves Bureau (SRB); the long-term strategy has seen a number of deals - the biggest of which is Chinalco¡¯s controversial investment in Rio Tinto, the world¡¯s third largest miner ¨C finalized or in the pipeline. Trade pacts with (among others) Peru and the Democratic Republic of the Congo, in exchange for access to their natural resources, is also a statement of China¡¯s longer-term intent.

There can be no clearer declaration of this intent than a recent comment from Cheng Siwei, the former chairman of the Standing Committee of China¡¯s National People.s Congress: ¡°We don¡¯t know when financial assets will reach bottom. And we are not experienced in investment banking businesses. So we had better focus on tangible assets.¡±

China¡¯s foreign reserves are rapidly approaching $2 trillion, which even at a time when multi-billion bailout packages are being bandied around, is a truly gargantuan war chest. Moreover, the window of opportunity for picking up attractive morsels on the cheap may not be open for as long as all that.

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