Big Money: China buys a commodity of different sorts

China is digging its hands even deeper into the pockets of the American economy this week. While many investors debate a tire tariff, Beijing is de-nationalizing another $2 billion worth of American assets.

This time the cash-heavy country is buying a commodity of different sorts, distressed assets.

While not a traditional commodity like gold, aluminum or crude, debt-ridden assets became bundled into the class during the latest investment cycle. Now the opaque investments appear, at least to China, as one of the most undervalued assets on the market.

China Investment Corp., the same $200 billion sovereign investment fund that recently shelled out $850 million for a stake in commodity-giant Noble Group, plans to invest up to $700 million in three separate distressed-asset funds.

It is a deal backed by an ever-desperate U.S. Treasury designed to prop up an industry that refuses to budge on its own.

By unloading the assets to the relatively risk-adverse fund, the funds find well-needed liquidity, while China gets a shot at strong long-term growth potential.

Even better, it will own an even larger part of the American economy.

This is yet another extension of what I have dubbed the “Commodity Carry Trade.”

Getting bigger by the minute

China is desperately pouring the cash generated by its massive trade surplus into American assets as protection from a weakening dollar.

Frankly, I am not sure what aspect of this deal to be more frightened of, China’s increasingly large holding of American assets or the Treasury’s need to quietly back the deal.

After losing billions during last year’s financial-sector meltdown, China’s resurgence in the sector means the fund must have gotten a pretty sweet deal from Mr. Geithner and his gang.

While the nation’s financial and real estate sectors appear to be regaining ground, there are plenty of back-room whispers that argue to the contrary. Deals like this one are evidence the picture may not be as rosy as the Obama administration would like.

But it does prove China has more than enough cash on its hands and is willing to accept some risk, especially if it means protecting itself from a weakening dollar.

Anyway we dissect this story, the news is not good for the American economy. China’s dominance is increasing. The dollar is expected to weaken. And the nation’s financial and real estate sector still cannot thrive without the intervention of outside stimulus.

As investors there are several ways to take advantage of this situation.

Outside of moving to China, a smart move is to overweight the commodities sector. As I have said countless times over the past six months, the Commodity Carry Trade is leading to one of the biggest transfers of wealth in a generation.

As foreign governments dump the dollar in search of higher returns elsewhere, the dollar will weaken. Commodity prices will have to follow.

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