Posted by Joseph Y. Calhoun, III

It is well known that the Chinese want to reduce their dependence on US debt for investing their foreign exchange reserves. They have increased their purchases of commodities and have spoken repeatedly about needing an alternative for the dollar. Now they are finding other uses for their $2 trillion stockpile:

“We should hasten the implementation of our ‘going out’ strategy and combine the utilisation of foreign exchange reserves with the ‘going out’ of our enterprises,” he told Chinese diplomats late on Monday.

Mr Wen said Beijing also wanted Chinese companies to increase its share of global exports.

The “going out” strategy is a slogan for encouraging investment and acquisitions abroad, particularly by big state-owned industrial groups such as PetroChina, Chinalco, China Telecom and Bank of China

Back in the 80s there was a backlash against the Japanese for buying up trophy US properties. China knows that and won’t make the same mistake:

In an interview published in state-controlled media, the chairman of China Development Bank said Chinese outbound investment would accelerate but should focus on resource-rich developing economies.

“Everyone is saying we should go to the western markets to scoop up [underpriced assets],” said Chen Yuan. “I think we should not go to America’s Wall Street, but should look more to places with natural and energy resources.”

The Chinese are thinking long term and are looking to buy long term productive assets. It’s a smart strategy that they will find easier to implement in developing economies like Brazil and Africa. Political opposition to large Chinese investments in the developed world is pretty intense.

To get an idea of how immense the Chinese reserves are, consider:

The sheer size of the reserves does give a daunting impression of China’s financial firepower. As Eswar Prasad and Isaac Sorkin note in a new piece for the Brookings Institution, $2 trillion is equivalent to:

• all the land and property in New York City, Los Angeles and Boston
• 73% of the market capitalization of the Dow Jones Industrial Average at the end of June
• 25% percent of the market capitalization of the S&P 500 at the end of June