Chinese Chess

China's Vice Commerce Minister Chen Jian, announced another poor set of Foreign Direct Investment (FDI) today. Year-to-Date, FDI in China amounted to USD 34 billion, or USD6 billion less than the corresponding period in 2008. After a string of 8 consecutive declines, Chen pledged that the "Government will announce policies to stabilize investment soon".

However, when you view this together with the growth in Fixed Asset Investment (FAI), which are mostly large infrastructure spending (read: Government intervention), the picture is far from bleak. Consequent to the massive fiscal package announced in late 2008, FAI has surged in China. Year-to-date, FAI amounted to CNY 5.35 trillion, compared to CNY4.02 trillion in the corresponding period in 2008. Surely this increase of CNY 1.33 trillion (USD170 billion) will more than offset weakness in FDI which have been export-oriented. Even after accounting for slippages and a lower money multiplier, one has to be extremely pessimistic to ignore this surge in FAI. Pessimists expect a collapse in 2H09 arguing that the FAI was front-loaded.

For me, I view 2009 as a "mixed" year- A winner, if one is in the construction/infrastructure business; A Loser, if one is in the export business. But as a whole, China will do fine.

Meanwhile, Chinese officials were "playing chess" elsewhere too. For the past 1-2 months, China has been constantly drumming up their dissatisfaction over the weak USD. Some senior officials even went as far as suggesting a "new" reserve currency. Premier Wen even asked the US to guarantee the credit-worthiness of their US Treasuries.

But today, ahead of the G8 meeting next week, Chinese officials were heard playing a different tune. Chinese Vice Foreign Minister , He Yafei said he was not aware of a plan to discuss a new currency at the G8 meeting. His comments were overall supportive of the dollar and hoped it would remain "stable". Consequently, the USD closed the afternoon stronger.

So, be it the economy or the currency, China is playing "chinese chess" - In the economy, they have "exchanged" one sector for another. In the currency market, they are still "setting up the pieces" for a grand strategy; not ready for execution.