China and the curse of King Midas

The Chinese moneybags are coming! And, watch out, they’re planning to buy up the world…

That’s the hysterical cry that goes out every time China contemplates any new overseas investment - of the sort that’s planned from the injection of $100-200 billion in new funds from the Chinese government to the country’s sovereign wealth fund, the China Investment Corporation (CIC).

But far from being flattering, fanfare-laced proclamations of prosperity, such intimations of Chinese affluence are, if anything, a curse. For as with the mythological King Midas, whose very touch turned everything to gold (but which boon in fact proved a curse), the mere suggestion of Chinese interest ends up driving up market prices for everything from commodities to, well, gold.

[caption id=“attachment_2427” align=“alignleft” width=“380” caption=“Visiting Australian Prime Minister Julia Gillard (L) and Chinese Premier Wen Jiabao after a signing ceremony at the Great Hall of the People in Beijing on April 26. Fredric. J. Brown/ AFP Photos”] [/caption]

The market prescription for anyone looking to ride China’s hunger for resources is: ‘Go long where China is short.’ In that crowded, one-way trade, China finds itself perforce having to pay a premium for the resources it desperately seeks - or reconcile itself to being outbid.

Earlier today, for instance, China Minmetal Resources threw in the towel on an offer to buy Australia-based Equinox Minerals and lost out to Toronto-based Barrick Gold Corp. “The price offered by Barrick is above our most optimistic assessment of value,” noted Minmetals CEO Andrew Michelmore.

Being ‘Mr Moneybags’ may have a lot of advantages, but it has at least one discernible downside: it’s hard to make discreet deals when town-criers announce your every move, inviting attention - and counter-bids that push up the price of the one thing you’re in the market for.

Inversely, the hype surrounding perceptions of China as the moneyed saviour of the world’s indebted nations lands it in embarrassing diplomatic situations. On a recent visit to China, Spanish Prime Minister Jose Luis Rodriguez Zapatero believed, on the strength of a some soul-stirring words, that he had secured a pledge from Chinese leaders to make billions of dollars in investment in the Spanish banking system. He even tom-tommed to his national media that the CIC would make a $13 billion investment in Spanish sovereign debt, only to have the CIC deny any such promise was made.

For both the Chinese moneybags, and the erstwhile empire that is today adrfit in a sea of debt, it was a sobering lesson on the wisdom of not putting your money where your mouth is.