Irwin says the decision by China Investment Corp (CIC), the country’s $200-billion sovereign wealth fund (SWF) to allocate $250 million in emerging markets means Latin ETFs could receive a big boost.

Irwin says China needs to diversify out the diving dollar and gain greater control of energy reserves – and Latin America serves both purposes best…

One of the biggest business stories of the year has literally been buried by the media – and it could cost you a lucrative opportunity.

On July 9, the China Investment Corp (CIC), the country’s $200-billion sovereign wealth fund, said it will start investing in global equity markets through its overseas asset managers, according to the China Securities Journal.

CIC said it will allocate $250 million to eight different overseas asset managers.

Why Big Media didn’t play this up more prominently is a real joke. CIC is the world’s sixth biggest sovereign wealth fund (SWF). The decision to start actively investing in emerging market equities is a clear indication that emerging markets cannot be ignored.

For readers unfamiliar with SWFs, they are huge investment organizations owned by central banks. They accumulate the trade surpluses and oil revenues, for example, for long-term investments. They are accountable to no one, although the International Monetary Fund is working with the leading SWFs to increase transparency.

You may have read about SWFs through their investments in several Wall Street financial firms including Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), and Merrill Lynch (NYSE:MER). (In January, CIC said it would be looking for foreign managers to help invest in fixed income products, and their stakes in some of these American investment banks could be a likely source to tap.)

Like many dollar investors, CIC is getting hit hard. It’s the second-biggest foreign holder of U.S. treasury securities, with $490 billion. Japan ranks as number one with $600 billion.

CIC’s emerging markets push accomplishes two objectives: 1) diversifying out of their $1.7 trillion in foreign-exchange reserves, which are mainly in U.S. treasury bonds and other fixed-income assets; and 2) gaining greater control of desperately needed energy reserves.

We believe the second objective will figure prominently in CIC’s emerging-market investment strategy.

China is the world’s second-largest energy consumer. Oil comprised 20.3% of China’s total energy consumption in 2006. Coal is the prime energy source, but the pollution it spews is now a major financial drain in terms of worker productivity and environmental damage to agriculture. China is ramping up like mad its nuclear output.

Oil, however, plays an increasingly important in China’s energy mix. Just last month the government cut oil subsidies to the growing millions of new car owners. They will be forced to pay 18% more for a tank of fuel. It’s unlikely that this move will achieve China’s goal of cutting consumption, since the country had been previously been operating in an artificially regulated $80-a-barrel oil market. Given all the new shiny cars on the road, we don’t believe an extra 18% will amount to a hill of beans.

So if you make the assumption that oil will be a top priority for CIC, our compass points to a greater presence in Latin America. Since 2000, trade between China and Latin America has increased six-fold.

The business deals are not confined strictly to oil. Latin America is also rich in other commodities that China needs to continue is massive economic expansion. We’re talking about copper, iron, silver and other raw materials. But when it comes to oil in the region, China has been very active.

Here’s a quick rundown of China’s energy influence in Latin America…

– China’s Shengli International Petroleum Development Co. Ltd. inked a deal pact Bolivia’s state-run Yacimientos Petroliferos Fiscales. The agreements call for China to invest $1.5 billion over 40 years in Bolivia’s onshore oil and gas sector.

– China’s leading refiner Sinopec reached a $239 million deal with state-owned Petrobras for construction of a stretch of a major natural gas pipeline across Brazil.

– Sinopec also showed up in Cuba, where it an agreement with Cuba’s state-run Cubapetroleo to jointly produce oil on the island in January 2005.

– A Chinese-led consortium, which includes China National Petroleum Corp. and Sinopec, bought Canadian-based (NYSE:ECA) Encana’s oil and pipeline assets in Ecuador for $1.42 billion.

– In Peru, the China National Petroleum Corp. produces oil.

– The China National Petroleum Corp. also operates two Venezuelan oil fields in Venezuela and has committed to spend over $400 million in Venezuela’s oil industry. The China National Petroleum Corp. is working with Venezuela’s state oil company in the Junin 4 block of the Orinoco extra heavy oil belt, the world’s largest deposit of crude oil. Chinese investments in Venezuela total more than $1.5 billion.

For investors looking to capitalize on the CIC move into emerging market equities, Latin America seems to be a logical first step. You can do this by talking with your broker about Latin ETFs, or investigating Latin publicly traded oil companies such as Brazil’s Petrobras (NYSE: PBR).

Irwin Greenstein

Source: China’s Next Big Oil Play?

• The World Trade Organization (WTO) has published a new draft of plans for a global trade deal that will be discussed the next time world trade ministers meet, BBC News reported. Although the plan doesn’t change existing tariff or subsidy cuts, it does offer some compromises and clarifies some key “sticking points.” Negotiators hope to have a deal closed by the end of the year.

• Battered by increasing steel costs and dampened consumer demand due to high gas prices, Ford Motor Co. (F) announced yesterday (Thursday) that it would not be able to meet Chief Executive Officer Alan Mulally’s goal of returning to profitability by 2009, Bloomberg News reported. North American vehicle production will be cut throughout the rest of this year due to “the rapidly changing business environment in the [United States],” a company statement read.

• First-time jobless claims fell 9,000 to 365,000, from a revised 374,000 the previous week, the Labor Department announced yesterday (Thursday), Bloomberg News reported. The decline was unexpected and indicates that companies are responding to the current U.S. economic slowdown by curtailing hiring, while trying to maintain current employees.

• Hong Kong’s Hang Seng index hit a one-month closing low yesterday (Thursday) in reaction to the declines in the U.S. markets. Oil firms Sinopec Shanghai Petrochemical Co. (ADR: SHI) and PetroChina Co. Ltd. (ADR: PTR) also weighed on the index. “Weak U.S. stocks and Beijing’s denial on an imminent deregulation of oil product prices hurt market sentiment,” Kenny Tang, associate director at Tung Tai Securities, told Reuters.

• Bookseller Barnes & Noble Inc. (BKS) yesterday (Thursday) reported a loss of $2.2 million, or 4 cents per share, for its fiscal first quarter ended May 3, compared with a loss of $1.67 million, or 3 cents per share, for the same period in the prior year, Reuters reported. Barnes & Noble reduced its full-year outlook based on the difficult economic environment and announced it would consider “the feasibility of a transaction” with rival Borders Group Inc. (BGP).

• The American Petroleum Institute, the trade group for major oil and natural gas companies, spent nearly $1.3 million in the first quarter to lobby on fuel economy standards, appropriations bills, and other issues, the Associated Pressreported. The API also lobbied on various pieces of legislation dealing with oil taxes and fees, renewable fuel standards, climate change, offshore drilling and more, according to the form posted online April 21 by the House clerk’s office.

• Bill Miller, portfolio manager at Legg Mason Capital Management, has not signed on to the Yahoo! Inc. (YHOO) investor coup being led by Carl Icahn. However, in an interview at a New York conference Wednesday, Miller, whose fund controls a 5.4% stake in Yahoo, said he wants Microsoft Corp. (MSFT) to reopen talks to buy Yahoo outright and not simply forge a joint venture. “It is a strategic imperative for Microsoft to change its position,” Miller told Reuters after speaking at the hedge fund conference.

• The International Energy Agency announced yesterday (Thursday) that it is studying depletion rates at about 400 oil fields in its first-ever study of world oil supply. The Paris-based group said the study, to be released in November, was prompted by concern about the volatility of world oil markets and uncertainty about supply levels.

• The spinal-products unit of medical-device maker Medtronic Inc. (MDT) will pay $75 million to settle accusations that it defrauded Medicare by telling doctors to bill in-hospital stay – even when a cheaper outpatient visit would have done the job, The New York Times and The Associated Press both reported. Originally, the accusations had been leveled against Kyphon Inc., which Medtronic spent $4.2 billion to buy in November.

Source: Global Investing Roundups: Friday, May 23rd, 2008

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Consider China the mother of all direct and indirect subsidies. Especially when it comes to the staging of the Beijing Olympics—the greatest coming out party a totalitarian government has ever staged.

Not that the others didn’t try. Hosting Olympic Games tends to be a fiscal nightmare for the host. The Athens Olympics resulted in massive budget deficits for Greece. Australian taxpayers will be paying off Olympic debt from the 2004 Games for a decade to the tune of $32 million a year. Even the Salt Lake City Winter Olympics in 2002 left Utah with a $155 million deficit.

The true cost of the Beijing Olympics will dwarf everything previously seen. But thanks to China’s inscrutable web of direct and indirect subsidies, their full extent will be as difficult to determine as the true cost of Chinese labor.

Beijing just added another layer. It will be carried by China’s heavy industry and power plants. Dozens of heavily polluting factories in Beijing and Hebei Provinces—scheduled for closure over the next two years—will be permanently closed before June.

Temporary shutdowns of other industries will last from July 17 until September 20 and will affect the neighbouring municipality Tianjin and the provinces of Hebei, Inner Mongolia, Shanxi, and Shandong. These provinces represent an area larger than France, Germany and Italy combined.

This will have a major effect on the electronical manufacturing industry and those companies who have been outsourcing their production to China. The closures will also reduce the supply of components, good and services to the affected industries. Steel maker Beijing Shougang Co. estimates that output this year will fall by 16% from 2007.

The hardest hit industries include electricity, petrochemicals, as well as coal and cement producers.
Chinese officials are just as reluctant to release details about the full extent of the shutdowns as they’d be to announce that torturing puppies had been added as an Olympic exhibition sport.

Idling production facilities will hit major companies like Eastern Petrochemical Co., China’s largest manufacturer of polyvinyl acetate. Beijing Eastern is owned by China Petrochemical Corp., or Sinopec (SNP:NYSE). Sinopec’s first-quarter profits already came it 70% lower than last year’s.

If you need a reason to be cautious around Chinese stocks this year, look no further than the effect of the Olympic shut-down on third-quarter earnings.

Source:  China Closures Spell Q3 Trouble