What the Credit Crisis Means for the World

Not long ago, politicians and investors were hailing the emerging markets as safe havens that could sustain strong economic growth even as the world's largest economy -- ours -- crumbled under the weight of its own greed. President Lula of Brazil laughed, for example, as Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) went down and began a chain reaction that's taken down significant portions of the U.S. financial system. "Go ask Bush," he said when asked about the potential effects of this crisis.

My, oh, my, how things have changed.

And there are consequences
Today, just a month after Lula's comment, people around the world are scared for their savings and are fleeing to cash. That risk aversion has reared its ugly head in ways few expected. Banks, trying to shore up balance sheets and eliminate assets that won't pay them back, have strangled the credit markets. Investors, terrified of the red in their portfolios, have sold their stocks and demanded their mutual funds and hedge funds do the same. This has caused a chain reaction of selling assets and currencies from emerging markets.

The result has been a dramatic turnaround in the conditions of emerging countries. Stock markets around the world have collapsed in recent months, but the worst losses have come from the likes of Brazil and Russia, where markets have fallen by 55% and 75%, respectively. Lula is now reportedly concerned and has delayed billions of dollars worth of public works projects.

Decoupling is dead
In the more obscure, less-talked-about countries (at least in financial headlines), like Pakistan or places in Eastern Europe, things aren't any better. For a variety of reasons, from collapsing commodity prices to the sudden retreat of foreign investment, these countries have seen their economies severely rattled.

The rash of economic turmoil in emerging markets has led to the revival of the International Monetary Fund (IMF). During the recent global boom that saw emerging markets blossom, this group has been at best bored and at worst disparaged by those it had previously attempted to help.

Long live the IMF
These changing winds have returned the IMF to the spotlight. It is now being called on to support a handful of emerging markets: $25 billion for Hungary, $16.5 billion for Ukraine, up to $15 billion for Pakistan, and even $2 billion for Iceland. With so much about what the future of this global slowdown holds still unknown and around $250 billion in available resources, one thing you can be sure of is that the IMF hasn't heard the last cry for help.

All of this news reiterates the fact that the best asset to have in the middle of a credit crisis is cash. That's true for people just as it is for companies and even countries. So when it comes to determining who is going to weather this credit crisis best and get stronger as a result, smart investors should follow the money. And when you do, you're going to end up looking at one place …

It's still good to be China
Data released by China's State Administration of Foreign Exchange (SAFE) this month revealed that the country continues to post trade and capital accounts surpluses. China's balance of foreign exchange reserves has climbed to $1.8 trillion, or more than 50% of GDP. That's a significant cash cushion to have at a time when cash is hard to come by and other emerging economies are being deprived of foreign direct investment and being forced to beg for bailout funds from intergovernmental agencies. Many formerly fast-growing economies have been left with little to spend on infrastructure, energy, and other projects that would serve as the foundation for development and long-term growth.

But not China.

In fact, a Russian energy official told The Wall Street Journal this week that China had agreed to provide "considerable loans [to Russian oil companies] in return for increased oil supplies." This is an example of China leveraging its financial might to satisfy its growing thirst for oil and other commodities, and it's a strategy we should expect to see China employ more and more in the years to come. That's because the Chinese government has already identified insufficient access to energy resources as one of the main obstacles to the country's economic development.

Speak softly … and carry a big wallet
Like any good investor, China is taking advantage of a downturn to put itself in a stronger long-term position. And so are cash-rich, state-owned Chinese energy companies such as CNOOC (NYSE: CEO  ) .

In October alone, CNOOC:

  • Announced a partnership with PetroVietnam, in which we can expect CNOOC to supply the capital and expertise and PetroVietnam to supply the resources.
  • Was reported to have agreed on a multibillion-dollar investment partnership with Petrobras (NYSE: PBR  ) to tap energy assets in Brazil.
  • Is rumored to be the preferred buyer for $1.8 billion together with Sinopec (NYSE: SNP  ) to buy a 20% stake in the Angolan Block 32 offshore project from Marathon Oil (NYSE: MRO  ) .

Each one of these deals will substantially enhance CNOOC's reserves -- reserves that will ultimately be sold into China.

The fact that China and its companies have sufficient financial strength to be putting cash to work in a time like this is one reason we believe at Motley Fool Global Gains that the China growth story is still only just beginning. Even as the global economy slows next year, we expect China to continue to build out its infrastructure, consolidate critical industries, and keep up a high-single-digit rate of GDP growth.

Thus, we view the recent dramatic decline in the value of Chinese stocks to be an enormous long-term investing opportunity. Take a look at our top Chinese stocks for new money now by joining Global Gains free for 30 days.

Tim and Nate are Motley Fool Global Gains analysts. Neither owns shares of any company mentioned in this article. CNOOC is a Global Gains recommendation. Petrobras is an Income Investor pick. The Motley Fool's disclosure policy requires that Fools disclose things that need to be disclosed.


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  • Report this Comment On October 31, 2008, at 2:39 AM, GoNuke wrote:

    You would have us invest in an unregulated market after seeing what carnage inadequate regulation can cause in a relatively transparent market?

    It is important that you explain to Americans the dire straights the rest of the world is now in. Capital is fleeing good countries to find refuge in US T-bills. The result has been a currency bubble in the US. The US dollar is now over-valued putting Brazilian and Russian etc. companies at further risk because their debt is denominated in US dollars. Just look at Cemex. It is a great company that has been imperiled by the recession plus the rapid increase in its debt load due solely to the US dollar bubble.

    If you hope to make money in China you HAVE to have connections. You have to understand Chinese. China's stock markets have few regulations and most of them are ignored. People making money in China are making direct investments: creating their own companies. They speak Mandarin. They don't play the Chinese stock market. The stock market crash we have just experienced is a common occurrence in China.

    I believe the best China plays for foreigners are investments in commodity producers in Canada and Australia or in Taiwanese firms that exploit cheap PROC labour. An alternative would be Korean or Japanese firms serving the Chinese market because they know how China operates. China plays by different rules. It can take a life time to learn those rules.

    The best China play for the US economy would be a drastic devaluation of the US dollar -stop China from buying up foreign assets at fire sale prices, and get them to buy more construction equipment made by Caterpillar and more clean technology from high tech US firms.

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