China has been in a bind for a while.

Thanks to its smart strategy of lending us money to buy its products and services, China owns $2.2 trillion in Treasuries and other foreign paper. This makes China rich, but it has also left it exposed to getting clobbered if inflation destroys the value of the dollar. If China starts dumping Treasuries to protect itself from inflation, meanwhile, it will destroy the value of the rest of the paper it holds.

So now China has a new plan. Use those dollars to buy stuff. Companies, land, natural resources, you name it.

Smart!

The moment China tries to buy stuff in the US, of course, everyone will freak. We're cool with European countries buying up our companies, resources, and land, but when Asian or Middle Eastern countries start doing it, we scream in horror and outrage (recall when China's CNOOC tried to buy our rinky dink oil company Unocal a few years back, as well as the Japan-is-buying-us! scare of the late 1980s).

So, for the time being, most of China's buying will likely take place elsewhere in the world. As least until we wake up and realize that China's money (which used to be our money, before we sent it to them) is green, and that if we want to get the highest price for our land, companies, and resources, we might want to open our market to them.

John Mauldin explains China's new plan:

The important news out of China this week was the assertion that China was getting ready to use its massive $2.2 trillion reserves. From the Financial Times:

"Beijing will use its foreign exchange reserves, the largest in the world, to support and accelerate overseas expansion and acquisitions by Chinese companies, Wen Jiabao, the country's premier, said in comments published on Tuesday. 'We should hasten the implementation of our "going out" strategy and combine the utilization 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."

This is a very big deal, and from the Chinese point of view, quite smart. Right now they are stuck with $2 trillion in US Treasuries, agency paper, etc. They can't sell their dollars without really hurting the dollar, thereby forcing the renminbi to rise and hurting their own exports. But they, and much of the world, feel that the US is pursuing policies that are going to be harmful to the value of the dollar and therefore to China's largest reserve exposure.

What to do? Take those dollars and buy physical assets. Companies, natural resources, maybe a few small countries. (To my Chinese readers: that's a joke, although some in the West worry about that.)

In the card game called Old Maid we played as kids, the loser was the one who ended up with the "Old Maid" at the end of the game. For the past decade, the Chinese sent us "stuff" and we sent them dollars in the form of electrons. They in turn invested those dollars in our debt so we could buy more stuff. It was a form of vendor financing.

And now the Chinese have apparently decided to pass the Old Maid of the dollar on to other parties, who will sell them their assets for dollars. Seriously, did anyone not think they would do this? Massively selling the dollar, which so many conspiracy-theory types keep saying they will, was never really a rational option. But using those dollars to acquire productive assets? Very smart, very rational. If you figure out what they want to buy and get there first, there are profits to be had. Attention should be paid.

$2.2 trillion in reserves and growing can cover a lot of economic sins and bad bank loans. It can buy time for the companies with too much production capacity in China to find new customers. Will it be a smooth ride? Of course not. There will be a lot of bankrupt companies and a lot of angst among the entrepreneurial class. That is part of the process. But in five or ten years, China will be larger and stronger than it is today. Count on it.

Read the rest of John Mauldin's weekly letter here >