China’s goals are becoming more global as its size and influence grows, and having taken over the title of the world’s largest economy (in terms of purchasing power parity) from the US in late 2014, this trend looks to continue.
The country’s ambitions have been focused on three main areas: its currency, its role in the global economy (shown by its Asian Infrastructure Investment Bank), and its outbound foreign direct investment.
China’s actions will effect developed nations, emerging markets, and indeed, every country in the world. However, they will perhaps impact frontier markets more than any other as a large amount of Chinese capital, influence, and knowledge helps to develop these growing nations.
The Yuan Goes Global
The Chinese Yuan is increasingly being used as a global currency, and Beijing is doing all it can to internationalize it while achieving their goal of making the yuan a major currency for trade and settlement.
The Chinese government has made dozens of agreements all over the world that will make the yuan more internationally recognized.
In 2014 alone, the first stock denominated in yuan was listed on the Singapore stock exchange, the first bond denominated in yuan was sold in London, a deal between China and Russia to settle oil purchases in yuan was made, and the currency become the most actively traded in Asia. This is in addition to countless other developments.
Perhaps the most important evidence of Beijing’s goals is their campaign to have the yuan included in the International Monetary Fund’s SDR basket. The SDR, which is re-weighted every 5 years, is used by most central banks as an asset on their balance sheets.
The yuan was non-deliverable in 2010, and therefore not included in the SDR’s weighting. However, it is set to not only be included this year, but at a weighting greater than the British pound. When that happens, central banks around the world will report the yuan on their balance sheets.
How does all of this impact frontier markets?
Mostly through greater currency stability. 30 countries have bilateral currency swap agreements in place with China – and many of these happen to be frontier markets. These include Pakistan, Albania, Belarus, Mongolia, Nepal, the United Arab Emirates, Argentina, Ukraine, Sri Lanka, Uzbekistan, Kazakhstan, and Armenia.
Such agreements are similar to lines of credit that give these countries’ central banks emergency liquidity in times of crisis. It’s also noteworthy that China has a history of valuing currency stability as seen in the 2007-2008 financial crisis and the recent U.S. Dollar rally.
On both of these occasions, China’s currency was one of the world’s best performing. This means that if another crisis hits, frontier markets can access liquidity in the form of a stable yuan.
Infrastructure and Development
Countries from Canada to Columbia have joined to support the Chinese-led Asian Infrastructure Investment Bank (AIIB). Seen as a counter to the western-dominated World Bank, the AIIB further positions China as an infrastructure powerhouse.
Infrastructure has been one of China’s strengths for a long time, and while a lot of the nation’s impact on frontier markets focuses on their work in Africa, they have a massive amount of ongoing and completed projects all throughout the world. All one has to do is look at the China Road and Bridge Corporation’s website to understand.
Once the AIIB gets into full-swing, increased competition should lead to lower interest rates and more funding for frontier markets looking to borrow capital. In turn, this will create jobs, infrastructure, and more robust economies.
The Growth of China’s Foreign Investment
A more commonly used currency leads to a more open capital account. According to the latest numbers from China’s Ministry of Commerce, outbound investment reached US$100 billion in 2013, growing 22.8% from the previous year.
Not only was this the largest amount ever, but Chinese investors were going to emerging and frontier markets, not developed countries. Investment in the EU was down 15.4%, while investment in Latin America, Oceania, Africa and Asia grew by 132.7%, 51.6%, 33.9% and 16.7% respectively.
Almost all of this capital is going into emerging and frontier markets, with Latin America enjoying most of the growth. Why Latin America? The motives could be political and involve “playing in the United States’ backyard”, so to speak.
In addition, a lot of countries that still recognize Taiwan are in Latin America, and China has a history of trying to lure them to its side through investment.
One part of the world worth keeping an eye on is Central Asia. Because of China’s New Silk Road, the region will play an important role because of its strategic location and historical involvement.
How to Invest in Frontier Markets
There are many different ways to profit from the growth of frontier markets and China’s role in it. One method is to open a brokerage account in Hong Kong and trade stocks that stand to benefit via the Shanghai-Hong Kong stock connect.
Companies with a bright future ahead of them include the previously mentioned China Road and Bridge Corporation, as well those in the raw materials, trade and logistics sectors.
There are also numerous ETFs that invest in either a single frontier market or a diversified group of them. The majority of these can only be traded with a US brokerage account.
For more control and better access, you can also open a brokerage account in a specific frontier market. This method usually involves knowledge of the local market, rules and regulations and while often more profitable, can also be more complicated.