Last updated September 17th, 2018.
China’s goals are becoming more international as its size and influence grows.
Having already taken over the title of world’s largest economy in terms of purchasing power parity, this trend will likely continue.
Right now, their ambitions focus on three main areas: its currency, role in the global economy, and outbound foreign investment.
China’s actions will impact developed nations, emerging markets, and indeed practically everywhere in the world. However, they’ll probably affect frontier markets more than any other.
That’s because a large amount of Chinese capital and knowledge is going toward developing these rapidly growing nations.
The Yuan Goes International
China’s yuan is increasingly used as a global currency. They’re setting up trade deals and swap agreements with dozens of countries each year.
Beijing is doing everything they can to internationalize the yuan. They boast size and influence, but a major worldwide currency is one of few things the Chinese economy lacks.
In 2014 alone, the Singapore exchange listed its first stock denominated in yuan and London hosted its first bond yuan-denominated bond.
It also became Asia’s most actively traded currency. That’s on top of countless other developments.
Yet probably the most important evidence of Beijing’s goals was their campaign to have the yuan included in the International Monetary Fund’s SDR (Special Drawing Rights) basket.
The SDR is re-weighted every 5 years and used by most central banks as an asset on their balance sheets.
China’s yuan was non-deliverable just a few years ago and not included in the SDR’s weighting. Today, it’s not only included but at a weighting even higher than the British Pound too.
How Does This All Impact Frontier Markets?
Frontier markets could benefit most from greater investment and stability in their currencies.
Over 30 nations have currency swap deals with China. Many of them are frontier markets including Pakistan, Nepal, Mongolia, Cambodia, Ukraine, Kazakhstan, and dozens more.
Such pacts are similar to lines of credit, giving these countries’ central banks emergency liquidity in times of crisis.
Furthermore, China has a history of valuing currency stability. China’s yuan was one of the world’s best performing currencies following the 2008 Financial Crisis.
As such, frontier markets can access easy liquidity in the form of a stable yuan if another crisis strikes.
Infrastructure and Development
Everywhere from Canada to Columbia have joined the Chinese-led Asian Infrastructure Investment Bank (AIIB). Considered a counter to the western-dominated World Bank, the AIIB positions China as an infrastructure powerhouse.
Infrastructure has been one of China’s strengths for a long time. Much of their effort in frontier markets focuses on Africa, yet they have a massive amount of ongoing and completed projects across the world.
You only must look at the China Road and Bridge Corporation’s website to understand. They have plenty of examples.
Once the AIIB gets into full-swing, greater competition should lead to lower interest rates and more funding for frontier markets looking to borrow capital. In turn, this will create jobs and infrastructure.
The Growth of China’s Foreign Investment
A worldwide yuan gives China lots of benefits. For starters, a commonly used currency leads to a more open capital account.
Numbers from China’s Ministry of Commerce state outbound investment reached US$100 billion in 2013 growing 22.8% from the previous year.
This was not only the largest amount ever, but Chinese investors were heading to emerging and frontier markets rather than developed countries.
Investment in the EU was down 15% while investment in Latin America, Oceania, Africa and Asia grew by 133%, 52%, 34% and 17% respectively.
Practically all this capital is flooding into emerging and frontier markets with Latin America enjoying a big share of the growth.
Why Latin America? The motives could be political and involve “playing in the United States’ backyard” so to speak.
In addition, most countries that still recognize Taiwan are in Latin America. China has a history of trying to lure them to its side through investment.
One region worth keeping an eye on is Central Asia. China’s Belt and Road Initiative means this area 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.
Some ETFs also invest in either a single frontier market or a diversified group of them. You can only trade the majority of these with a US brokerage account though.
However, the best way to profit in frontier markets is going there and investing yourself. The world’s best opportunities aren’t found on the New York Stock Exchange.
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