US and Europe have been experiencing lackluster growth. Due to sanctions, Russia is becoming economically dormant. Commodities are taken a plunge all over the world. With all this in mind, China is investing abroad, helping drive growth in emerging and frontier markets.
A growing trend over the last decade has been the Chinese investments all over the world. A trend set to continue in the foreseeable future.
Although for the moment China is experiencing lackluster domestic growth, abroad investment is business as usual. The $250 billion National SSF and Chinese state-run enterprises continue to make direct investments in projects and also invest in government debt.
Chinese investments might not have a strong impact as the Saudi Arabia $2 trillion mega-fund might have. Nevertheless, the investments conducted by China tend to be in infrastructure, bringing long term growth.
Where is China investing
Short answer: everywhere! From South America to Sub-Saharan Africa and from Eastern Europe to central Asia, basically every emerging and frontier market had a glimpse at Chinese money.
Developed economies were acceptable too, with the acquisition of Thames Water, a UK Utility company. However, the bulk of Chinese investments is done in emerging and frontier markets. As mentioned, certain regions are favored.
The investment scope is very narrow, ranging from infrastructure projects, currency swaps and government debt. A more active and diversified role is taken by Chinese companies. One example is Huawei, a telecommunication giant, investing in training centers and IT projects across western Africa.
Manufacturing companies are creating a so called China’s China by investing in manufacturing hubs in eastern Africa. Here wages can be up to 10 times lower than in China.
On the financial side, Argentina received a currency swap helping it by-passing its US Dollar need for imports. At the same time, boosting Chinese imports in the South American country. China has been a fresh breath of air for Argentina, a country that has been out of international capital markets for years.
China has large interests in these regions
For a super-power, Stratfor points that China is lacking food security. For a middle size country, food security might not be a problem. It [food security] becomes an issue and a security concern when you have the most populous country, that at the same time is aspiring to become a super-power.
China’s investments in sub-Saharan frontier markets will eventually help develop agriculture on some of the largest uncultivated areas in the world. In addition, investments in agribusinesses in Romania and Russia will offer China exposure to the Black Sea basin, one of the biggest wheat exporting region in the world.
One thing that most frontier countries have in common is that they are exporting commodities. The Chinese hunger for commodities is a secret to nobody. The infrastructure projects developed so far can be regarded as a bridge to the producers commodities, making it easier and cheaper for China to import these commodities.
China is aspiring to become a super-power, there is no doubt.
At the same time, China needs its currency to become a de facto reserve currency. It seems that the way China is trying to implement this strategy is by offering currency swaps and deals to cash hungry nations. One example is Argentina, another example are the central Asian open-dictatorships of former soviet republics. Even if Russia is the strong hand in the area, due to its economic problems, China managed to infiltrate its ‘soft-power tools’. By offering currency swaps and infrastructure partnerships to these land-locked countries China could rival Russia in regional influence.
It is known that bond markets currency denomination follow liquidity. It is no surprise that Hungary announce in 2015 that will start issuing Renminbi denominated bonds.
What’s in it for frontier markets
Two words: development and liquidity. Infrastructure projects not only help developing countries, but offer long term economic gains by facilitating a faster and easier movements of people and goods.
Skilled workforce and professional know-how have been the intangible gains that now are reflected in the local spending power.
Huawei funded professional centers across western Africa, developing the engineers that helped build the regional telecommunication infrastructure.
Overall, by receiving capital, knowledge for developing a skilled workforce, infrastructure funding and financial deals, frontier markets benefit from creating an economic growth that is transferred to equity growth.
Can investors gain from China’s frontier business
Frontier markets have been regarded as the pariah by investors. Often, the lack of capital, infrastructure and stability in this countries acted as a barrier for investors.
Today’s developments, infrastructure investments, a skilled workforce and more capital flowing in these countries will lead to economic growth. Political stability often times comes with economic growth as more individuals are getting a piece of the pie, making it unprofitable or uneconomically viable to overturn governments.
China may invest direct making it impossible for investors to get exposure. Usually these agreements are made between countries and the flow of capital takes a straight line from China to local governments, or Chinese subcontractors in the area.
Investors can gain exposure to these developments by investing in local companies. By investing locally, they will gain exposure to infrastructure-led growth. This growth will create the future middle class of frontier markets.
With more money flowing around and rising living standards, it is a matter of time until locals start to emulate the western lifestyle, spending and bumping profits of local companies.
Rising living standards will create internal demand that will drive growth, in the same way that China’s rising standards helped create a middle class that is shifting the inland [Chinese] economic growth from manufacturing to consumption.
Although there will not be a future China in frontier markets, as there is no country big enough to equate China’s capabilities of 30 years ago, opportunity for investors will be present all over the frontier world.
Through infrastructure projects, educating the workforce and financial deals, China is creating dependencies that, in turn, will build the power-base that it needs in order to have a stronger hand internationally.
From an investor point of view, these developments are driving frontier markets growth. It is a matter of time until this growth will be reflected in corporate profits. The question remaining is in what companies is worth investing?
All content on DraculaCapital.com is for information purposes only. Do not use this content as investment recommendation. Every type of investment involves the risk off losing investment principal. Frontier Markets presents higher risks than mature markets.