Yesterday in Egypt, Chinese Premier Wen Jiabao offered $10 billion in concessional loans to Africa over the next three years, describing China as a “true and tested friend” of the African people. Wen also pledged to build 100 new clean energy projects for Africa in an effort to support the development of green economies in some of the world’s poorest countries. Reaction to the deal was mixed. Some lauded China’s move as a much needed step to help the continent develop technology and infrastructure needed, while some Westerners have expressed that China is only interested in African resources.
In addition to the low-interest loans, Wen pledged that Chinese financial institutions would set up a $1 billion fund to lend to small and medium-sized African businesses. China has promised zero tariffs on 95% of products from the least developed African nations that have diplomatic relations with China, potentially a major boost for economies on the continent.
Many regions of Africa are incredibly rich in natural resources, but lack the technology and infrastructure to reach the natural resources that could power regional economies. As the relationship with China strengthens, it becomes more likely that Chinese firms will be selected to Africa tap its vast potential.
China has suffered several setbacks in recent months in its efforts to buy into African oil fields, recently losing out to Exxon Mobil in a bid for Ghana’s Jubilee field. “At stake is China’s ability to secure fuel for its economy, which expanded 7.9% in the second quarter from a year earlier,” writes Carli Lourens. As China’s manufacturing sector has expanded rapidly, the need to find external sources for energy and other raw materials has become more pressing.
While the economic impact of China’s move to invest in Africa won’t be felt overnight, it does reflect some interesting trends in the new world economy. In addition to China’s push to secure African energy and natural resources, we are seeing that emerging markets are investing heavily in other emerging (and frontier) markets, cooperation that could lead to both continued growth and reduced risk in coming decades.
Below are three ETFs that could be interesting medium to long term plays following China’s bet on Africa. For more actionable ETF investment ideas, sign up for our free ETF newsletter or a seven day free trial of ETFdb Pro.
- Emerging Global Dow Jones Emerging Markets Energy Titans Index Fund (EEO): This ETF invests in energy companies operating in emerging markets, including China.
- Emerging Global Dow Jones Emerging Markets Metals & Mining Titans Index Fund (EMT): This ETF invests in metals and mining companies of emerging markets. With nearly 25% of its holdings in Chinese companies, EMT could get a boost if Africa and China continue to develop a mutually beneficial relationship.
- Market Vectors Africa Index ETF (AFK): While this ETF does have a significant allocation to South African companies, it also maintains exposure to several less developed economies, including Egypt, Nigeria, Morocco, Equatorial Guinea, Nigeria, and Zambia. If China’s commitment to promoting Africa’s economy proves effective, many of these countries could take big steps forward over the coming decade.
Disclosure: No positions at time of writing.