China has long been considered the world’s most important economies, thanks to its massive size, tremendous potential, and impressive growth rates over the last two decades. With a population that is rapidly urbanizing, many predict the Chinese economy will be the largest in the world within just a decade, potentially knocking the U.S. from the number one spot that it has held for so long. While China’s potential policy shifts and economic potential dominated the headlines for much of last year, the end of 2010 focused on a different corner of the globe as the euro zone struggled with looming debt crises that struck several nations. Countries like Greece and Ireland have already received bailouts, and others such as Spain and Portugal are on the brink of needing international intervention to stay afloat. While many have looked to the EU or the IMF to help these indebted nations, few have considered the possibility of other countries, with far more sound balance sheets, stepping in to help [see also Three ETFs To Watch If Roubini Is Right About Europe ].
China recently announced a deal with Spain valued at approximately $7.3 billion dollars that will allocate much needed cash to over 16 market sectors in the nation, with the most valuable acquisition coming from the $7.1 billion of Repsol oil assets purchased by China Petroleum & Chemical Corporation. Other major purchases included meat products, olive oil, wine, and ham from Spain. Chinese Vice Premier Li Keqiang stated that “China is a long-term and responsible investor in the Spanish and European financial markets, and it has confidence and great interest in the Spanish market,” suggesting that perhaps Chinese investment in troubled euro economies is only just beginning.
Mr. Li also stated that China had intentions to purchase more Spanish government bonds if the market conditions were right, effectively adding to the already 10% stake of Spain’s debt that the China currently owns. But while China has expressed monetary interest in Spain, it also holds the EU as a whole in high regard as an investment destination; the bloc of nations is China’s biggest trading partner. Already, China has more than $2.6 trillion invested in non U.S. dollar-denominated assets, the highest in the world, and it clearly has plans to expand that figure in order to not only help the country further diversify away from U.S. dollars but to cozy up with its biggest trading partner as well. Late last year, a Portuguese newspaper reported that China had plans to invest in Portuguese bonds to help the nation refinance their massive debts, and China has expressed interest in buying Greek bonds as well [see also Ten Worst Performing ETFs Of 2010 ].
While China’s motives may be more political than economic, their stake in the EU is clearly growing, and Beijing has given indications that investment in the euro zone will continue. Below, we outline three ETFs that could benefit from China’s growing investment in the euro zone [see also China, Norway ETFs In Focus Amid Major Oil Deal].
Global X China Energy ETF (CHIE)
This ETF tracks an index that is designed to reflect the performance of the energy sector in China. Top holdings of this fund include CNOOC (11.8%), and China Petroleum & Chemical Corporation (11.1%). This fund could give investors a pathway to investing in the various deals China seems to be making in the energy space. In particular, the $7.1 billion purchase of oil assets by China Petroleum could have a significant impact on CHIE, as China expands its European oil operations and gains yet another market to develop energy supplies to fuel its red hot economy.
iShares MSCI Spain Index Fund (EWP)
EWP measures the performance of the Spanish equity market, which had a rough 2010–this fund has lost nearly 30% over the last 52 weeks. This ETF focuses its holdings in the financials (43.7%), telecom (18.4%), and industrial materials (12.5%) sectors, with the majority of its holdings coming from giant and large cap companies. Repsol accounts for nearly 5% of the ETF, giving it direct ties to the recent China-Spain deal. Beyond ties to this recent deal, China’s explicit willingness to invest in and help Spain could turn things around for this fund as well [see EWP's fundamentals here].
iShares MSCI EMU Index Fund (EZU)
This ETF tracks the MSCI EMU Index, which measures the performance of equity markets of the EMU member countries: those members of the European Union who have adopted the Euro as their currency. From a sector standpoint, this fund primarily dedicates its assets to the financials (22.2%), industrial materials (16.7%), and consumer goods (16%). As far as countries are concerned, EZU holds France (31.2%) and Germany (26.2%) and Spain (12.2%) in its top three spots. This fund reflects the euro-zone as a whole, which will benefit from any single country climbing their way out of debt, so EZU could be a more general play on the Chinese foreign investment and its long-term impact on the zone.
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Disclosure: Photo courtesy of Håkan Svensson. No positions at time of writing.