Investors and the Belt and Road Initiative: A Brief Overview
China’s belt and road progress stands as one of the most ambitious infrastructure development endeavours of the 21st century. A loosely meshed portfolio of projects across Asia, Africa and Europe, the BRI has more than 70 countries participating, with its reach of impact estimated to be 4.4 billion people (or 62% of the world’s total population). The approximate total cost of the infrastructure needs across BRI countries by 2030 is $26 trillion, of which China has pledged $2 trillion.
The BRI and its advocates tout the initiative as a ‘win-win.’ It is crucial to make that distinction here-however subtle it be-the BRI, ostensibly, is NOT a strategy per se-as its name suggests, it is an initiative which Beijing envisions as global in nature.
Indeed, there WILL winners from the BRI. Its success spells Chinese government’s heightened geopolitical influence, consolidation of access routes to energy sources (thereby a decreased reliance on international shipping) and internationalization of the renminbi. Additionally, the BRI allows for China to export its excess savings through overseas infrastructure development projects. Recipient ‘partner’ countries stand to gain an influx of infrastructure, along with loans with fewer strings attached-on paper. Companies involved in constructing the BRI see before them massive opportunities for growth and expansion. Can stock investors also be winners through this initiative?
It is important here to examine here just HOW the BRI is being financed. Over the past 5 years, China’s state-owned enterprises (SOEs), which are listed on exchanges in Shanghai and Hong Kong, have carried out 3,116 BRI projects. SOEs constitute one component of BRI’s financial backbone, with the others coming from banks and multilateral institutions such as the Asia Infrastructure Investment Bank (AIIB) and the Silk Road Fund. A successful example of SOEs in action is China Merchant Port Holdings’ investment in the massive Bagamoyo port in Tanzania, which is slated to become the largest in Africa. Another success story is at the Greek port of Piraeus, where China COSCO, a shipping and logistics SOE, has a controlling stake.
Yet betting on SOEs will not prove ideal investing grounds- for the time being. Hermes’ head of emerging markets, Gary Greenburg, regards the BRI as a tool for strategic gain rather than providing a return on investment for minority investors, a view also argued by Mihir Kapadia, Sun Global Investment’s founder. BRI projects, Mr. Greenburg highlights, should not be the primary basis for investing in China’s SOEs.
It should further be noted that a considerable number of the recipient ‘partner’ countries are ranked lowly in terms of good governance, as shown through countries such as Laos (#135), Kenya (#143) and Turkmenistan (#167) in Transparency International’s 2018 Corruption Perceptions Index. Political and reputational risks in countries such as Pakistan and Myanmar, in which several BRI related projects lie in areas of armed conflict, understandably shake investors’ confidences.