Is China’s ambitious Belt and Road Initiative a risk worth taking for foreign investors?
Five years after it was first unveiled, questions remain about whether foreign participants can actually benefit from the world’s most ambitious infrastructure plan
China’s Belt and Road Initiative (BRI) has aroused almost as much scepticism as it has raised expectations. The US$900 billion project to recreate the old Silk Road trading routes between Asia and the rest of the world, first outlined by China’s President Xi Jinping in 2013, heralded an extraordinary programme of power, transport and infrastructure construction.
“The BRI is a manifestation of China’s re-globalisation ambitions, especially its commercial and economic engagement with neighbouring countries. There is no defining blueprint, it is not a specific, discrete strategy and nor is it a type of Marshall Plan,” says Nicholas Kwan, director of research at Hong Kong Trade Development Council. The Marshall Plan, a US economic aid scheme, helped rebuild Europe after second world war.
According to the Chinese government, there are more than 100 separate agreements that make up the BRI. These agreements and projects are cross-border, bilateral and multilateral and include many types of enterprise, not just infrastructure schemes.
However, doubters contend the BRI is simply a way for China to export its excess industrial capacity, while some geopolitical rivals and neighbours fear it is an instrument of strategic and economic hegemony.
Just as the motivations of BRI are ambiguous, so the achievements are as yet unclear. Perhaps even more nebulous is how foreign companies can participate and how investors can get involved.
“BRI is progressing fast if you value the number of projects that China has financed, some of which are extremely relevant in terms of improving physical connectivity at a global level. So far there are around US$350 billion worth of projects financed, the bulk by Chinese development banks and only marginally by foreign banks or international financial organisations,” says Alicia Garcia Herrero, chief economist Asia-Pacific at investment bank Natixis.
At the outset in 2013, there were five stated objectives: policy coordination, facilities connectivity, unimpeded trade, financial integration and communication between different people and communities. Subsequently, a final communique at the Belt and Road Forum for International Cooperation in Beijing released on May 16, 2017 emphasised dialogue, consultation and cooperation between about 70 participant countries.
Its signatories pledged “to oppose all forms of protectionism, including in the framework of the BRI” while “promoting a universal, rules-based, open, non-discriminatory and equitable multilateral trading system”.
The Ministry of Foreign Affairs also released a list of 270 commitments, including two-way agreements with countries ranging from Switzerland to Afghanistan.
According to Kwan, perhaps the closest to an official declaration of BRI’s objectives came in a paper published by China’s National Development and Reform Commission in March 2015, which affirmed BRI’s globalisation intentions, with official policymakers guiding commercial and financial enterprises. “Interpreted in this way, BRI covers myriad projects and it is all-encompassing,” he says.
Headline projects include a US$5 billion China-Belarus industrial estate, a US$3.1 billion bridge and railway project in Bangladesh, the US$5.8 billion China-Laos railway, a US$10 billion refinery in Saudi Arabia, a new city next to Colombo’s port in Sri Lanka that will have a total investment of US$13 billion over the next 25 years, and a freight route that now links China’s eastern coast and London.
Outweighing everything is the China-Pakistan Economic Corridor, a US$60 billion effort consisting of numerous projects. For Pakistan, the investment amounts to about 20 per cent of its GDP.
This activity will drive demand for raw materials, including iron ore. BHP Billiton said it looked at 400 core projects that will require US$1.3 trillion of spending. Those projects could lead to an additional 15 million tonnes per year of steel, an additional 3 to 4 per cent demand growth, as reported by the Financial Times in September 2017.
That demand will be met by Chinese steel mills, because only 10 of the 68 countries covered by the BRI are net steel exporters. About 80 per cent of the steel will be used in structures and reinforced concrete, and 20 per cent in machinery and other equipment, BHP said. Clearly, China’s state-owned enterprises are likely to benefit; but overseas investors can also hope for rewards by taking a positive view on commodity prices.
However, major projects have already faced difficulties. Khorgos is a crucial hub in the rail transport network linking China and Europe, and by 2020 it is intended to contain the world’s largest dry port, where 4 million tonnes of goods a year can be stored and transferred between Chinese and Kazakh trains. However, Khorgos is reportedly mired in logistical problems. Meanwhile, a free-trade zone set to open last year in the regional capital of Urumqi was delayed because the local government had not been able to decide on logistics operations and a customs regime, the Financial Times reported in December.
Pakistan’s Gwador Port, a key part of the BRI that connects to Xinjiang in western China, was attacked by terrorists last October. In Myanmar, the US$3.6 billion Myitsone dam project was abandoned after local protests over environment concerns, as were the Budhi Gandaki hydroelectric project in Nepal and the Diamer-Bhasha dam in Pakistan.
Moreover, foreign direct investors, construction companies and ancillary services firms face a diverse range of political, legal and regulatory risks based on individual jurisdictions, and then encounter construction risk, cost overruns and demand risks determined by local conditions, and currency and refinancing risks shaped by macroeconomics and overseas creditors’ perceptions.
So far, most of the investment in BRI projects has been supplied by China through state-owned enterprises such as China Communications Construction Company and China Railway Construction Corporation; further funding is through the 77-member Asian Infrastructure Investment Bank.
“The projects follow a hub-and-spoke model in which China is at the centre. Of course, this pushes forward the excess capacity and geopolitical objectives of China, clearly a double win for China, but only if it ends up well,” says Natixis’s Herrero.
Foreign investment opportunities
There are no clear BRI-linked listed vehicles for portfolio investors. Nevertheless, Kwan points out that there are several venture capital funds and angel investors directly taking part in BRI projects, although most are from mainland China and often based in Hong Kong due to greater logistical efficiency, proximity to professional skilled ancillary services and access to wealthy individual investors.
In addition, portfolio investors will have access to BRI projects indirectly, since China’s pool of savings – no matter how large – are not enough to finance the full initiative, says Herrero. China will tap global portfolio investors, and is already doing it through the Hong Kong stock market and US dollar bond issuance.
“For direct investors, it will be much harder as China wants to retain control of the projects,” says Herrero.
Yet, foreign companies from the UK, Sweden, Australia and the US, notably GE, have already been co-investing with Chinese state-owned enterprises, as well as major Hong Kong infrastructure companies such as CLP, MTR and the territory’s ports operators. It really depends upon how widely or narrowly BRI is defined: by Kwan’s definition, BRI encompasses most of China’s annual US$100 billion overseas investment and US$3 trillion worth of trade.
However, Hong Kong expects to play a crucial role. MTR, the Airport Authority and CLP are already working on projects, and the city should benefit from its expertise in logistics, financial services, trade finance and asset management, plus from its reputation for maintaining the rule of law. In early December, the office of Hong Kong Chief Executive Carrie Lam Cheng Yuet-ngor had said Beijing would soon set out a clear path for Hong Kong’s role in BRI.
Indeed, “the skill set for BRI in terms of project and export finance, infrastructure finance, structuring and indeed the whole legal system for dispute resolution, sits firmly here in Hong Kong”, Stuart Gulliver, the former group chief executive of HSBC Holdings, told delegates at the Asian Financial Forum in Hong Kong on January 15.
Both Kwan and Herrero recognise that project transparency and risk mitigation are issues that investors will need to contend with. On the other hand, they will be eventually rewarded with strong returns if they can identify the winners.
(This article appears in the March issue of The Peak magazine, available at selected bookstores and by invitation.)