Belt and Road: tackling the misconceptions

A FinanceAsia survey reveals strong interest in China’s massive infrastructure plan, but the level of understanding is mixed

Encompassing 65-plus countries, China's Belt and Road Initiative aims to create a modern Silk Road connecting the world’s second-largest economy with Central Asia, Europe and Africa, and another route linking China to Southeast Asia and east Africa by sea.

The scale of the programme is vast. With over $1 trillion of investments planned, from ports in Pakistan to railway projects in Africa, Belt and Road spans approximately 4.4 billion of the world’s population and about 40% of the global economy.

To test the level of Belt and Road appetite from investors and executive, we surveyed FinanceAsia readers on their expectations for the initiative.

Interestingly, we discovered that sometimes the perception differs markedly from the reality. For example, senior executives believe the majority of Belt and Road projects will occur in Central Asia. This will not be the case. Southeast Asia will be (and already is) the major recipient of investment.

We also found there is concern about how infrastructure projects in developing countries will be funded. This is a natural anxiety. The Asian Development Bank expects emerging Asia to need about $26 trillion of infrastructure investment between now and 2030. That amounts to $1.7 trillion per year, more than twice what the ADB had forecast in 2009.

About 81% of the respondents expect Chinese capital will lead funding for those infrastructure projects, according to the survey, namely the policy lenders such as China Development Bank and the Export-Import Bank of China, as well as the state-owned enterprises.

During his speech at the opening of the Belt and Road Forum in May this year, Xi pledged at least $113 billion in extra funding for the initiative, and urged countries across the globe to join hands with him in pursuit of globalisation.

In addition, Beijing has spearheaded several institutions to facilitate some of the financing. The Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund have garnered more than $240 billion of dry powder as of June this year, and are starting to invest in projects that promote energy efficiency and waste management.

The initiative will require a broad spectrum of international and regional investors to put their capital to work in long-term projects through bank loans and bond markets. According to the survey, 70% of the respondents said the adoption of public-private partnerships will be the key funding model.

A total of 130 responses were collected for the period, which was carried out mid July for five days. Public-services and corporate sector represented 38.5% and 28.5% of the total feedback. Banks 20%, investors 7.7% and law firms 2.3%. The remaining 3.1% went into others.

The perception gap

Do FA readers have a good grasp of Belt and Road? We compare the results with the reality.

FA Says: That’s the theory anyway. Overall trade volumes will increase, but whether that ends up in China’s favour (exporting more than it imports) is the bigger issue. Take Pakistan, for example. An early beneficiary of Belt and Road, the trade imbalance between to two has widened in the last two years late. Enough to have prompted its government to push Chinese authorities to revise the existing free trade agreement between the two.

FA Says: It’s interesting that while 74% believe Belt and Road will create more trade, executives are less sure it will create more jobs in their country. In the long term this should be the case, but there are legitimate concerns Chinese contractors will only employ Chinese nationals to work on Belt and Road projects. This happened in Africa and the social fallout was widely reported. Governments should work together to ensure local skilled employees are given a chance where appropriate.

FA Says: China will most certainly stump up the lion’s share of capital for strategic Belt and Road projects. The government has plenty of levers to pull – policy banks, large state-owned institutional investors, commercial banks, and the SOEs. With them all pointing in the same direction there’s a lot of capital available. But the more money that comes from China, the move leverage it has over structure and the terms and conditions of the projects.

FA Says: This is true. Belt and Road will be a damp squib without support from the private sector. A lot of hope is being pinned on PPP contracts to bring together public and private sector capital. China’s track record with successful PPPs is sketchy at best, and China’s revised PPP contract law has spurred more transactions, but unless other means of luring the private sector in are found, there may be trouble ahead. 

FA Says: Split thinking on this, and possibly in line with the school of thought that the financial markets need to accommodate the spectrum of risk-takers out there. Infrastructure funds directly investing in “Belt and Road” companies are popping up that are wrapped by multilaterals who are absorbing first losses, for example. Chinese asset managers FinanceAsia has spoken to are gearing up to launch funds that invest in public stocks of companies they believe will benefit from improved infrastructure.

FA Says: As far as we are concerned Central Asia will not be high on the priority list for China. In terms of economic development, political stability and some very obvious easy wins, Southeast Asia is the primary target for Belt and Road investment in the short and medium term. And if you don’t believe us, research conducted by the Economist Intelligence Unit indicates that over 60% of Chinese overseas direct investment flows to Belt and Road countries between 2013 and 2015 were parked in Association of Southeast Asian Nations countries.

FA Says: This is a logical response. Clearly the most pressing need is to ensure the routes to better trade are radically upgraded. Improved airports, ports, rail and roads will be the focus of all the major Belt and Road projects. However, power, telecommunications, and utilities (including water) will also be high on the priority list. Access to clean water, reliable energy, and effective broadband cannot be sidelined for long.

FA Says: Again, it’s a sensible response given the nature of Belt and Road. A lot of equity portfolio managers, including commercial banks with constrained balance sheets, are eyeing up these types of companies as good bets to benefit from Belt and Road. 

To offer more Belt and Road insights, FinanceAsia is hosting its first Belt and Road Connected: Invest Philippines conference in Manila on January 30. For more information, contact Andrew Wright on +852 31751926 or via email.

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