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Thematic ideas | Infrastructure: China’s Belt and Road Initiative

Investment outlooks / Q2 2020

The Belt and Road Initiative (BRI) is China’s global development strategy adopted in 2013. It aims to develop land and sea trade routes with countries and international organisations in Asia, Europe, and Africa. Formerly known as the “One Belt, One Road”, it refers to the Silk Road Economic Belt and the 21st century Maritime Silk Road linking three continents. The BRI involves investments in infrastructure development and has a target completion year of 2049, which coincides with the 100th anniversary of the People’s Republic of China.

In the last couple of decades, China has become the second largest economy in the world. Most BRI countries have also expanded their economies over the same period. The Belt and Road initiative is a mutually beneficial program. For China, it is a key strategy to increase the strategic value of outbound investment, explore new export markets and to strengthen CNY internationalisation. For BRI countries, it can help decrease the gap in their infrastructure investments and unleash growth potential.

Click map to expand. Source: China Daily, April 2015.

The BRI alludes to the original Silk Road connecting China and Europe between 206 BCE and 220 CE. The initiative highlights 5 key opportunity areas; cultural exchange, policy coordination, facilities connectivity, trade and investment and financial integration. Already, 126 countries and 29 international organisations have signed co-operation documents with China on the BRI.

The initiative has already made sizeable progress. Investments from Chinese companies involved in the BRI, approached $280bn by December 2019 according to data compiled by The American Enterprise Institute (AEI) and The Heritage Foundation. This $280bn has been invested via 135 projects with 73 of those being greenfield. The top sector by amount invested into is Energy with $109.7bn, and the top country by amount invested is Singapore with $26.3bn.

Key benefits for China

The BRI increases the strategic value of outbound Chinese investment. Prior to 2016, the increase in Chinese outward direct investments was primarily driven by investments in overseas entertainment, hotels and real estate. The BRI, on the other hand, is concentrated in infrastructure investments such as roads, railways, power plans and seaports. This is done to strengthen connections between countries along BRI routes. In order to bolster the process, Chinese officials encouraged organisations to allocate more finances toward the BRI and reinforced regulation on “irrational overseas investment” by creating a “negative list” with non-core areas.

The BRI helps China to explore new export markets.

Over the past decade, Chinese low-end manufacturing competitiveness has been somewhat reduced due to rising protectionism, trade tensions, structurally weaker global demand and the country’s ageing population. The initiative can become a major corridor for China to explore new markets and move up the value chain.

Finally, the BRI helps to promote the internationalisation of the CNY. As of end 2018, the People’s Bank of China had signed currency swap agreements with 21 BRI countries. Some countries (Malaysia, the Philippines, Nigeria and Cambodia) have taken CNY as part of their reserve currencies. The initiative is likely to further advance the international status and usage of CNY over the long-term.

Key benefits for partners

The initiative helps to reduce the global gap in infrastructural investment, especially as the ratios for infrastructural investments to GDP ratios for BRI countries tend to be low. In addition, urbanisation rates are lower compared to both China and developed countries. This implies insufficient infrastructure and manufacturing investment into BRI countries. The Asian Infrastructure Investment Bank (AIIB) estimated a $21tn financing gap in projected $40tn infrastructure investment demand, which BRI has been helping to lower.

The BRI also helps to unleash growth potential amongst the recipients of the aid. One of the key characteristics of BRI countries is a relatively young population. The age dependence ratio (the ratio of non-working age population to working age population) has been declining in these countries, implying incrementally more producers than consumers. The UN estimated that 54 per cent of global working age population can come from BRI countries by 2030. Investments in these countries should create jobs and help to unleash their growth potential.

A large investment

Total investments to BRI countries are estimated to reach $1.2tn by 2027, according to forecasts by Morgan Stanley. $370bn of those are projected to come in direct form and $842bn in indirect form via policy banks, commercial banks and the AIIB.

As data compiled by the American Enterprise Institute (AEI) suggests, BRI annual direct investments by China have rapidly increased from $10bn in 2013 to $30bn+ in the years after. Most of these investments were made in infrastructure related sectors such as energy, metals, and transportation, which together have accounted for two-thirds of the total amount in 2013-19. Non-core sectors such as entertainment and tourism have accounted for less than 5 per cent of total investments. By the end 2019, almost half of all investment projects were greenfield.

Click chart to expand. Source: China Global Investment Tracker by the American Enterprise Institute, December 2019.

In terms of regional breakdown, the largest proportion of investments were made in South and East Asia with 36 per cent, while Americas (Canada and Latin America) have accounted for 13.3 per cent in 2013-19. Europe, Russia with Central & West Asia and Middle East and Africa have all accounted for 17 per cent of total investments.

Click chart to expand. China Global Investment Tracker by the American Enterprise Institute, December 2019.
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Thematic ideas | Infrastructure and social development
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