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China's Big Global Infrastructure Bet: Will It Work?

The Belt & Road Initiative—a multi-billion-dollar effort to update the famous Silk Road trading route—could offer real opportunities to investors


THE ORIGINAL SILK ROAD SHAPED the world’s commercial destiny. A network of trade routes, both over land and over water, it anchored trade between East and West from roughly the 2nd century BC to the 15th century. Over the past five years, under President Xi Jinping, China has begun putting into motion a massive infrastructure plan widely dubbed "the New Silk Road." The expansive Belt and Road Initiative (BRI), combines a "belt" across the Eurasian landmass—an array of transportation, energy pipeline, power and telecommunications infrastructure—with a network of ports, terminals and other marine facilities from the South China Sea across the Indian Ocean to Africa, the Middle East and Europe at a total cost expected to reach the hundreds of billions of dollars.

For investors, the initiative could provide a new source of global demand for energy and industrial commodities.

“We expect it to be an ongoing process,” says Ehiwario Efeyini, Senior Market Strategy Analyst, Bank of America Global Wealth and Investment Management. “These are big infrastructure projects, so they're going to take many years to develop, plan and build. It’s not something that’s going to be finished in the next five to 10 years and even decades.”

Projects in more than 60 countries have already been proposed, with funding pledged by a number of financial institutions including the new China-led Asian Infrastructure Investment Bank, the China Export-Import Bank and the national Sovereign Wealth Fund. The initiative comes at a time when the pace of both domestic and foreign investment in China is slowing, due to industrial overcapacity, rising wages and emerging low-cost manufacturing centers elsewhere in Asia.

 

China’s strategy for connecting itself with the world has many components. These are some of the most important.

 


Source: “5 New Silk Road Projects That Will Alter Your View of How the World Works,” Forbes, March 13, 2018.

 

Shipping company COSCO has acquired 51% of Greece’s port at Piraeus, a gateway to Europe and a new node in a network of Chinese-operated ports stretching to Southeast Asia.

 


Source: “5 New Silk Road Projects That Will Alter Your View of How the World Works,” Forbes, March 13, 2018.

 

An 873-kilometer high-speed railway linking China’s southern border with the ports of Thailand will help turn the province of Yunnan into an export hub for the Southeast Asia market.

 


Source: “The trains and sea ports of China’s new Silk Road,” The Independent, May 14, 2017.

 

A 471-kilometer cargo and passenger railway in Kenya connects the capital, Nairobi, with the port city of Mombasa.

 


Source: “The trains and sea ports of China’s new Silk Road,” The Independent, May 14, 2017.

 

A China-Europe railway will connect 27 cities in China with 28 European cities via 51 rail links for freight trains, providing faster transport time than sea routes.

 


Source: “The trains and sea ports of China’s new Silk Road,” The Independent, May 14, 2017.

 

The Chinese port at Gwadar in Pakistan is being connected to the north of the country, which abuts China’s Xinjiang region, by road, rail and pipelines.

 


Source: “5 New Silk Road Projects That Will Alter Your View of How the World Works,” Forbes, March 13, 2018.

 

Chinese state-owned companies are helping build the Padma Bridge in Bangladesh, part of a road network stretching from South Korea to Turkey conceived by the U.N. in the 1950s.

 


Source:“OBOR on the Ground: Evaluating China’s ‘One Belt, One Road’ Initiative at the Project Level,” Center for Strategic and International Studies, November 30, 2016.

The goal, from China’s standpoint, is to create new export markets for industries facing excess capacity, such as steel, glass and cement, as well as for higher-value-added output such as cell towers, high-speed rail systems, industrial machinery, power plants and consumer electronics. “The BRI is a way for China to export some of that industrial capacity to other countries that need it,” says Efeyini. The project also has the ability to extend China’s regional influence across Asia, Africa and Europe.

What it could mean for investors
The initiative could provide a new source of global demand for energy and industrial commodities: iron ore for pipelines and rail tracks, cement for road construction, and copper and aluminum for communication and power lines. “One area of opportunity is in the Chinese engineering and construction firms that produce the machinery and equipment and develop these projects,” notes Efeyini. “Whether it's rail links in Africa, or road projects, or other infrastructure across Eurasia, most of the companies involved will be Chinese.” Further, an expanded external market could benefit China’s growing capacity in advanced manufacturing of telecommunications, information technology and transportation equipment.

To see how far this ambitious project extends, take a look at the map above. For details about some of its most important elements, check out the slideshow.


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