Strategic Insights | The Belt and Road Initiative

Strategic Insights | The Belt and Road Initiative

Published August 8, 2021
A favourite fantasy among modern-day investors involves building a time machine, going back in time to the mid-90s, befriending Larry Page when he was just a PhD student at Stanford… and then investing massively in the then nascent Google. Needless to say, there are variations that feature a young Steve Jobs or an even younger Mark Zuckerberg.
Our job at Investment Quorum is to take some of the legwork out of finding excellent investment opportunities by scrutinising global events and developments… and identifying the next big thing before it has actually become the next big thing.
That’s why we are currently very interested in China’s Belt and Road Initiative.

Actually, the BRI is nothing new

The BRI has its roots in the centuries-old Silk Road of trade routes connecting the East and the West, and Xi Jinping’s contemporary version of it is essentially an ambitious effort to further regional cooperation and improve connectivity on a trans-continental scale.
Although the scope of the BRI is still taking shape, it primarily consists of the Silk Road Economic Belt linking China to Central and South Asia and onwards towards Europe, and the New Maritime Silk Road, linking China to countries in Southeast Asia, the Gulf, North Africa and Europe.

It’s big… really big

What is certain is that the initiative is really quite extensive. Staggeringly big, in fact. In his sweeping history of Central Asia The New Silk Roads, Peter Frankopan describes it as “breathtakingly ambitious”. Indeed, according to him, the economies of the countries it covers account for around a third of global GDP and trade, and nearly two-thirds of the world’s population live in a BRI country.
In many of these countries, the poverty ratios (the percentage of the population living below the poverty line) are eye-wateringly high. So if the various projects covered by the BRI come to fruition, then a significant number of poor people could stand to be lifted out of poverty, and huge chunks of the world’s economies will benefit.

The world is brimming with untapped potential

The economies covered by the BRI are all interconnected. Over the past 25 years or so, their contribution to global exports has nearly doubled. But only a small number of them – the most obvious one being China – are responsible for the lion’s share of these exports. The trade in which many BRI economies engage is well below full potential. This shortfall can be attributed to weak policy and inadequate infrastructure, among other things. So if the BRI is a success, it could address these inadequacies and boost international commerce – particularly for countries that have been unable to flourish in the modern, globalised world economy.

Better infrastructure should mean better connectivity

Normally, on the days when the Ever Given containership is not on the seas, it takes around 30 days to transport goods from China to central Europe via the Suez Canal. Although most goods are transported by sea, shipping them by train can cut transit times by up to 50%. It also reduces costs significantly. Needless to say, there is a trade-off between saving time and saving money. According to the OECD, for every day’s delay in transporting an item from a factory to a consumer, trade is reduced by 1%. So bolstering railway capacity, maximising coverage and improving transport infrastructure could create more cross-border trade, increase investment… and lead to higher growth in BRI economies.

Complex policy issues – reforms are needed

We might think that Brexit has generated a lot of red tape and created cumbersome customs procedures.
In Central Asia, for example, it can take a staggering 50 days to comply with all the procedures involved in importing goods. And it takes fewer than ten days in most G7 countries – even post-Brexit. BRI countries tend to have more restrictive policies governing foreign direct investment than high-income OECD countries (in terms of starting a foreign business and accessing industrial land). So if connectivity is to be improved, then policy must be reformed, and infrastructure projects need to be accompanied by better cooperation as well.

Risks with major infrastructure projects

There are potential environmental, social, and corruption risks. These might include biodiversity loss, environmental degradation, or elite capture (a form of corruption whereby public resources are biased for the benefit of a few individuals of superior social status, negatively impacting the welfare of the larger population). Such risks may be especially significant in countries involved in the BRI, which tend to have relatively weak governance structures in place. Safeguards should be put in place to minimise their potential negative effects. The World Bank and other multilateral development banks could play a role in supporting the implementation of higher environment, social and governance standards for BRI investments, and ensuring that ESG criteria are met.

Macro risks

For some countries, the financing required for BRI projects may expand debt to unsustainable levels. Indeed, because of Covid, many of the loans agreed upon are now in or nearing technical default – many debtor countries reliant on exporting commodities have seen a slump in demand for them. Some debtor countries have started to negotiate to defer payments that are now due. In particular, the African continent owes an estimated US$145 billion – much of which is related to BRI projects. Many African heads of state are now calling for debt forgiveness, and The Economist forecasts a wave of defaults on these loans.
The Centre for Global Development recently estimated that BRI projects will increase debt-to-GDP ratios for several BRI countries, putting eight at high risk. Countries participating in BRI projects will need to balance the need for these development projects with the vulnerabilities created by increased debt levels.

What about investing?

Investment Quorum’s Chief Investment Officer Peter Lowman is focusing his analysis in three main areas.
“We are looking at the current connectivity gaps in BRI companies – the shortcomings that affect transport systems, communications, trade and investment.
“We are also looking at the potential economic effects of the kind of infrastructure that will come into being as successive tranches of the BRI are delivered. This includes the impact on international trade, the flow of cross-border investment, the distribution of economic activity across the globe and GDP growth in BRI countries.
Finally, we need to identify policies that will enhance all the benefits for all BRI companies. This includes reforms in trade, investment and procurement policy, as well as the environmental, social and governance safeguards that will need to be put in place”.
By undertaking this analysis, we hope to develop a clear picture of the effects of the BRI and identify investment opportunities that will generate significant growth for our clients’ portfolios.