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Capital Acumen 34

What's Driving China's New Silk Road?

A look at the motivations behind China's expansive Belt and Road infrastructure initiative and what it could mean for investors.

Landscape of sunny hills with a road winding through them, and Chinese symbols representing “Belt and Road”.

Photo credit: Liuliming/Getty Images

China is boosting its outward investment under the country’s expansive Belt and Road Initiative (BRI). With allusions to the ancient Silk Road, the BRI is a dual strategy that combines a “belt” across the Eurasian landmass — an array of transportation, energy pipeline, power and telecommunications infrastructure — with a maritime network of ports, terminals and other marine facilities from the South China Sea across the Indian Ocean to Africa, the Middle East and Europe. Projects in more than 60 countries have already been planned, 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 Chinese government is prioritizing the initiative at a time when industrial overcapacity, rising wages and emerging low-cost-manufacturing centers in Asia are slowing the pace of both domestic and foreign investment in China.

What’s the Motivation?

We see five key motivations behind the People’s Republic’s ambitious initiative:

  1. New export markets for industries facing excess capacity, such as steel, glass and cement, as well as higher-value-added output such as cell towers, high-speed rail systems, industrial machinery, power plants, PCs and smartphones.
  2. Regional influence across Asia, Africa and Europe, particularly in countries in which critical infrastructure is to be built.
  3. Reduction in regional inequality by improving infrastructure in China’s underdeveloped western hinterland.
  4. Energy security via access to natural resources as well as alternative routes to the contested South China Sea for commodity imports.
  5. Financial liberalization through greater renminbi-settled trade, as well as more bank lending and bond issuance in local currency.

China’s Belt & Road: 6 Key Projects

Connections to Europe

The front of a train

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.  

Photo credit: Isabel Infantes/Getty Images 

Increased access to Pakistan

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.

Photo credit: SM Rafiq Photography/Getty Images

High-speed rail to Thailand

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.

Photo credit: Zoonar Gmbh/Alamay

A bridge in Bangladesh

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.

Photo credit: Nurphoto/Getty Images

A railway in Africa

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.

Photo credit: Bloomberg/Getty Images

A port in Greece

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.

Photo credit: Hxdbzxy/Getty Images

What’s the Opportunity?

We believe it will be important for investors to monitor the progress of China’s Belt and Road Initiative as more projects are undertaken.

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.

Engineering and construction firms as well as makers of industrial machinery and other capital goods also stand to benefit, primarily in China but also in other industrial heavyweight countries that are signatories to the Asian Infrastructure Investment Bank, such as South Korea and Germany.

Further, China’s growing capacity in advanced manufacturing of telecommunications, information technology and transportation equipment could benefit from an expanded external market.

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