Update on China’s Belt and Road Initiative

China’s ambitious ‚New Silk Road‘ project aims to build road, rail and sea transport infrastructure, power grids, oil and gas pipelines in 78 countries in Asia, Africa and Europe. However, despite the enormous scale of the project, it is very difficult for foreign investors to participate. Fortunately, other public initiatives in the US, Canada, Europe, Australia, New Zealand and the UK offer alternatives for infrastructure investment.

The Belt and Road Initiative (BRI) is an ambitious Chinese infrastructure development project involving 78 countries spread across the continents of Asia, Africa and Europe. It is focussed on building out infrastructure as a large network of roadways, railways, maritime ports, power grids, oil and gas pipelines and associated infrastructure projects.

By connecting the less developed border regions like Xinjiang with neighbouring nations, China expects to increase the regions’ economic activity. The BRI opens new markets for Chinese goods, providing Chinese manufacturers with cost-effective export routes. Investopedia thinks that while China continues to pitch BRI as an all-inclusive project for regional development, many nations perceive it as a strategic move by China to attain significance and control at a regional level, and to play a larger role at the global level by building and controlling a China-focused trading network.

The cost of BRI is difficult to quantify, with popular estimates ranging from USD 1-8trn (the World Bank’s estimate is USD 575bn).  China’s financing of the BRI makes it the world’s largest bilateral creditor, but it has now become a financial drag for the country and its biggest banks. About USD 78.5bn of loans from Chinese institutions to roads, railways, ports, airports and other infrastructure around the world were renegotiated or written off between 2020 and the end of March this year, according to figures compiled by New York-based research organisation the Rhodium Group.

According to WorldNews Era, increasing numbers of BRI borrower countries are being pushed to the brink of insolvency by a slowdown in global growth, rising interest rates and record high debt levels. China has extended an unprecedented volume of “rescue loans” to prevent sovereign defaults by the largest BRI borrowers. Those countries’ western creditors, meanwhile, are blaming China for blocking debt restructuring negotiations.

The value of such sovereign bailouts amounted to USD 104bn between 2019 and the end of 2021, according to a study by researchers at AidData, the World Bank, Harvard Kennedy School and Kiel Institute for the World Economy. Over a longer timeframe between 2000 and the end of 2021, such bailouts to developing countries totalled USD 240bn, the study found.

As Beijing canvasses international support for its Global Development Initiative and its Global Security Initiative, those countries signing up are almost invariably also debtors to Chinese creditors under the BRI. Cambodia, Mongolia, Cuba, Uruguay, Nicaragua, and Belarus have all demonstrated their support for the GSI during recent meetings, said Alice Ekman, senior analyst at the European Union Institute for Security Studies. All these countries are also prominent BRI members.

Investment opportunities?

Although the BRI is probably the largest government-sponsored infrastructure initiative in the world, unlike the US Infrastructure Investment and Jobs Act (a USD 1.2 trillion package), investors will be hard-pressed to participate. The BRI contractors and materials are mostly Chinese, and the financing has generally been limited to Chinese banks and China itself. Traded liquid securities related to the BRI are rare.

We’ve concluded that, despite its size, reach and political implications, the BRI is not an investable proposition for liquid infrastructure funds. The good news is that significant government-sponsored initiatives in the US, Canada, Europe, Australia, New Zealand and the UK present plenty of investment opportunities and provide a strong tailwind for infrastructure investing.

Among the companies expected to benefit from government largesse are NextEra, RWE and EDP Renovaveis, which will be deploying significant renewable capacity in the US over the next 10 years and will therefore be eligible for US tax credits under the recently passed Inflation Reduction Act. On the other side of the Atlantic, large green energy developers such as Orsted, Engie, EDP Renovaveis or Enel will benefit from similar measures in Europe. An important part of the European subsidies is also destined to the digital market where Cellnex and Inwit are prominent players through their telecom towers.