Market Views: Can 'small and beautiful' reinvigorate China's Belt and Road Initiative?

China has invested $240 billion into its infrastructure-led Belt and Road Initiative since 2013. Ten years on, as China revives the ambitious plan, how should investors weigh up the investment opportunities and risks?
Market Views: Can 'small and beautiful' reinvigorate China's Belt and Road Initiative?

China’s Belt and Road Initiative (BRI) is back in focus after the country held its third international forum in Beijing last week, marking the 10th anniversary of President Xi Jinping’s flagship initiative.

Representatives from over 150 countries across the five continents attended the forum on October 17 and 18.  

During the summit, Xi announced that the country’s two policy banks, China Development Bank and the Export-Import Bank of China, will each set up Rmb350 billion ($47.8 billion) financing windows, while an additional Rmb80 billion will be injected into the Silk Road Fund to offer more financing for BRI projects, especially those that are “small and beautiful”.

Under a revived BRI, China’s foreign direct investments (FDI) around infrastructure projects is set to increase, benefiting enterprises and investors involved along the supply chain, with green investment and artificial intelligence becoming additional areas of focus.

China’s foreign direct investments to BRI countries from 2013 to 2021 totalled $240 billion, according to data released in October.

Yet, there are some concerns over investment returns, operational and political risks in BRI countries, as well as whether BRI will impose a toll on the country’s debt level amid an already sluggish domestic economic recovery.  

So what investment opportunities will the BRI throw up, and what do they mean for China’s debt level and economic development? AsianInvestor canvassed research experts and analysts for their views. 

The following responses have been edited for clarity and brevity.

Robin Xu Bin, head of Asia industrials research
UBS Securities

Xu Bin

We estimate annual infrastructure demand from Belt and Road countries may reach $1-$2 trillion, creating significant opportunities for the whole construction supply chain for both Chinese as well as local players, covering construction, construction machinery, rolling stock and construction materials sectors. 

Geographically, South Asia (especially India), Southeast Asia and Middle East see the biggest potential for infrastructure buildup.

According to the China International Contractors Association, Vietnam, Malaysia, and Saudi Arabia indicate more short-term popularity of infrastructure investment, while Indonesia, Egypt and Pakistan have larger gaps of long-term infrastructure demand.

Transportation, power and general building have been the key focus areas, while we expect more green infrastructure (e.g. renewable energy and 5G) to be new growth drivers.

Infrastructure funding has been a key challenge for countries with high debt-to-GDP ratios. Policy banks in China and multilateral development bank financing will be pivotal in BRI infrastructure financing.

Other than infrastructure, we expect more trade opportunities between China and BRI countries. China’s rising competitive strength in manufacturing, together with BRI trade policy support, will encourage more exports (e.g. solar/battery supply chain, auto, construction machinery, rolling stock, CRO, home appliance, etc.) out of China.

With China’s large population and rising individual wealth, there will also be more imports into China from BRI countries.

Alicia García Herrero, chief economist for Asia Pacific
Natixis CIB

Alicia García Herrero

Since 2018, China’s lending, as well as foreign direct investment, into Belt and Road countries, slowed down dramatically but there has been a slight recovery in 2023.

That recovery is concentrated in green field investment, especially renewables, whether EV battery, solar or wind turbines.

These are sectors dominated by Chinese private companies, so the revival of the BRI does look quite different from the past, when it was dominated by large infrastructure products carried out by Chinese state-owned enterprises and for which large financing was needed.

There are two important signals of this change towards a more market-driven BRI.

Firstly, Xi Jinping’s speech at the BRI summit made it very clear that future projects are meant to be smaller and smarter.

Also, his emphasis on green projects, under the mantra of the clean BRI, and less corruption involved in them is important.

It is also noticeable that the amounts pledged to support BRI projects are now much smaller than in the past both in terms of development banks’ access to new funding as well as the Silk Road Fund.

Finally, two more important changes in the way China understands the BRI, namely the idea of a club of like-minded countries are clearly appearing. One could call it friend-lending, possibly a response to the US push for friend-shoring.

Secondly, the BRI can become a platform for China to develop alternative standards, as announced for artificial intelligence during the summit, and challenge the West as current global standard setter.

Chim Lee, China analyst
Economist Intelligence Unit

Chim Lee

Chinese lending activity will continue to shape global development finance, and China will remain involved in high-risk projects where it suits the country's geopolitical strategies.

However, the era of easy Chinese money has gone.

The flow of Chinese overseas direct investment (ODI) is set to grow further in the coming decade. 

Much of it will be driven less by the formal BRI agenda than by business interests.

China's more cautious attitude suggests that its development financing is unlikely to return to the peak reached in 2016, even as we expect it to recover from recent lows.

A move away from mega-projects will reduce the likelihood of unsustainable debt.

A stronger emphasis on environmental and social responsibilities brings China closer to international practice but also makes Chinese financing less unique.

Meanwhile, the forum did not outline an overarching framework for the governance of the BRI.

At the 2023 BRI summit, Xi underscored that China will simultaneously promote “signature projects" and ones that are "small and beautiful", which we interpret as manageable, high‑return projects with low operational and financial risks. In practice, China will probably remain interested in key infrastructure projects with strong (geo)political implications, although it will avoid the riskiest projects, such as the Myitsone Dam in conflict-ridden Myanmar or mining projects in Afghanistan.

China has ceased new financing for coal power plants since September 2021, although it continues to honour contracts signed prior to that.

New oil and gas projects, including those in Central Asia, remain on the agenda.

Nonetheless, green investments will probably become more prominent, as a result of both demand from developing countries and Chinese firms' dominance in the supply of renewable energy equipment and electric vehicles.

Nicholas Chui, senior vice president, portfolio manager
Franklin Templeton Emerging Markets Equity

Nicholas Chui

In the short span of 10 years since the BRI was created, China’s level of innovation has grown by leaps and bounds. This has created profound opportunities for Chinese companies to partake in.

In the area of sustainability, China has become a global leader here supported by its entire value chain spanning upstream to downstream.

It is evident that China is not just a cost leader [good at lowering costs], but also a technology leader. Such solutions fit in perfectly with how China can help countries achieve their sustainability goals via the Initiative. 

It is important to stress that such levels of innovation were possible only through a combination of the government’s desire to support these initiatives as well as the availability of talent to capitalise on these opportunities.

In addition, many of the companies that contribute to such innovation are profitable without taking on huge amounts of debt.

Ultimately, it is important to appreciate that many of such initiatives carry revenue streams.

The beauty of the initiative is that it avails opportunities both domestically as well as internationally. Some companies will choose to retain their competency domestically whilst exporting the end product overseas whilst others might export the entire process know-how overseas.

There is no hard and fast rule here, but it shows how flexible the model will be.

Companies choose what fits them best depending on the prevailing market dynamics.

Looking ahead, the opportunities for China to contribute globally via the Initiative are more than ever before.

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