Belt and Road Initiative (BRI) is the largest infrastructure and trade project in the world, affecting some 119 countries and around 65% of the global population. At present, 7,000 infrastructure projects are planned up to the year 2050. Large sums of capital from a wide range of sources will be needed to realize the BRI.
The Belt and Road Initiative (BRI) is the largest infrastructure and trade project in the world, affecting some 119 countries and around 65% of the global population. At present, 7,000 infrastructure projects are planned up to the year 2050. Large sums of capital from a wide range of sources will be needed to realize the BRI. China has already signed cooperation agreements with more than 105 countries and is providing cash to finance projects through its own state banks and funds. The BRI offers investors an opportunity to profit from the economic growth stimulated by the project of the century.
What exactly is the Belt and Road Initiative?
The Belt and Road Initiative was first mentioned on a state visit to Kazakhstan by Chinese President Xi Jinping in September 2013. It involves the construction of two global trade routes: the Silk Road Economic Belt (an overland transport corridor from the Pacific Ocean to the Baltic Sea) and the 21st-Century Maritime Silk Road (a new shipping network linking China to South Asia, Africa, and Europe via Southeast Asia and the Indian Ocean).
This "new Silk Road" has nothing to do with nostalgia for the old trade route from the great seafaring city-state of Venice to the Far East, nor is it intended to evoke images of Marco Polo or Kublai Khan. Rather, it is part of a strategy aimed at strengthening China and all participating countries both geopolitically and economically. This is about much more than just enlarging China's sphere of influence. The idea is to create an economic corridor offering new import and export options and making new production chains possible. It is hoped that this will lead to economic growth, boosting local incomes and domestic consumption. The initiative covers five specific core elements, including infrastructure expansion, trade and investment, financial integration, and international relations. This opens up opportunities for many economic sectors and investors not only to participate in the infrastructure expansion but also to profit from the economic growth that could be generated by closer relationships between countries, greater financial integration, and frictionless trade.
The importance of this century's biggest infrastructure project for China is illustrated by the fact that it was written into the constitution at the annual National People's Congress in March 2018 and has its own chapter in the country's 13th five-year plan, which covers the years 2016 to 2020.
It would not be an exaggeration to call this the most ambitious infrastructure and investment plan in history. The following statistics1 alone make this clear: 65% of the global population is affected by the BRI, with the more than 100 participating countries together accounting for 40% of the world's GDP and 38% of its trading volume.
Who is going to pay for it?
Infrastructure has a vital role to play in enabling frictionless trade between the participating countries. Investments are focusing in particular on more efficient airports, rail lines, stations, roads, and sea ports. One well-known example of a BRI project is the state-owned China Ocean Shipping Company's acquisition in 2016 of the Port of Piraeus in Greece with the aim of turning it into a hub for Europe-bound container traffic.
The trillions needed to fund a megaproject on the scale of the BRI could destabilize national budgets, so financial assistance is also being sought from the private sector. There has been increasing criticism in the media recently of the financing structures, transparency, and governance of BRI projects. Participating countries have reportedly taken on excessive debts and become dependent on China, and it has been suggested that Chinese firms have been given precedence when it comes to handing out contracts. The West is thus calling for more transparency and fairness. Public-private partnerships (PPPs) could be a solution here, with local companies and international players alike invited to tender for projects in line with international standards. This would guarantee a relatively high level of transparency and good governance on the part of the participating governments.
Various sovereign wealth funds have already provided money for BRI projects, including Chinese state banks, the Asian Infrastructure Investment Bank (AIIB), the New Development Bank, and the Silk Road Fund, which was created by the Chinese government in 2014 especially for the BRI. The latter three have already committed USD 1.1 trillion. Private-sector banks are also contributing to the funding. HSBC, for example, is now invested in around 100 BRI projects2.
However, market research conducted by the Asian Development Bank (ADB) in 2017 revealed that just the 25 Asian countries concerned need to spend USD 1.5 trillion a year on infrastructure up to 2030, particularly in the four areas of energy, transport, telecommunications, and water and sanitation. Annual investment currently amounts to USD 881 billion. The ADB thinks that state-owned corporations could cover 40% of the shortfall, leaving the private sector to cover the other 60%. Asia could thus represent a key future growth market for firms in sectors linked to the BRI.
Trade Effects of the New Silk Road
The World Bank Group's research report "Trade Effects of the New Silk Road", published in January 2019, estimates that BRI infrastructure improvements could boost trade between BRI countries by somewhere between 2.5% and 4.1%. The five core elements set out by the Chinese government are crucial in this respect. Political reforms and improved trading relations could lead to fewer border delays and more effectively managed economic corridors. The World Bank believes that BRI transport projects may cause exports between BRI countries to rise by up to 4.6% – or as much as 7.2% if border delays are reduced by 50%.
Controversy surrounding the BRI
Half of all 28 EU Member States have already signed a bilateral memorandum of understanding (MoU) backing the BRI. Italy became the first of the G7 nations to do so in March 2019 during a three-day state visit by China. The fourth-largest country in the EU by GDP hopes that this will bring foreign investment to kick-start its stagnating domestic market. Nevertheless, the customary political divide between those who are for and against is opening up. Some see China as a systemic threat that is hungry for more influence and forcing participating countries into a debt trap. They say that the BRI could drastically alter the economic and geopolitical balance of power globally.
Others, such as Swiss Federal Councilor Ueli Maurer, are much less vehemently opposed. He says it is clear that BRI projects are too big to fund from state coffers, meaning that countries will have to take on debt to pay for them, and hopes that they will not borrow more than they can repay or even end up becoming vassal states3. Maurer does not deny that China has its own interests in mind, but he thinks that this is typical of any global power. He also notes that China is aware of the need to adequately address issues like corruption, protecting the environment, and sustainability going forward. Xi Jinping touched on this last topic at the recent Belt and Road Summit. China is promising to open up its domestic market more, improve transparency with regard to the funding of its foreign investments, and reduce trade barriers.
In China Construction Bank International Asset Management (CCBIAM), part of China Construction Bank Corp. (CCB), Vontobel has found the ideal partner to help it develop and launch an investable financial product based on the Belt and Road theme. The cooperation draws on the respective strengths of these two highly renowned financial institutions to add value for investors. CCBIAM has outstanding investment expertise and local knowledge, and it knows the BRI inside out, so it is able to spot market-leading firms with the potential to profit from the investment and stimulus created by the BRI. Vontobel, for its part, brings its own expertise in specialized investment solutions for private and institutional clients.
Founded in Beijing in 1954, CCB is now the second-largest bank in the world by total assets and thus a member of the select group of global systemically important banks (G-SIBs). It has more than 310,000 employees worldwide and posted revenues of CHF 104 billion in 2018.
Index strategy of the Vontobel Belt and Road Index, advised by CCBIAM
The Vontobel Belt and Road Index, advised by CCBIAM, is an index designed and calculated by Bank Vontobel AG as Index Calculation Agent. The Index Sponsor CCBIAM is responsible for the index composition, the weightings of the constituents, the investment strategy, and the stock selection. The index reflects the price performance of companies that stand to profit to a considerable degree from the realization of the Belt and Road Initiative. Its constituents are selected by CCBIAM using a partly systematic and partly discretionary process based on a three-dimensional top-down approach (country/sector/stock). Taking account of both qualitative and quantitative variables (see chart), CCBIAM picked eight BRI countries to constitute the equity universe.
Five sectors were then chosen that have an especially high chance of profiting from the BRI: communication, engineering, diversified and conglomerate, industrial manufacturing, and technology and public utilities.
CCBIAM completes the process by deciding at its own discretion which five stocks in each sector it admits to the index, basing its choices on its own financial expertise, research capabilities, know-how, and market experience.
The index guidelines and index composition can be found on the information page at https://indices.vontobel.com. The Index Calculation Agent also publishes changes to the guidelines and other changes on this page.
1: "Just what is this One Belt, One Road thing anyway?", CNN, May 12, 2017 World Bank, Belt and Road Portal (eng.yidaiyilu.gov.cn)
3: Neue Zürcher Zeitung interview "Bundespräsident Ueli Maurer über den Belt-and-Road-Gipfel: Die Schweiz hat seit 70 Jahren eine China-Strategie: nämlich unsere festen Werte'"
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