On 14 May, China’s president Xi Jinping hosted some 30 world leaders in Beijing at the first Belt and Road Initiative (BRI) Forum. He outlined plans to boost investment and trade in the Belt and Road economic corridors. More than 100 countries on five continents have signed up, showing the demand for global economic cooperation despite rising protectionist sentiment in the US and Europe. Our investment team has already spotted attractive investment opportunities in several sectors.
Belt and Road Initiative
The Belt and Road Initiative is one of Xi Jinping’s most significant initiatives. It is designed to help China achieve international, domestic and political long-term objectives by opening up new trade and investment opportunities. It should also further boost the renminbi’s internationalisation.
What is the Belt and Road Initiative (BRI)?
The first BRI Forum highlighted the importance to Xi Jinping of this infrastructure-and-trade initiative, which is designed to boost funding and improve financial integration, as well as increase policy cooperation and offer long-term financial support to facilitate BRI projects.
Introduced by Xi in 2013, the initiative’s name has changed from “One Belt, One Road” (OBOR) to “Belt and Road Initiative” (BRI) and is now truly global, with the main goal of rebuilding the ancient trading routes from China to Europe and beyond, over land and by sea.
Recently, Xi pledged RMB 540 bn (approximately USD 78 bn) in financing and encouraged state-run banks to contribute another RMB 300 billion in overseas capital to support the BRI. Given that the initiative has gained momentum over the past few years, we expect the Chinese government to maintain its firm commitment in terms of funding and seeking further framework agreements with trading partners.
Exhibit 1: China’s Belt and Road Initiative routesSource: Xinhua News Agency, as of 30/01/2017
What are the main objectives of the BRI?
The BRI is designed to help export China’s excess capacity by creating new markets for Chinese construction firms and capital goods makers. This should enhance domestic investment returns and stabilise GDP growth, in addition to spurring growth in underdeveloped regions. The project involves building roads, railways, pipelines and industrial corridors across some 67 countries, requiring significant tonnages of steel and cement, large numbers of workers, cranes and diggers, new dams, power stations and power grids. With over USD 3 trillion in international reserves (25%+ of the world’s total), China has enormous resources to support the success of the BRI.
Internationally, it should unleash an infrastructure boom by connecting China with Asia, Europe and Africa by land and sea. It should thus also providing greater impetus to the renminbi’s internationalisation by encouraging its usage in both trade and financial transactions. The BRI is gaining momentum at a time when Brexit raises questions about the future of the European Union, and Trump’s withdrawal from the Trans-Pacific Partnership reflects the rising protectionism of the US.
Which sectors will be the main beneficiaries of the BRI?
In this regard, we see investment opportunities in Chinese engineering and construction companies as well as capital goods producers that benefit from overseas contract growth. Given that the BRI should stimulate global demand for commodities, companies related to this sector should also benefit.
For BNP Paribas Asset Management's investment stance on China, we do not expect to be much of a game changer in the immediate future as the initiative was well expected and our Greater China equities investment team already invests in Chinese engineering and construction stocks. Based on the stance that it could broadly benefit the economic development of the targeted investment regions, we expect local cement companies and other infrastructure material suppliers in the targeted countries to benefit from BRI.
Written on 16 May 2017 by Jessica Tea and Caroline Yu Maurer
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