The ongoing U.S. / China trade negotiations continue to dominate news storylines, but an arguably more important recent event for the global economy appears to be largely unnoticed.  The Belt and Road Initiative (BRI) Forum held in Beijing from April 25th through 27th was extensively covered by most Asia news outlets, but only received cursory coverage by most western news sources.  The lack of coverage highlights U.S. and other criticism of BRI, but we expect the program to continue in a new, better form.  Importantly, the continuance of BRI and its transformation are positive for global investors.

The Belt and Road Initiative, initially known as the One Belt One Road Initiative announced by the Chinese government in 2013, referred to increased cultural ties and, more significantly, to infrastructure development in countries along the ancient Silk Road trade route connecting western China through Central Asia, the Middle East, and Europe (the Belt) and also the 21st century maritime route connecting East/SE Asia through the Indian subcontinent, Arabian peninsula, Horn of Africa, Europe and the Red Sea-Suez Canal-Mediterranean Sea (the Road).  Lately, the initiative has expanded to include the rest of Africa, Latin America, and the Caribbean.  The grand economic strategy for transport, energy, telecommunications, and power infrastructure development now covers 66 countries with more than $1 trillion in planned and current projects.

Infrastructure is the key investment developing countries make to lift consumer incomes and better the lives of their populations.  Singapore exemplifies the benefits of such investments.  Early in the life of the republic, the country’s population suffered poor living conditions due to overcrowding and low incomes.  Despite having little in the way of natural resources, Singapore managed to become the richest country in Asia—now ranking third in the world with GDP per person of more than $100,000—thanks largely to consistent, high levels of infrastructure investment.  Singapore enjoys a world class airport, port terminal, and telecommunication network.  As a clean, vibrant, global business hub many local companies flourish.  The largest most successful Singaporean companies on the local exchange include regional powerhouses in finance, real estate development, and telecommunications. The success has attracted capital from the U.S. and Europe with many multinational companies using Singapore as their gateway to Asian operations.  Developing countries have seen this success and many country leaders are modeling their policies after Singapore, including India’s Narendra Modi.

Better infrastructure improves emerging market (EM) investment opportunities since it makes local companies more competitive in the global marketplace, as the following examples from our international portfolios demonstrate.  New LNG (liquefied natural gas) facilities lower natural gas prices in Asia, helping bring down corporate costs since LNG is roughly four times higher than the U.S.  A Jakarta-based artificial intelligence company able to access first-class communication networks can make its traffic-flow software more effective to boost sales.  A Philippines-based food ingredient producer will be able to expand export orders faster with a modernized, more efficient Manila port.  Although most of the negative views about the BRI program come from developed markets, viable infrastructure projects also help developed countries, especially ultra-low interest rate countries like Japan and those in Europe, which can participate in these higher-yielding investment opportunities.

Criticisms of the BRI, however, may derail these investment opportunities.  Some are concerned that these projects leave the host country with excessive debt it can never hope to repay, fostering dependency on China, and exacerbating trade imbalances.  Other critics point out that China, instead of the host country, provides most of the labor and construction services without transfer of technology and training to local partners.  Further, these projects lack transparency in the competitive bidding process and risk assessments.  Some projects are judged to be harmful to the environment.  Additionally, charges of bribery, bid-rigging, and other corruption have plagued multiple BRI projects.  In the Indo-Pacific region alone, since 2013, an estimated 270 out of 1,814 BRI projects have been halted or suspended over these concerns.

This year’s Forum directly addressed many of these concerns.  President Xi called for projects to deliver both financial viability and positive ecological impact, coining a new term “Green BRI.”  Discussions focused on the need for greater transparency, efforts to stamp out corruption, and ensuring host-country debt sustainability.  More importantly, the program is moving beyond financing provided solely by Chinese banks and institutions.  Japan, France, Canada, Spain, the Netherlands, Belgium, Italy, and Australia have signed cooperation agreements to help finance infrastructure projects.  This helps silence critics claiming BRI is a type of modern-day colonialism.  The Forum signaled China’s intent to be both a better infrastructure developer and trade partner.  The new emphasis and joint financing, in particular, gives BRI a fresh start, or reboot.

BRI’s impact on the emerging market investment environment continues to grow, despite its critics, and it now touches approximately 67% of the world’s population, 39% of world trade, and more than 34% of world GDP, according to IHS Global Insight. We are seeing BRI help to plug financing gaps to enable emerging economies to build needed public and industrial infrastructure.  As the BRI reboot continues, we expect to see targeted jurisdictions benefit from the buildout.  This, in turn, helps the companies operating in these improved-infrastructure areas achieve higher productivity and this should, over time, support rising valuations.


About the Author

David Ruff

David Ruff

Prior to joining ACM as a Portfolio Manager, David Ruff was a managing director and senior portfolio manager at Salient where he co-managed the Dividend Signal Strategy® portfolios. Previously, David was chief investment officer for Berkeley Capital Management. In 2008,...
About the Author