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Inside China: President Xi's Quest to Build a 21st Century Silk Road
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In part 2, we discussed how China’s exponential growth has given way to a powerful consumer market that many now want a piece of. But as we are coming to realize, it is not proving to be a simple task. To read the previous section, click here.
As we have discussed, China’s rapid ascent to global power has given way to a massive consumer market with money to spend. But while the Chinese people are using their newfound wealth within the country, its government is holding even more cash in hand, and has big plans overseas.
One Belt, One Road
Investors may already be familiar with Chinese President Xi Jinping’s “Belt and Road Initiative” (BRI). Announced in 2013, BRI is China’s plan to reshape global trade by connecting over 70 countries through direct land and sea routes. “Belt” refers to the ancient Silk Road route running through Europe and Scandinavia, while the “Road” is a network of sea routes spanning from New Zealand to East Africa and the Mediterranean.
BRI represents an opportunity that is equally compelling as it is risky. According to estimates from The Economist and its Intelligence Unit, China has already invested at least $900 billion in various projects across the belt and road. According to Business Insider, this includes “a gas pipeline in Pakistan, a motorway in Hungary, and a high-speed railway link in Thailand,” to name a few. The Middle Kingdom plans to continue building roads, rail lines, ports, and airports across Asia, Africa, and Europe.
Although the West is not directly involved in BRI, some well-known firms have capitalized on the movement. General Electric (GE - Free Report) is one such example, with its Chinese business posting $400 million in revenue in 2010 and surging to $2.3 billion in 2016 thanks to BRI-related demand. Moreover, the firm projects regional revenue to double by 2020. Other firms include Honeywell (HON - Free Report) , which sells natural gas processing equipment to Central Asia, and Siemens (SIEGY - Free Report) , which sees nearly $124 billion in infrastructure opportunities through 2025.
A Turning Tide?
In recent months BRI activity has slowed down, as macroeconomic concerns, including the prospect of an extended trade war with the US, continue to pile. According to a New York Times report, the value of the deals that the nation is forming with other powers is smaller than last year, based on new data. Emerging markets are continuing to experience broad interest rate fluctuations, fueling already-existing concerns that they will not be able to repay Chinese loans.
Still, this recent slowdown appears to be more of a much-needed brake check than an actual policy shift. The China Banking and Insurance Regulatory Commission estimated that this past spring alone, Chinese banks lent $200 billion for 2,600 projects. While the project portfolio continues to grow, the Chinese government is still trying to keep track of it all. Moreover, China’s domestic debt levels are also quite high (256% Debt-to-GDP ratio as of mid-2017), meaning that this prudence is a necessary step in ensuring that foreign-bound money isn’t being wasted any more than is politically warranted.
The implications of a successful BRI are massive. A key piece of the puzzle is the political angle, which has involved the creation of bilateral agreements between China and other powers. While the goal of creating a physical trade network is seemingly the main goal of BRI, the arguably more important part of the equation is China’s quest to increase its geopolitical clout. In doing so, it can continue to work towards dethroning the US from its hegemonic throne.
Being that the sum of the economies currently involved in BRI amounts to a third of the global GDP and 62% of the global population, Chinese influence is clearly growing quite rapidly. And as we will see, China has been working on this for quite some time now.
China has been gradually ramping up its foreign investment activity for years. In current US Dollars, China’s outbound FDI was $44 million in 1982 and as high as $216.4 billion in 2016, according to World Bank data. But in 2017, outflows shrank to just $101.9 billion as the government began to curb what it called “irrational investments” overseas.
But underneath the government’s statement are real concerns about the prolonged devaluation of the Yuan and a regulator push to minimize leverage in China’s financial sector, which is already under heavy duress. But at the same time, investments related to BRI were encouraged, according to a report from Brink Asia. Data from BBVA Research shows that investment to BRI countries jumped to 12% in 2017, compared to 8% the year before.
While the escalating trade war with the US is a major concern for China, investors may be interested to know that according to data from the China Greentech Initiative (CGTI), North America went from representing 33.1% of FDI flows in 2016 to 16% in 2017. At the same time, Europe went from 33.2% to 53.4% and Asia from 15.1% to 18.8%. In other words, at least for the time being, China is looking away from the US to continue its growth efforts.
Looking Ahead
Many have drawn comparisons between BRI and the US’s post-WWII Marshall Plan, which was its way of cementing its newfound global influence. But BRI much larger than that plan, and could have even bigger consequences. Moving forward, investors should consider looking out for BRI-related developments in the years to come.
Up Next
Now that we have mentioned it a few times, investors may be interested in getting a more in-depth look at the trade conflict between the US and China. In our next section, we will give an overview of relevant developments, as well as a glance at China’s trade activity in other parts of the world.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
Image: Bigstock
Inside China: President Xi's Quest to Build a 21st Century Silk Road
In part 2, we discussed how China’s exponential growth has given way to a powerful consumer market that many now want a piece of. But as we are coming to realize, it is not proving to be a simple task. To read the previous section, click here.
As we have discussed, China’s rapid ascent to global power has given way to a massive consumer market with money to spend. But while the Chinese people are using their newfound wealth within the country, its government is holding even more cash in hand, and has big plans overseas.
One Belt, One Road
Investors may already be familiar with Chinese President Xi Jinping’s “Belt and Road Initiative” (BRI). Announced in 2013, BRI is China’s plan to reshape global trade by connecting over 70 countries through direct land and sea routes. “Belt” refers to the ancient Silk Road route running through Europe and Scandinavia, while the “Road” is a network of sea routes spanning from New Zealand to East Africa and the Mediterranean.
BRI represents an opportunity that is equally compelling as it is risky. According to estimates from The Economist and its Intelligence Unit, China has already invested at least $900 billion in various projects across the belt and road. According to Business Insider, this includes “a gas pipeline in Pakistan, a motorway in Hungary, and a high-speed railway link in Thailand,” to name a few. The Middle Kingdom plans to continue building roads, rail lines, ports, and airports across Asia, Africa, and Europe.
Although the West is not directly involved in BRI, some well-known firms have capitalized on the movement. General Electric (GE - Free Report) is one such example, with its Chinese business posting $400 million in revenue in 2010 and surging to $2.3 billion in 2016 thanks to BRI-related demand. Moreover, the firm projects regional revenue to double by 2020. Other firms include Honeywell (HON - Free Report) , which sells natural gas processing equipment to Central Asia, and Siemens (SIEGY - Free Report) , which sees nearly $124 billion in infrastructure opportunities through 2025.
A Turning Tide?
In recent months BRI activity has slowed down, as macroeconomic concerns, including the prospect of an extended trade war with the US, continue to pile. According to a New York Times report, the value of the deals that the nation is forming with other powers is smaller than last year, based on new data. Emerging markets are continuing to experience broad interest rate fluctuations, fueling already-existing concerns that they will not be able to repay Chinese loans.
Still, this recent slowdown appears to be more of a much-needed brake check than an actual policy shift. The China Banking and Insurance Regulatory Commission estimated that this past spring alone, Chinese banks lent $200 billion for 2,600 projects. While the project portfolio continues to grow, the Chinese government is still trying to keep track of it all. Moreover, China’s domestic debt levels are also quite high (256% Debt-to-GDP ratio as of mid-2017), meaning that this prudence is a necessary step in ensuring that foreign-bound money isn’t being wasted any more than is politically warranted.
The implications of a successful BRI are massive. A key piece of the puzzle is the political angle, which has involved the creation of bilateral agreements between China and other powers. While the goal of creating a physical trade network is seemingly the main goal of BRI, the arguably more important part of the equation is China’s quest to increase its geopolitical clout. In doing so, it can continue to work towards dethroning the US from its hegemonic throne.
Being that the sum of the economies currently involved in BRI amounts to a third of the global GDP and 62% of the global population, Chinese influence is clearly growing quite rapidly. And as we will see, China has been working on this for quite some time now.
For a better idea of what BRI will look like, take a look at Visual Capitalist’s diagram below:
China Has Been Looking Outward for Some Time
China has been gradually ramping up its foreign investment activity for years. In current US Dollars, China’s outbound FDI was $44 million in 1982 and as high as $216.4 billion in 2016, according to World Bank data. But in 2017, outflows shrank to just $101.9 billion as the government began to curb what it called “irrational investments” overseas.
But underneath the government’s statement are real concerns about the prolonged devaluation of the Yuan and a regulator push to minimize leverage in China’s financial sector, which is already under heavy duress. But at the same time, investments related to BRI were encouraged, according to a report from Brink Asia. Data from BBVA Research shows that investment to BRI countries jumped to 12% in 2017, compared to 8% the year before.
While the escalating trade war with the US is a major concern for China, investors may be interested to know that according to data from the China Greentech Initiative (CGTI), North America went from representing 33.1% of FDI flows in 2016 to 16% in 2017. At the same time, Europe went from 33.2% to 53.4% and Asia from 15.1% to 18.8%. In other words, at least for the time being, China is looking away from the US to continue its growth efforts.
Looking Ahead
Many have drawn comparisons between BRI and the US’s post-WWII Marshall Plan, which was its way of cementing its newfound global influence. But BRI much larger than that plan, and could have even bigger consequences. Moving forward, investors should consider looking out for BRI-related developments in the years to come.
Up Next
Now that we have mentioned it a few times, investors may be interested in getting a more in-depth look at the trade conflict between the US and China. In our next section, we will give an overview of relevant developments, as well as a glance at China’s trade activity in other parts of the world.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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