World Economy

Warnings Over New Silk Road Investments

Warnings Over New Silk Road InvestmentsWarnings Over New Silk Road Investments

Beijing-based news site has an interesting take on how Chinese companies and banks are queuing up to invest in the vast areas of Asia, Europe and Africa earmarked for development under China’s “one belt, one road” initiatives.

Caixin Online says local financial experts are urging these players and others to carefully weigh potential risks before committing cash and resources overseas for the huge project also known as the New Silk Road. However, their warnings have apparently done little to cool investor ardor for the initiative, which some estimates say could eventually generate over $1 trillion in business, NewsNow reported.

China’s grand vision—which  combines so-called New Silk Road Economic Belt and 21st Century Maritime Silk Road strategies—was first proposed by President Xi Jinping in 2013. It aims to bolster and forge economic and trade links between western China and Central Asia, as well as Southeast Asia toward Africa.

Sources familiar with ongoing preparations told Caixin that state banks and other financial institutions are busy amassing funding for various projects that will be launched under the New Silk Road.

Caixin says Chinese firms in a position to profit from “belt and road”-related infrastructure and industrial projects are jumping in as well. “Since late last year, according to a state-owned company executive who asked not to be named, many firms have been dusting off old project plans that were shelved years ago due to a lack of investor interest,” Caixin said.

Banks and companies are also seeking to capitalize on the financing advantages from the internationalization of the yuan to support their participation in the project.

“Experts have also urged Chinese companies to heed a variety of warning flags by carefully assessing the potential risks related to doing business abroad,” Caixin added. “A corporate banking department employee at Industrial and Commercial Bank of China (ICBC), who asked not to be named, said Chinese investors and their financiers must prepare to face complex issues stemming from diverse political, social and economic conditions in countries targeted by the initiatives.”

Investors should also be aware of the differences between China’s legal, environmental and technological standards and those in other countries, the ICBC source said.

Other experts are pointing to the potential for waste. They warn that short-sighted exuberance for the project could trigger overspending that leads to heavy debts for borrowers and lenders. This is similar to what followed the government’s 4 trillion yuan ($644.3 million) in stimulus spending after the 2008 financial crisis.

 Lion’s Share

China’s commitment to building infrastructure in countries covered by its “One Belt, One Road” initiative—a scheme to boost development along ancient “silk road” trading routes between China and Europe—is revealed by data showing that the lion’s share of Beijing’s recent overseas lending pledges have been in countries that lie along the routes.

A study by Grison’s Peak, a boutique investment bank based in London, shows that the majority of 67 overseas loan commitments made by Beijing’s largest policy lenders, the China Development Bank and the China Ex-Im Bank, have been in areas defined by the “One Belt, One Road” strategy since it was agreed in late 2013.

If loans to regions not included in the strategy—namely Latin America and west/central Africa—are excluded from calculations, the proportion of overseas state loans that were directed to countries on or close to the trading routes is 76% of total overseas state lending by the institutions during the five quarters ended in March this year, the Grison’s Peak study shows.

The “One Belt, One Road” strategy, a key policy of the administration of President Xi Jinping, was first incorporated into official Communist Party documents in late 2013. Its principal aim is to boost connectivity and commerce between China and 65 countries with a total population of 4.4b by building infrastructure and boosting financial and trade ties.

These aims also come through in the data crunched by Grison’s Peak. Loans for infrastructure projects, including road, rail and power schemes, made up 52% of the 67 loans pledged while trade finance accounted for a further 30%. The value of the 67 loans included in the study was $49.4 billion.

 Infrastructure Alliances

The focus on infrastructure is consistent with what Parag Khanna, senior fellow at the New America Foundation, describes as China’s strategy to build up “infrastructure alliances” with countries it regards as important for commercial and strategic reasons.

“Infrastructure is a way of asserting connectivity as a tool of geopolitical leverage,” Khanna said. “Infrastructure, particularly railways, has been a tool of extending influence for a couple of hundred years now, but not necessarily on this scale.”

“China is winning the new ‘Great Game’ by building the new silk roads,” Khanna said, referencing the 19th century rivalry between Russia and Britain for influence in Central Asia.

“The silk road economic belt is not new. There is 25 years of evolution on these projects. The purpose has always been the same for China, to smooth the flow of commodities imports and to smooth the outbound flow of goods,” he added.