CON­CRETE RE­SULTS

China’s Belt and Road ini­tia­tive is pro­vid­ing much-needed im­pe­tus to in­fra­struc­ture devel­op­ment in emerg­ing Asia, but in­vestors and busi­ness­peo­ple should stay fo­cused on the fun­da­men­tals.

The Peak (Hong Kong) - - Feature • Perspective - JU­LIAN VELLA Ju­lian Vella is Asia Pa­cific Re­gional Head, Global In­fra­struc­ture, for KPMG

In 2013, China’s Belt and Road ini­tia­tive was an­nounced. It may not have gar­nered much at­ten­tion in the west when it was first men­tioned, but like many note­wor­thy ad­dresses, it has ul­ti­mately served to fo­cus minds. In this case, the fo­cus has been on the need for sub­stan­tial in­vest­ment in in­fra­struc­ture in emerg­ing Asia.

There has been much pub­lic­ity and dis­cus­sion about the Belt and Road ini­tia­tive, and plenty of ef­fort to un­der­stand what it ac­tu­ally means. For Hong Kong in­vestors of all stripes, there is po­ten­tial up­side to this ini­tia­tive, but like any in­vest­ment, it must be ap­proached with an ap­pre­ci­a­tion of the risks in­volved.

If you look at Belt and Road from a high level per­spec­tive, with maps of trade and in­vest­ment cor­ri­dors, as well as cor­re­spond­ing road, rail and port con­struc­tion, it looks very bold in­deed. It is part of a strate­gic ini­tia­tive to con­nect China with Europe and parts of Africa. It is also part of a greater plan by Bei­jing to de­velop China’s less eco­nom­i­cally ad­vanced re­gions in the south­west and west­ern hin­ter­lands, and put some spare ca­pac­ity to use. It may also be seen as part of the broad shift by China to­wards a ser­vice-ori­ented econ­omy, rather than one re­volv­ing around man­u­fac­tur­ing and ex­port.

Even with­out the Belt and Road ini­tia­tive, there is an enor­mous need for in­fra­struc­ture devel­op­ment through­out Asia, a need that can be measured in the tril­lions of dol­lars’ worth of in­vest­ment al­ready an­nounced. Now that the ini­tia­tive has been an­nounced, the im­pe­tus is there to get on with it. That means plenty of busi­ness and in­vest­ment op­por­tu­ni­ties for Hong Kong, ini­tially in ar­eas such as pro­fes­sional and fi­nan­cial ser­vices, trans­port and lo­gis­tics, power and util­i­ties, and com­mu­ni­ca­tions. More­over, I get the sense that the pol­icy is de­lib­er­ately flex­i­ble and that it’s open to whichever coun­try or com­pany that wants to get in­volved, which po­ten­tially widens the scope of op­por­tu­nity fur­ther still.

How­ever, it’s when you try to cat­e­gorise a par­tic­u­lar plan or project as Belt and Road, that things can get a bit tricky, and it is on this point that in­vestors need to fo­cus their at­ten­tion. Some coun­tries, such as Kaza­khstan, are specif­i­cally tied to the ini­tia­tive. Aside from the fact that Kaza­khstan sits astride the pro­posed Eurasian Land Bridge – a rail trans­porta­tion route from Rus­sia and China to Europe – the Chi­nese are also keen to ac­cess nat­u­ral re­sources there. Other coun­tries, such as In­done­sia, may fit into Belt and Road in a more tan­gen­tial way, al­beit still stand­ing to ben­e­fit strongly.

There is a mas­sive di­ver­sity in the coun­tries around the many cor­ri­dors of Belt and Road – some with very ad­vanced busi­ness en­vi­ron­ments and some that are un­de­vel­oped. In­fra­struc­ture projects in the less de­vel­oped na­tions will likely find their fund­ing from mul­ti­lat­eral or­gan­i­sa­tions such as the new Asian In­fra­struc­ture In­vest­ment Bank and the Asia Devel­op­ment Bank, or state-con­trolled fi­nan­cial in­sti­tu­tions. Other projects, in suit­able busi­ness en­vi­ron­ments, will likely be draw­ing pri­vate cap­i­tal; par­tic­u­larly in­sti­tu­tional in­vestors keen on long-term, sta­ble re­turns. The scale of the ini­tia­tive is so large that it will re­quire sig­nif­i­cant pri­vate sec­tor in­vest­ment, and there is a lot of pri­vate sec­tor cap­i­tal look­ing for such in­vest­ments. The key ques­tion is: which mar­kets can truly sup­port such largescale pri­vate in­vest­ment?

The op­por­tu­ni­ties stem­ming from Belt and Road will man­i­fest them­selves over the course of years, pos­si­bly decades. This is not an overnight en­deav­our, nor will it go away in a flash. This ini­tia­tive is un­der­pinned by a gen­uine need for in­fra­struc­ture in­vest­ment, as much as by any grand scheme from China.

At the mo­ment, there are sub­stan­tial in­fra­struc­ture pro­grammes in the Philip­pines and In­done­sia, which also sit on the Belt and Road. Both are ahead of other Asean na­tions in that they can at­tract pri­vate cap­i­tal, and for in­vest­ment pur­poses, that is some­thing I’d be look­ing at. There is also a big op­por­tu­nity here for Myan­mar, which does sit on a cor­ri­dor.

Given the cur­rent state of its in­fra­struc­ture, Myan­mar has the op­por­tu­nity to re­ally de­velop and move up the in­vest­ment curve.

One should also con­sider the broader busi­ness and in­vest­ment op­por­tu­ni­ties that may arise from Belt and Road, be­sides in­vest­ing in a con­struc­tion com­pany. New in­fra­struc­ture can spur in­vest­ment in other busi­nesses and in­dus­tries, sim­ply by first build­ing the in­fra­struc­ture, and then by its ex­is­tence. Ev­ery­thing from fi­nan­cial ser­vices to lo­gis­tics and sup­ply chain man­age­ment op­por­tu­ni­ties ex­ist with the growth of care­fully planned and prop­erly ex­e­cuted in­fra­struc­ture. Your in­vest­ment ideas could even be around nat­u­ral re­sources or power plants, in places where this ac­tiv­ity might not have been fea­si­ble be­fore.

There are risks, of course. But no in­vest­ment or busi­ness de­ci­sion is with­out risk, nor are in­vest­ments in projects that are sup­posed to be part of Belt and Road. Some in­di­vid­ual gov­ern­ments may han­dle in­fra­struc­ture bet­ter than oth­ers. Some projects may (lit­er­ally) lead nowhere – a bridge that spans a val­ley with no roads on ei­ther side, or a con­tainer port where no ship­ping has ever been needed. I think there is a risk that some coun­tries will pro­mote projects that don’t nec­es­sar­ily see the out­come that in­vestors are look­ing for.

Of course, some projects may have a very spe­cific in­ter­est from China, such as set­ting rail and port in­fra­struc­ture that links south­east China to the In­dian Ocean. Some projects are fun­da­men­tally gov­ern­ment or mul­ti­lat­er­ally funded, rather than pri­vately.

Over­all, Belt and Road is a very grand scale ini­tia­tive from China. The im­pe­tus for in­vest­ment in in­fra­struc­ture should not be ig­nored by busi­ness­peo­ple and in­vestors want­ing seek­ing sta­ble, long term re­turns. Be en­cour­aged by the talk, but stay fo­cused on the project’s mer­its.

THE OP­POR­TU­NI­TIES STEM­MING FROM BELT AND ROAD WILL MAN­I­FEST THEM­SELVES OVER THE COURSE OF YEARS, POS­SI­BLY DECADES

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