China’s Belt and Road to alter risk perception

Unlike the IMF, Beijing doesn’t tie funding to policy and this could reinforce bad policies in frontier markets

China’s Belt and Road initiative will be a boon for frontier markets, but investors should be careful reading into the implications, says Exotix Partners LLP’s Hasnain Malek.

Unlike the International Monetary Fund (IMF), China doesn’t tie the provision of funds to changes in policy by the recipient country, said Malek, the Dubai-based head of equities research at the investment firm that specialises in frontier and illiquid markets.

“The start of an IMF programme can signal a positive change from policies, which were unfriendly to private, foreign investors,” he said.

“The start of China funding likely reinforces existing good or bad polices for private, foreign investors.”

Conceived in 2013 as a way of deepening China’s ties with countries along the Silk Road route, Belt and Road has become President Xi Jinping’s signature international initiative.

Expanded to include nations as far afield as Fiji and the Maldives, it’s also seen as China attempting to move into a space traditionally filled by the US, which has pulled back internationally under US President Donald Trump.

Xi has pledged 540 billion yuan ($82 billion; Dh300 billion) to finance the Chinastyle globalisation effort, which he’s called the “project of the century.”

Defining test case

Pakistan, where Beijing plans to invest about $50 billion via the China-Pakistan Economic Corridor, provides a defining test case for China’s rising influence in frontier markets, Malek said.

“China’s investment in frontier markets has shifted from extracting natural resources to building supplychain infrastructure,” he said. “So what’s left behind for the recipient economy should be much more useful for the broader economy.”

Chinese investment has been one of the big drivers of Pakistan’s economy and stock market and is also making Mongolia more attractive, said Thomas Hugger, chief executive officer at Asia Frontier Capital Ltd in Hong Kong, which specialises in frontiermarket investments.

Belt and Road will benefit Myanmar, Laos and Bangladesh in coming years and is also resulting in Asia Frontier looking at countries like Kazakhstan, he said.

Exotix views Pakistan more positively because of the Belt and Road involvement, even though China’s investment means the nation is probably delaying its re-engagement with the IMF. Malik said Kenyan and Ethiopian stocks are also benefiting from Chinese investment.

The firm is “more negative” on Tanzania, though, because its government’s relations with China have turned frosty under President John Magufuli, he said.

While it’s a “moot point” which source of funding is more beneficial for a country’s structural growth, China’s cash is not contingent on expectations to do with fiscal, monetary or exchange-rate policy, Malek said. “Those policy anchors have generally given comfort to investors in IMF programmes.”