Chinese windfall from Belt and Road is a support system worth examining

▶ With even Kenyan and Ethiopian stocks benefiting from the policy, investors do have opportunities but should proceed with caution

China’s Belt and Road initiative will provide a boon for frontier markets, but investors should probably do their homework before following Beijing’s money trail.

Funding channelled as part of the Chinese-style globalisation drive typically does not come with expectations for reform, like aid provided by multilateral lenders. That means access to Chinese funds could mean countries delaying engaging with the IMF for rescue packages, says Hasnain Malik, the head of equities research at Exotix Partners, a Dubai investment firm specialising 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 says. “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 the the president Xi Jinping’s signature international initiative. Expanded to include nations as far afield as Fiji and the Maldives, it is also seen as China attempting to move into a space traditionally filled by the US, which has pulled back globally under Donald Trump. Mr Xi has pledged 540 billion yuan (Dh301.19bn) to finance what he has called the “project of the century”.

Pakistan, where Beijing plans to invest about US$50 billion via the China-Pakistan Economic Corridor, provides a defining test case for China’s rising influence in frontier markets, Mr Malik says. Exotix views the country more positively because of the Belt and Road involvement, even though China’s investment means it is probably delaying its re-engagement with the IMF.

While it is 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, Mr Malik says. “Those policy anchors have generally given comfort to investors in IMF programmes.”

He says Kenyan and Ethiopian stocks are also benefiting from China links. But the firm is “more negative” on Tanzania, because its government’s relations with Beijing have turned frosty under the president John Magufuli, he adds.

Chinese investment has been one of the big drivers of Pakistan’s economy and stock market, and is also making Mongolia more attractive, says Thomas Hugger, the chief executive at Asia Frontier Capital in Hong Kong, which also specialises in frontier market investments. Belt and Road will benefit Myanmar, Laos and Bangladesh in coming years and has Asia Frontier looking at countries like Kazakhstan, he says.

That may provide a welcome boost for frontier equities, whose 20 per cent climb this year trails the 26 per cent advance in emerging market stocks.

After surging 46 per cent in 2016, Pakistan’s KSE100 Index has fallen 11 per cent amid political turbulence and concern over the country’s worsening finances. While MSCI added six Pakistani companies to its EM gauge this year, Mr Hugger says he still considers the country as more of a frontier market.

Belt and Road will also bring a large pool of financing to the Middle East, but investors should be aware of the implications, according to Alicia Garcia Herrero, the chief economist for Asia Pacific at Natixis Asia in Hong Kong.

“Chinese financing does not seem to be directed to changing the economic structure of Middle Eastern economies,” she says. “If anything, it could actually increase their dependence on the oil and gas industry.”