China's Belt And Road Initiative

Summary

• China is aggressively expanding throughout the world and this will cement their global status.
• While the developed world focuses on isolationist and environmental concerns, China is building its empire under the radar.
• The belt and road initiative involves trillions of dollars in investment through the world's poorest nations, and those who can't pay forfeit asset ownership to China.
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The westward expansion policy, known as "The Belt and Road" initiative, is a major catalyst for the Chinese economy. The bad news, is that many are saying it is a negative catalyst. The initiative is plagued with secrecy, bad-debt, and emphasizes speed over quality/safety. Having been in action for almost a decade, there is little to show for and the policy may actually be crippling the country.

Source: HSBC

Given the scale of this program, one is left wondering if the problems experienced are growing pains, or if they demonstrate that this initiative holds no future. The initiative is expected to directly impact ~70 countries, the majority of which are among the poorest in the world. Chinese investment is expected to reach a range of $600-$800 billion by 2022, and will help to combat the "youth demographic bulge" that is plaguing many emerging Asian countries.

Overview

In a watered-down definition, the belt and road initiative entails infrastructure investment by the Chinese government on a grand scale. The investments touch nearly 70 countries, spanning across Asia, Africa, and into Europe. As of mid-2017, China was underwriting nearly $150 billion a year in investments. This initiative is part of President Xi's ultimate goal of making China the world superpower. The Economist equates the area targeted by China, to the transatlantic trade routes that the US dominates.

The Initiative Beckons Divisiveness

As with everything involving China, there is a lot of skepticism surrounding the true intent of the program. The poor countries of Africa and Asia are fans. They get to become friends with a global power, receive infrastructure investment, and economic catalysts. The West is not a fan. They worry that China is overloading economically-weak countries with debt. They also worry about the environmental impacts of such an expansion.

Trade

The belt and road initiative holds a lot of potential if all goes well, if not it will be a disaster. Infrastructure investments along these routes will increase the interconnectivity of countries, which will benefit everyone worldwide. Positives include faster shipping and more cooperative governments. In G7 countries, it takes 10 days to import a product, that same product will take 51.6 days in West Asia. This massive delay is because of strong border policies that are very tough to comply with.

Source: World Bank

This easier flow of trade will provide a strong economic boost to the poor nations that are involved. However, the potential comes at a cost and there is a lot of risk. These are notoriously corrupt parts of the world. The political risks are huge, and this is in part why China is involved. The credit risk for some of these countries is far too great for Western banks to loan to, but not the Chinese.

On top of this, the countries' GDPs are some of the smallest in the world and infrastructure is not cheap. There are concerns that China will overload economies with debt they will not be able to pay. For example, a railway section in Laos costs $6 billion to build, equivalent to 40% of GDP.

The trade corridors also stand to decrease world trade costs by upwards of 23%. This is due to the high costs of trade with belt and road countries.

Source: ING

Environment

As for the environmental argument that the US and Europe love to push, developing countries always have the same response: hypocrisy. Why do India and China need to be handicapped with environmental responsibilities when the US and developed European countries never had to worry. Trying to rapidly expand a country, while also regulating industries, is extremely difficult and expensive.

This is a severe hindrance to poorer countries. China, among others, has relied on coal for their energy demand because it is cheap. However, it is also very dirty and Western countries do not approve. At its peak, China was opening 2 coal plants every day, that has now declined to ~2 a week.

Because of the cheap energy coal provides, Chinese companies have planned to build coal production in countries along the belt and road. Shanghai Electric Group (OTC:SIELF) plans to build 6,285 megawatts. The China Energy Engineering Corporation plans to build 2,200 megawatts. Egypt, for example, will increase its negligible coal consumptions to ~17,000 megawatts as a result of the investments.

"A typical coal plant has a capacity of about 500 megawatts and burns 1.4 million tons of coal each year, enough to power almost 300,000 homes."

Coal is one of the greatest catalysts for China. Because developed nations focus on the environmental effects, there were movements and political pressures to stop supporting the energy source. This led to the World Bank eliminating financing for coal plants, except in circumstances with "no feasible alternatives."

Source: BP

As a result, China stepped up and provided the capital necessary for coal plants in these emerging countries. China benefits greatly from this. They essentially 'control' the resources of these poor countries as they enter deals, Chinese companies provide the operations which allows global expansion along with guaranteed sales, and China is constructing a massive trade network to combat the US.

Conclusion

The Belt and Road initiative is a massive geopolitical program that is not receiving enough attention. This is a major catalyst for the country and will change the world as we know it when completed. There is an odd 'reversal' occurring where the US is becoming isolated (how China used to be) and China is aggressively branching out.

While I am not usually a fan of Vox, I do think the video below does a good job at explaining the initiative with visuals to help.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.