China’s ‘New Silk Road’ to Spur Infrastructure Investments

Not only is the New Silk Road a major project, according to Edmund Harriss, a portfolio manager at Guinness Atkinson, it’s also a major diversification project. “China has for a while been seeking to diversify some of the foreign assets it has amassed … A substantial part [of those assets], $4.3 billion in foreign reserves, are held in U.S. Treasuries. A little while ago they set up the China Investment Corp. to invest in overseas assets,” said Harriss, who manages several Asia-focused strategies.

China’s original focus was to secure access to natural resources such as ore, iron, copper, and zinc with big investments in South America and Africa, according to Harriss. “Its efforts to pursue that path in the U.S. wasn’t so successful. In fact, Chinese oil company Cnooc’s unsuccessful attempt to acquire Unocal Corp. in 2005 “was a major slap in the face to China.”

 “Looking at the various investments that they made, particularly through the China Investment Corp., they weren’t particularly successful and attracted quite a lot of criticism internally, so [they] had to have a bit of a rethink,” he said, adding the result of that rethink appears to be the Silk Road project.

What do they hope to achieve? Harriss said they have several basic objectives. First is diversification of their foreign assets. The Chinese “like to invest in currency projects that are long-term contracts in nature and provide long-term stable return. Couched in terms of the Silk Road, [that diversification] will relate to China trade. They have a purpose that is likely to translate into stable returns over time. They’re not going to be particularly high-return projects, but they will be stable—presumably in more stable parts of the world and where they have stable relationships with governments.”

China’s second objective is greater influence on international affairs through resources. Harriss said, “By investing in infrastructure projects that local governments cannot by themselves easily afford, they’re building up geopolitical influence with these countries.” While it’s been “standard practice in emerging market countries” for China to exert its influence through investment, Beijing hasn’t been so successful at that in Europe—so now, while European growth is faltering and it wants to stimulate growth, China is looking to leverage what investments it does have there.

Since European options are “really quite limited” for growth without taking on additional debt, “which is the last thing the EU government needs,” it’s looking to countries with a deep well of funding. Harriss said that China, Norway, which is looking to diversify out of oil-based assets, and the Middle East and its petro dollars are its options.

Another objective for Beijing is a more basic level of international engagement. While China’s presence in world trade is well known, Harriss said that it amounts to only about 15% or maybe a little more of world trade. “Its contribution to world GDP is substantial, as is its growth, but integration with the rest of the world financially is much, much below that.” Just a couple of China’s goals along these lines is the desire to make its currency convertible at some point and to expand the level of overseas investments.

The New Silk Road project is a high-profile, expensive undertaking, and although $40 billion sounds impressive, Harriss said that China has $4 trillion—and they’re planning to spend at least $50 billion on domestic road and rail projects on their own turf. But if, say, “a country like the U.K.—one of the G7—is willing to seek Chinese funding for infrastructure, that’s a big deal. China is willing to support, to invest; it’s looking for returns.”

“In the U.K. or Germany or France, and Italy too, if you make an investment on infrastructure terms on a 20-year project and return based on that project, you will expect those terms to be fulfilled, and they will be. China is going in in a hardheaded fashion, looking for projects that will generate return, and [that are] not as speculative as earlier forays overseas proved to be,” Harriss said.