Saturday, June 3, 2017

While Western Leadership May (or may not) Resist Belt and Road, Western Investors Absolutely Should Not!

From Bloomberg's May 12, 2017 Economic Brief:
China is one of the few countries in the world today with money to spend, and Xi Jinping is ready to write some checks.
Those checks would be written to fund China's "Belt and Road Initiative".

Per the Guardian:
In concrete terms, the Belt and Road initiative is an immensely ambitious development campaign through which China wants to boost trade and stimulate economic growth across Asia and beyond. It hopes to do so by building massive amounts of infrastructure connecting it to countries around the globe. By some estimates, China plans to pump $150bn into such projects each year. In a report released at the start of this year, ratings agency Fitch said an extraordinary $900bn in projects were planned or underway. 
There are plans for pipelines and a port in Pakistan, bridges in Bangladesh and railways to Russia - all with the aim of creating what China calls a “modern Silk Road” trading route that Beijing believes will kick start “a new era of globalisation”.
According to the global consultancy McKinsey, the plan has the potential to massively overshadow the US’ post-war Marshall reconstruction plan, involving about 65% of the world’s population, one-third of its GDP and helping to move about a quarter of all its goods and services. Some describe Xi’s scheme as the biggest development push in history.
In many ways it is an economic plan designed to open up and create new markets for Chinese goods and technology at a time when the economy is slowing and to help export excess cement and steel capacity by shifting factories overseas to less developed countries. Beijing also hopes Xi’s initiative will help boost the economies of less developed border regions such as Xinjiang by linking them with neighbouring countries.
But many believe the Belt and Road initiative is also a geopolitical gambit to boost China’s regional clout at a time when Donald Trump’s US looks to be stepping back from Asia. “It’s about making China the dominant country in the region,” says Tom Miller, the author of a book about the scheme called China’s Asian Dream.
Regardless of the intent, such a plan would of course markedly increase China's global influence:
Cai said it was indisputable that Belt and Road would have geopolitical consequences, giving Beijing greater leverage over its neighbours. “It will give China more influence.”
On the attendance at the recent Belt and Road Forum; a few invitees decided not to attend:
Beijing has said 28 heads of state and government leaders will attend Xi’s forum but German chancellor Angela Merkel has turned down an invitation and US president Donald Trump is not expected to attend. Only one G7 leader, Italian prime minister Paolo Gentiloni, has confirmed. 
However, and encouragingly, in the eleventh hour -- and in the wake of a newly signed trade deal between the U.S. and China -- the U.S. decided to send a delegation:
The announcement that a U.S. delegation would be coming to what is China's biggest diplomatic event of the year coincides with the unveiling of an important trade deal between China and the United States.

Cutting to the investment chase:

Clients know that we presently like the technology, industrials and materials sectors. Economic indicators, our anticipation of an acceleration in the business capex (investing in productivity-enhancing capital) cycle, and the promise of a big U.S. infrastructure spend -- not to mention the technical setups for each -- virtually forces us to feature these sectors prominently in every client's portfolio.

Plus, as I emphasized in this week's message, we're a global investment shop. Meaning, agree or disagree with the West's present approach to trade, there's clearly opportunity here for global-minded investors to exploit:

From the Bloomberg Brief:      emphasis mine....
“China is offering an alternative to the U.S. version of globalization,” Cai said. “In the Chinese case, it’s globalization paved by concrete: railways, highways, pipelines, ports.”
Lastly: Of course what amounts to modern history's greatest economic outreach is the definition of ambitious. Given China's internal challenges in terms of its transition to a service-oriented economy, along with the debt overhang from its own massive infrastructure buildout, one could sincerely question China's ability to pull it off. Clearly, it'll have to be a hugely collaborative effort.

In a McKinsey & Company podcast from last July, McKiney's own Joe Ngai and Kevin Sneader did a good job assessing the risks and opportunities.

Here's Sneader's summation:
 For every skeptic, there are two optimists, and what was striking this week in looking at the gathering of business leaders was the sheer number of people who showed up and the breadth of the countries they represented and the businesses they were part of. While it’s going to be very easy to provide long explanations of why this won’t work, there are people already looking at what it’s going to take to make it work. We saw leading construction companies, leading financial companies, and leading advisory firms all looking to be involved. At this stage, the very practical side of this is, you could choose to sit out all of what we’ve just discussed. You could do so on the basis of this being a foreign-policy move. The economics are questionable. The geographic coverage is never going to be achieved. The financial returns won’t be offered.
You could make all those assumptions and sit out. Or you could say, “If I sit out, I may be missing out on the world’s largest trading collaboration for many, many years. Missing out on a set of theoretical opportunities that, if delivered, would amount to an enormous step change in infrastructure investment and the quality of trade.” And you would say to yourself, “Do I really want to sit that out? Or is it time to at least understand at a deeper level and invest some time and assets in doing so?”
My sense, based on where we are today, is I’d probably want to do the latter. 
That's my sense as well.

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