How Can Chinese Companies Benefit From the Belt & Road Initiative?

China’s US$8 trillion Belt & Road Initiative (BRI) plans to invest in infrastructure around the world, aiming to create new trade routes along the lines of the ancient Silk Road. This famously crisscrossed all of Eurasia and reached from China all the way into the Middle East and even Eastern Europe.

Leading the cause today are some of China’s largest state-owned enterprises (SOEs), which are investing in roads, railways, ports, and other infrastructure assets around the world to facilitate a resurgence in trade. In the long term, the end beneficiaries will also come to include China’s massive numbers of exporters, who are looking for new markets to sell apparel, electronics, and home appliances.

Let’s dig a little deeper and see how investors can profit from this massive initiative.

Belt & Road will create new markets for China

China’s BRI is partly motivated by a need to offload excess capacity in its own economy and create job growth for its large population. The initiative encompasses 65 countries and 60% of the world’s population, and will create new export markets for Chinese companies.

China currently suffers from severe overcapacity in key natural-resources and building-materials sectors such as steel and cement, stemming from overinvestment in the years following the global financial crisis. China will also create new markets for its private sector, particularly exporters of textiles and light manufacturing products.

Another motive is natural resources. For example, China is building railroads in Pakistan to transport oil from the Middle East to its Western regions. China Merchants Port’s (SEHK:144) new port in Hambonota, Sri Lanka, is also designed to host oil tankers traveling from the Middle East and to China. Kenya’s new railroads will help connect China with natural resources found in landlocked African countries like Uganda, South Sudan, Rwanda, and Burundi.

Thus far, 89% of BRI projects have been implemented by Chinese companies. Right now, primarily SOEs are benefitting from the construction and infrastructure projects, but hopes are that over time, China’s exporters of small goods and appliances will gain from them as well.

Chinese exporters to benefit from the BRI

Many of the end beneficiaries of the BRI will be Chinese exporters. Haier Electronics Group (SEHK:1169), one of China’s largest producers of refrigerators, air conditioners, and other white goods appliances, is a perfect example.

Over the last two decades, Haier has been expanding its operations overseas, having built eight industrial parks and 24 manufacturing plants across 18 different countries. Six of their industrial parks are in Belt & Road countries such as Vietnam, Indonesia, Pakistan, Thailand, and Russia. And in 2018, Haier generated RMB 10.1 billion in revenues from South Asia, Southeast Asia, and the Middle East.

But Haier faced a crucial issue in Pakistan, a market it had entered in the year 2000. Pakistan’s major cities regularly suffer crippling bouts of rolling electricity blackouts. Over 140 million Pakistani citizens have less than 12 hours of electricity access a day. It is estimated that the country’s chronic power shortages are responsible for a 7% annual loss in GDP.

Yet over the last few years, the first wave of US$62 billion in Belt & Road capital has started to pour into Pakistani infrastructure projects. Two-thirds of this capital is dedicated to energy projects such as coal power plants, to alleviate the country’s frequent power outages. Since 2014, the country’s installed electricity generation capacity has increased from 23 megawatts to nearly 34 megawatts, improving conditions across the country.

As a company that produces and sells white goods appliances such as microwaves, refrigerators, and washing machines to middle-class households, this is undoubtedly a major boon for Haier. Today Haier has a whopping 32% share of the home appliances market in Pakistan and boasts a distribution network of 3,000 dealerships and retail stores. In 2018, Haier’s Pakistan revenues grew 21.7% in 2018, and the outlook for the company’s fortunes in the country remains strong.

Belt & Road to continue making inroads

As the Belt & Road Initiative begins to make its mark on the rest of the world, investors should keep an eye out to see who will benefit the most. While China’s SOEs may capture the headlines with Belt & Road infrastructure assets, China’s private exporters (that tend to fly under the radar) could enjoy even greater rewards in the long term.

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