Global investors are cautious of China's 'One Belt, One Road'

The "One Belt, One Road" program China launched four years ago to strengthen rail, road and maritime links with trading partners in Asia, Africa and Europe has become an investment theme for some stock pickers even as it remains a work in progress for most infrastructure investors.

Two months after Chinese President Xi Jinping pledged an additional $125 billion in financing, over and above the more than $50 billion already invested, some money managers contend the market is ​ underestimating the lift that companies financing or engineering these projects could get from that coming wave of infrastructure spending.

The market has yet to discount the earnings boost "the largest economic policy the world has ever seen" will provide for key banks and insurers, trading companies and e-commerce players, in addition to firms directly tied to construction and engineering, predicted Douglas Morton, a London-based senior vice president and head of research, Asia, with Northern Trust Capital Markets.

Bank of China Ltd., Ping An Insurance (Group) Company of China Ltd., HSBC Holdings PLC and Standard Chartered PLC are among the firms poised to benefit, said Mr. Morton. Others likely to enjoy a tailwind include China Communications Construction Co. Ltd., CGN Power Co. Ltd., General Electric Co., Siemens AG and Alibaba Group Holding Ltd., he said.

Brendan Ahern, chief investment officer of New York-based Krane Funds Advisors LLC, said his firm's KraneShares exchange-traded funds business will launch a One Belt, One Road ETF — benchmarked to MSCI Inc.'s recently introduced Global China Infrastructure Exposure index — by the end of August. In an interview, he predicted interest from institutional and retail investors alike.

Skeptics, by contrast, say with the program's political and strategic objectives outweighing questions of commercial viability, institutional investors focused on brownfield investments in developed markets should remain largely on the sidelines as China's leadership moves to finance the construction of high-speed railways, roads and ports across Asia, Eastern Europe and Africa.

"It is above all else a political project to cement Xi Jinping's own particular nationalist vision, and to try to accelerate the shift from a U.S- to a China-centric world economy," noted Michael Every, Hong Kong-based senior Asia-Pacific strategist with Rabobank's RaboResearch Global Economics and Markets.

"In some cases, genuine infrastructure needs and commercial logic might be secondary to political motivations," said Fitch Ratings, in a February report on One Belt, One Road-related risks.

Kalai Pillay, Singapore-based senior director, corporates, with Fitch, predicted in a telephone interview that it will be difficult to enlist private investors to participate in projects such as railways in Laos or the relatively sparsely populated east coast of peninsular Malaysia.

It becomes a question of how feasible it is to have these private infrastructure projects in places like Central Asia, noted Frederic Blanc-Brude, Singapore-based director, EDHEC Infrastructure Institute and EDHEC Asia Pacific.

Meanwhile, there's little evidence projects are being pursued on a commercial basis with open tenders and competitive bidding, noted Mr. Pillay. Most are being developed by favored Chinese state-owned companies and banks, a further hurdle to institutional investors overseas pouring money into public-private partnerships under the initiative, agreed Mr. Blanc-Brude.

Regional politics, including India's concerns about Chinese road-building projects on the subcontinent, will further complicate the commercial outlook of the program's infrastructure projects, raising the prospect of poor returns or losses, noted Rabobank's Mr. Every.

"Why does one want to own a slice of a loss-making railway? Or port? Or toll road?" he asked.

Still, the broader considerations at play, such as finding an outlet for the excess capacity in China's construction and infrastructure industries as the country's economy moves to one powered by domestic demand from the export-focused growth model of past decades, could pave the way for greater investment opportunities down the road.

While One Belt, One Road might not spawn a wealth of short-term, bottom-up investment opportunities, it could be setting the stage for a broad restructuring of China's economy that will buoy corporate profits in the future, said Robert Horrocks, San Francisco-based chief investment officer with Matthews Asia.

For example, lowering transportation costs to countries in Central Asia not fully integrated into the global trading system until now will allow Chinese companies to relocate lower value-added manufacturing to those countries as they move up the value chain, said Mr. Horrocks. Even if the infrastructure platform itself doesn't earn handsome returns, companies will be able to use that platform going forward to generate profits from entrepreneurial enterprise, he said.

Northern Trust's Mr. Morton said another knock-on effect of the program will likely be a deepening and maturing of Chinese capital markets at a time when the country's rapidly aging population urgently needs better yields on their savings.

The One Belt, One Road program could spur the launch of a municipal bond market in China, helping savers earn better returns while allowing insurance companies to better match their liabilities, he said.

For the immediate term, it remains to be seen whether overseas capital can be harnessed to turbo-charge One Belt, One Road. "The challenge for China is how to get other people involved in terms of capital contributions" by ensuring projects deliver real returns — "something they don't have an answer for yet," said Mr. Pillay.

Some analysts hold out hope on that score, predicting progress in balancing strategic and commercial goals that will move One Belt, One Road onto institutional investor radar screens.

While "we didn't see a great deal of activity" in 2016 by overseas institutional investors, such as sovereign wealth funds or Canadian pension funds, that's "something we would expect to see changing over time," said Simon J. Booker, a Hong Kong-based partner with PricewaterhouseCoopers and infrastructure lead for Hong Kong and mainland China.

Even though the value of projects launched under the initiative dropped sharply last year, the average size of projects increased "quite considerably," reflecting a flight to quality and a "greater focus on commercial viability," said Mr. Booker. With demand for infrastructure investments now outstripping brownfield opportunities in developed markets, he predicted institutional investors will become increasingly "pragmatic" in evaluating the risks in "alternative" markets such as the more than 60 countries and territories covered by One Belt, One Road.