Is your portfolio geared for China’s growth potential?
The “One belt, one road” project concept initiated by China is attracting global investors’ attention.
The “One belt and one road” project — involving major infrastructure development along ancient “silk road” trading routes between China and Europe – is the most significant and far-reaching initiative that China has ever put forward. As such, it has aroused great interest amongst SMSF investors looking to capitalise on the growth opportunities in the region.
What is the “One belt, one road” initiative?
The “One belt, one road” strategy, a key policy of the administration of President Xi Jinping, was first incorporated into official Communist party documents in late 2013. The name “One belt, one road” is short for the Silk Road Economic Belt and 21st Century Maritime Silk Road. The project spans over Central Asia, Southeast Asia, South Asia, West Asia and part of Europe. Its principal aim is to increase connectivity and commerce between China and 65 countries (covering a total population of 4.4billion and economic volume of US$21 trillion) by building infrastructure and boosting financial and trade ties. The development will provide Asia with a powerful engine for further growth. That will be good news not only for Asia, but for the whole world.
How is this initiative being underpinned?
During the APEC meeting in Beijing in November 2014, China pledged to contribute US$40 billion to kick-start a Silk Road Fund, together with the initiation of founding the Asia Infrastructure Investment Bank (AIIB). The essence of the project would be building an open trade route, with an initial focus on aiding developing countries to build transport infrastructures.
“One belt, one road” has been formally included in the resolution of the Third Plenum of the 18th CPC Standing Committee of China and this strategic vision had officially become the national policy. The project should not be purely regarded as an infrastructure initiative, it also represents an important move towards adapting to the new conditions under globalisation.
Promoting efficiency and reduce overcapacity
China has faced the problem of over-investment since last decade and that has lead to overcapacity and declines in the utilisation rate. With the new senior leaders in position, they have changed their mindset. On one hand, China needs to eliminate the overcapacity problem and increase corporate efficiency and competitiveness, on the other hand, it also needs to discover new means for growth.
Through “One belt one road”, China would achieve several goals, such as removing trade barriers, boosting exports, absorbing excess capacity, globalising the official currency (renminbi) and improving relationships with neighbour countries.
China’s government pushed forward the merger between the two duopoly railway companies (China CNR and China CSR), and this is likely to be a showcase for subsequent consolidations in different industries. A successful merger between the two should not only enhance internal efficiency, but also improve global competiveness, with greater economies of scale translating into cheaper and better quality industrial goods to other countries, especially developing countries. Overall, it would be a win-win situation for both China and associated countries, as China could integrate its industrial capacity and technology advantages, while the products exported could match the demand from developing countries at competitive price levels with reliable qualities.
What does this mean for investments?
SMSF investors, who would like to participate in the structural growth story of “One belt one road”, should look at sectors that could be involved in output and capacity exports and of industrial transfer. In addition, the project would drive the flows of people, capital and products between border provinces and cities of China and neighbour countries. Those companies that had major business activities in those border provinces and cities would be potential beneficiaries as well.
Want to invest in China’s growth potential?
While most SMSF investors can appreciate the value of gaining portfolio exposure to China’s growing economy, knowing what Chinese stocks to invest in can be difficult. To uncover how you can access a diversified portfolio that takes advantage of the new growth opportunities in China, see the China Growth Fund page.
About the author
Patrick Ho was appointed as Head of Asian Equities in January 2014 after serving as Head of Greater China Equities since June 2012. He leads the five-strong Asian Equities team based in Hong Kong. Patrick has more than 16 years’ investment experience. Patrick holds a Masters in Philosophy (Statistics) from the Chinese University of Hong Kong, and is a CFA charterholder.