The Belt and Road Initiative in a post-pandemic world
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The Belt and Road Initiative in a post-pandemic world This marketing document is exclusively for use by Professional Clients and Financial Advisers in Continental Europe (as defined in the important information), Qualified Investors in Switzerland and Professional Clients in Cyprus, Dubai, Jersey, Guernsey, Ireland, Isle of Man and the UK. As participating Belt and Road Initiative (BRI) countries manage the economic fallout of Covid-19, we believe China’s support will strengthen the foundation for future BRI cooperation and we do not believe the health crisis will dampen China’s long-term commitment. We expect the Covid-19 pandemic to have a negative short-term impact on global growth and credit conditions, especially in emerging markets, which face weaker healthcare systems and debt dynamics. But China’s efforts through the BRI, along with its unilateral support and the potential support of international organizations, should help ameliorate the global economic and financial situation. Furthermore, China’s greater domestic focus post the pandemic may lead to “multilateralization” of the BRI, as other countries play growing roles in BRI-related partnerships. Invesco Fixed Incomes believes BRI projects will become more economically viable going forward as China increases its efforts to improve sustainability, transparency and governance.
Progress on the Belt and Road Initiative
Since first endorsed by President Xi in 2013, According to the American Enterprise Institute, China’s
the BRI has expanded and evolved. By the end of outbound direct investment and construction contracts
January 2020, 138 countries and 30 international with BRI countries has reached over USD900 billion
organizations had signed 200 Belt and Road since 2013.3 In the first three months of 2020, the
cooperation agreements with China.1 Figure 1 total value of new Belt and Road projects exceeded
summarizes key milestones of the signature policy. USD25 billion.4
According to China’s Ministry of Commerce, the total
volume of trade in goods between China and the
BRI countries increased from around USD1 trillion in
2013 to USD1.34 trillion in 2019.2 The share of BRI
countries’ in China’s total trade reached almost 30%
in 2019 (Figure 2).
Figure 1: Belt and Road Initiative Milestones
Italy became the first
G7 country to sign a
memorandum of China's Q1 trade
understanding with volume with Belt
Establishment of the and Road countries
China endorsing the First China-Africa
Silk Road Fund reached RMB2
Belt and Road Initiative Economic Trade
(USD40 billion) and trillion, growing Expo was held
Asian Infrastructure 7.8% yoy
Investment Bank Second Belt
President Xi Belt and Road and Road China proposed
endorsed the Initiative was written The number of Forum for 30+ institutions around construction of
Belt and Road into the Constitution China-Europe freight International the world co-founded the the Health Silk
Initiative of the Communist trains exceeded Cooperation Belt and Road Economic Road
Party of China 12,000 in 2018 was held Information Partnership
Sep Mar May Jul Apr
2013-15 2016-18 2019 2020
The development The first Belt and Trade volume Luxembourg signed Switzerland signed China and Kazakhstan signed
of six economic Road Forum for between China and memorandum of memorandum of memorandum of understanding
corridors was International Belt and Road understanding with understanding with on cooperation plan for the
proposed Cooperation countries exceeded China endorsing the China endorsing the connectivity of Nurly Zhol
USD6 trillion during Belt and Road Belt and Road (Bright Path) new economic
past five years, initiative initiative policy and Belt and Road
growing at an initiative
average annual
growth rate of 4%
Source: China Daily, Xinhua Net, People’s Daily, OBOReurope, RWR Advisory Group, CNBC, Euractiv, data as of May 10, 2020.
Figure 2: Total trade volume between China and belt and road countries
• China’s trade volume with BRI countries (Cumulative)
• BRI countries’ share of China’s total trade
%
8 31
7 30
6 29
5
28
4
27
3
2 26
1 25
0 24
2013 2014 2015 2016 2017 2018 2019
Source: Belt and Road Portal, China’s Ministry of Commerce, data as of May 10, 2020.
02 The Belt and Road Initiative in a post-pandemic worldThe Belt and Road Initiative in a post-pandemic world
As the coronavirus spread globally, many countries China’s economy contracted in Q1 2020 for the
implemented lockdowns, quarantines and social first time in decades. How will China balance its
distancing measures. These economies are expected efforts to address domestic issues and lead the
to suffer unprecedented losses due to the drastic Belt and Road Initiative?
drop in economic activity. The shock to global GDP China’s domestic economy contracted by 6.8% year-
and potential funding stresses will likely magnify the over-year in the first quarter due to the coronavirus
impact on emerging market countries, given their outbreak.5 While China’s ability to provide ongoing
relatively less developed healthcare systems and funding to other countries has not suffered – foreign
higher debt levels. exchange reserves have held steady (Figure 3) - we
believe China will increasingly focus on domestic
Although Covid-19’s impact on future global issues in the near term.
economic growth and social interaction remains
uncertain, we try to analyze its impact on the BRI
by answering the following questions.
Figure 3: Chinese foreign exchange reserves have remained stable since 2019
USD million
3,140,000
3,120,000
3,100,000
3,080,000
3,060,000
3,040,000
3,020,000
3,000,000
12/18
1/19
2/19
3/19
4/19
5/19
6/19
7/19
8/19
9/19
10/19
11/19
12/19
1/20
2/20
3/20
4/20
Source: Bloomberg L.P., data as of April 30, 2020.
Going forward, China may promote a wider range of Invesco Fixed Income expects more multilateral
financing options and more multilateral projects under projects and a broader range of financing options
the BRI. Various financing options involving multiple to bring increased transparency, efficiency, and
stakeholders in BRI projects could improve project sustainability to BRI projects overall, potentially
management and decrease dependence on Chinese benefiting Belt and Road recipient countries.
capital.Private financing and co-financing had played a Notwithstanding additional financing options and
growing role in BRI projects even before the pandemic. multilateral projects, we expect China to provide
strong support to Belt and Road projects going
We expect the current situation to speed this process. forward. In March, for example, the China Development
In March 2019, China’s Ministry of Finance signed Bank announced that it will provide low-cost financing
a memorandum of understanding with several and special foreign exchange liquidity loans to
multilateral development banks to establish a companies involved in Belt and Road projects.
Multilateral Cooperation Centre for Development
Finance. According to research by Refinitiv BRI Pandemic-related interactions between
Database, 27% of total funding for Belt and Road China and Belt and Road Initiative countries
projects has come from private sector or publicly Since the emergence of the pandemic, President Xi
listed firms.6 While the number is well below the has commented frequently on the building of the
46% of financing from government institutions, we Health Silk Road. As the first country to appear to
expect the private portion to expand as the number have contained the virus, China has actively donated
of multilateral projects grows and China becomes medical supplies and equipment to other Belt and
increasingly open to the multilateralization of BRI.7 Road countries. Media reports suggest that China has
donated at least 40 million masks to other countries
In addition to multilateral projects, financial market (Figure 4). Most donations were made within Asia, with
funding could help make up the gap in Chinese Iran and South Korea receiving the most.
capital. According to a 2020 Central Banking survey
conducted with 30 central banks in the BRI, a fair European countries, especially Italy, have also
number of respondents expected funding for BRI received major Chinese donations. China has sent
projects to come from financial markets.8 The London medical experts abroad to help Belt and Road countries
Stock Exchange, for example, supports the BRI (Figure 5), and many Chinese tech companies are
through a variety of services and initiatives. currently exporting coronavirus-related products and
At the end of 2019, it facilitated the raising of USD80 services overseas. Alibaba has offered its coronavirus
billion in equity capital and USD170 billion in debt response guide to several countries and Huawei
capital.9 It also seeks to provide a “world-class listing donated wireless network equipment, smartphones
infrastructure” for the BRI. and cloud platform access to Italian hospitals.
03 The Belt and Road Initiative in a post-pandemic worldFigure 4: Cumulative number of masks delivered to belt and road countries by China
• Asia • Europe • Africa • North America
Million
45
40
35
30
25
20
15
10
5
0
20-02-28
20-03-06
20-03-13
20-03-20
20-03-27
20-04-03
20-04-10
20-04-17
20-04-24
20-05-01
20-05-08
Source: Social media, public information, Invesco. Data as of May 10, 2020.
Figure 5: Number of medical personnel sent by China to belt and road countries
• 30-40 • 20-30 • 10-20 • 1-10
Source: Social media, public information, Invesco. Data as of May 10, 2020.
Aside from the immediate boost to medical resources, The IMF estimates that total emerging market
China’s efforts to help Belt and Road countries financing needs could reach USD2.5 trillion in the
fight the pandemic should aid in the long-term remainder of 2020.10 Invesco Fixed Income estimates
development of the BRI, as it may build trust and a that the additional public investment needed to offset
foundation for future Belt and Road cooperation. the decline in emerging market growth is around
USD9.7 trillion. Russia and Turkey currently face the
What impact will the pandemic likely have on largest additional investment need (Figure 7).
Belt and Road economies?
The International Monetary Fund (IMF) forecasts Some emerging market countries may experience
that emerging market growth will decline by around short-term funding stresses, and potential
1% on average in 2020 (Figure 6). This represents restructurings and defaults cannot be ruled out. Given
a 5.6% drop from its forecast last October. Some the pandemic’s severe economic impact and pressure
Belt and Road countries, like the Maldives and on funding needs, some emerging market countries
Thailand, are expected to be heavily affected by may need support from international organizations
a slowdown in tourism. and other countries, including China, to help stabilize
their economies. The BRI could potentially fill this role.
04 The Belt and Road Initiative in a post-pandemic worldFigure 6: Forecast drop in 2020 growth among sample BRI countries
• Outlook in October 2019 • Outlook in April 2020 • Difference (RHS)
Growth Rate (%)
7 -1
5 -3
3 -5
1
-7
-1
-9
-3
-5 -11
-7 -13
-9 -15
Mongolia
Qatar
United
Arab
Emirates
Bahrain
Average
Nigeria
EM
India
Philippines
Thailand
Maldives
South
Africa
Source: IMF World Economic Outlook Report & Database, Oct. 2019 and April 2020. Data as of May 10, 2020.
Note: The “Outlook” bars correspond to the left-hand axis; the “Difference” line corresponds to the right-
hand axis. EM is emerging markets.
Figure 7: Top 10 countries with large additional public investment needs
USD billion
500
400
300
200
100
0
Russia Turkey Indonesia Thailand Poland Saudi Nigeria South United Philippines
Arabia Africa Arab
Emirates
Source: Invesco, IMF Working Paper: The Macroeconomic (and Distributional) Effects of Public Investment
in Developing Economies, IMF World Economic Outlook Report and Database, Oct. 2019, IMF Fiscal Monitor
Database April 2020.
China’s post-pandemic support to Belt and Road countries and ESG factors
As the first country to emerge from the pandemic, Debt renegotiation and relief for Belt and Road
China is one of the better-positioned major economies countries?
to extend financial support to emerging market It has been reported that China has written off interest
countries. It is also in China’s interest, since most Chinese on some bilateral loans with partner countries. China
BRI loans were extended to emerging market countries. has also given some borrowers more time to repay or
made other concessions. The Kyrgyzstan government,
We have already witnessed Chinese direct lending, for example, announced in April that China had agreed
including a concessionary loan of USD500 million to reschedule USD1.7 billion of debt repayments.12
granted to Sri Lanka upon request to fight the virus.11 Notably, these relatively less developed countries are
We expect China to continue to provide financial also receiving emergency financing and debt relief
support to emerging market countries going forward. from major international organizations, such as the
That being said, conditions vary in different countries IMF and World Bank (Figure 8).
and individual domestic policies, types of governance,
levels of corruption, and debt levels are important
when making investment decisions.
05 The Belt and Road Initiative in a post-pandemic worldFigure 8: Countries receiving emergency financing and debt relief
• Multiple • Rapid Financing Instrument (RFI) • Augmentation of Existing Arrangement
• Rapid Credit Facility (RCF) • Catastrophe Containment and Relief Trust (CCRT)
Source: IMF, data as of June 4, 2020.
We expect China and other international organizations We believe environmental, social and governance
to provide debt relief or renegotiation to selected (ESG) factors will be critical to the long-term economic
emerging market countries in the future. development of emerging market countries where the
However, we do not expect debt write-offs to level of socio-economic development, degree of political
discourage Chinese lending activity. Most funding stability and entrenchment of the rule of law can vary
was conducted through Chinese policy banks and significantly. The outbreak of Covid-19 has highlighted
government support for investment in participating the importance of a safe, clean and sustainable
Belt and Road countries remains high. From an environment to reduce systemic health risks.
investment perspective, we believe China’s support
and that of key international organizations is a positive The importance of ESG factors has been reflected in
factor that will benefit Belt and Road countries. the financial market performance of emerging market
sovereign bonds. Over the last three years, the
Sustainability of Belt and Road country sovereign bonds of countries rated more highly from
development and the significance of ESG factors an ESG perspective have outperformed lower ESG-
We expect BRI projects to become more economically rated peers (Figure 9). We believe China’s emphasis
viable as China increases its efforts to improve their on ESG factors would be a positive catalyst for the
sustainability, transparency and governance. Measures overall development of the Belt and Road universe.
like the Debt Sustainability Framework and the inclusion
of multilateral participants will likely benefit Belt and
Road countries and projects over time.
Figure 9: Emerging market sovereign bond returns for past three years by MSCI ESG rating
%
25
20
19.8%
15
10
5 8.4% 7.5%
0
-5 -7.3%
-10
A BBB BB B
Source: MSCI, JP Morgan, Bloomberg L.P., Invesco. Data as of May 28, 2020. Past performance is not a guide
to future returns
06 The Belt and Road Initiative in a post-pandemic worldSource Investment risks
1
Source: Belt and Road Portal, as of The value of investments and any income will fluctuate (this may partly be the result of
Jan. 31, 2020. exchange rate fluctuations) and investors may not get back the full amount invested.
2
Source: Chinese Ministry of As a large portion of the strategy is invested in less developed countries, you should
Commerce, as of Dec. 31, 2019. be prepared to accept significantly large fluctuations in the value of the strategy. The
3
Source: American Enterprise Institute, strategy may invest in certain securities listed in China which can involve significant
as of Dec. 31, 2019. regulatory constraints that may affect the liquidity and/or the investment performance
4
Source: RWR Advisory Group, as of of the strategy. The strategy invests in a limited number of holdings and is less
March 21, 2020. diversified. This may result in large fluctuations in the value of the strategy.
5
Source: Bloomberg L.P., as of March
31, 2020.
6
Source: Refinitiv BRI Database, as of Important information
Dec. 31, 2019.
7
Source: Refinitiv BRI Database, as of This marketing document is exclusively for use by Professional Clients and
Dec. 31, 2019. Financial Advisers in Continental Europe (as defined in the important information),
8
Source: Central Banking, as of April Qualified Investors in Switzerland and Professional Clients in Cyprus, Dubai,
16, 2020. Jersey, Guernsey, Ireland, Isle of Man and the UK. By accepting this document, you
9
Source: Central Banking, as of April consent to communicate with us in English, unless you inform us otherwise. This
16, 2020. document is not for consumer use, please do not redistribute. Data as at 31.05.2020,
10
Source: IMF Report: Enhancing unless otherwise stated. This document is marketing material and is not intended
the Emergency Financing Toolkit— as a recommendation to invest in any particular asset class, security or strategy.
Responding To The COVID-19 Regulatory requirements that require impartiality of investment/investment strategy
Pandemic, as of April 9, 2020. recommendations are therefore not applicable nor are any prohibitions to trade before
11
Source: The New Indian Express, as of publication. The information provided is for illustrative purposes only, it should not be
March 18, 2020. relied upon as recommendations to buy or sell securities.
12
Source: Barron’s, as of April 29, 2020.
Where individuals or the business have expressed opinions, they are based on current
market conditions, they may differ from those of other investment professionals and
are subject to change without notice. This information is available using the contact
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