Bloomberg reported this morning that 60% of China’s Belt and Road (BRI) partners have sovereign debt ratings of “junk” or have withdrawn from such ratings (presumably due to fear of poor showings):
Of the 68 nations China lists as partners in its Belt and Road Initiative, the sovereign debt of 27 are rated as junk, or below investment grade, by the top three international rating firms. Another 14, including Afghanistan, Iran and Syria, are either not rated or have withdrawn their requests for ratings.
The fact that many of these countries are junk-rated today is exactly the point. Central to the BRI plan is for China to assist economically devastated, infrastructurally lagging, and politically troubled countries as they attempt to re-provision themselves and develop into the future. This isn’t only rhetoric, but what is actually happening on the ground:
-China made a string of big investments in post-civil war, politically tumultuous Sri Lanka after the West turned its back.
-China is pumping $50 billion into energy and transportation projects in relatively hostile and underdeveloped Pakistan.
-China is moving fast into Bangladesh, a country that has dealt with all sorts of troubles since independence.
-Not to mention the fact that all through Africa China is putting up big money for new rail lines, ports, and other entities that economies can prop themselves up on.
-Undaunted by its economic implosion, China is propping up Greece by revitalizing Piraeus port and making other big investments.
While it’s true that the Belt and Road goes through areas of major financial risk these are also regions that have the potential to produce huge long-term economic and political gains. China is essentially going around the world making big investments in places that nobody else will touch under the premise that after being linked into the BRI these countries will develop and their economic outlooks will eventually change considerably. Long-term here doesn’t mean three or four years, but three or four decades.
We’re talking about countries here that are attempting to reinvent themselves from the top to the bottom — places like Kazakhstan, Azerbaijan, Georgia, Bangladesh, Sri Lanka, Pakistan, Serbia, Oman, Abu Dhabi. Many of these countries are already in the middle of their own economic diversification and infrastructure building programs, which find direct synergy with the Chinese objective and could potentially change their own paradigms and become something very different than what we think they are now.
On top of that, Chinese investors tend to truly understand the value of getting in early, of entering markets when they’re considered junk, because this is where the biggest margins can be made. What’s more is that, in partnership with they government, they know how to seed these investments and take them to fruition — by all out fiat, if necessary.
We’re talking about a country that completely rebuilt itself in 30 years, constructing over a hundred new cities and turning former backwaters like Wuhan, Changsha and Chengdu in some of the most economically dynamic places in the world. While we mocked China for building ghost cities everywhere, China packed these ghost cities with factories, schools, corporate headquarters, shopping malls and people. In the process of which they thoroughly learned the rudiments of transit-oriented development and how to turn squalid middle of nowheres into centers of the world. This isn’t fiction, it really happened.
While it’s true that international infrastructure development is a little different than China’s domestic development and carries with it an entire array of additional challenges, the process that is being followed in many stations along the Belt and Road is exactly the same: build roads, build rail lines, build a port, construct a manufacturing zone, seed it with companies, build a new city around it, and boom, 20 years later you’re looking at a new Shenzhen.
Well, maybe not Shenzhen, but at least an inconspicuous new dot on the map that is more or less economically sustainable.
China understands that places change — China understands that places can be made to change — and extended periods of loss and stagnancy are nothing compared to the big future gains they’re gunning for along the Belt and Road.
When we look back on what’s happening now along the BRI our narrative may very well change from “China overpaying for junk assets” to “how in the world did China get all of that so cheap.”