One Belt, One Road Initiative May Carry Financial Risks

China’s One Belt, One Road (OBOR) initiative, an effort to streamline the transport of goods from Asia to Europe, is one of the largest infrastructure projects of the century and harkens back to the trade routes established millennia ago. But while the program is expected to boost economies in the region, there are risks that it might not address the most pressing infrastructure needs and could fall short in delivering expected returns, according to a new report from Fitch Ratings.

China has invested over $51 billion and more than 100 countries have signed on to participate in the project, also known as the Silk Road Economic Belt and the 21st-Century Maritime Silk Road. According to a report from the World Economic Forum, the project could provide an economic boost to more than 60 countries that represent 70% of the global population, more than half of global GDP and 24% of global trade.

Chinese funding will be used for construction of a network stretching across Asia, eastern Europe, east Africa, and less-developed sections of China. Opportunities will be created in the targeted economies, and projects associated with OBOR might help to address some infrastructure deficiencies in the region. But China’s shift from investment-led growth has created areas of excess capacity across its industrial sector, and OBOR is partly a strategy to export this extra capacity, according to Fitch Ratings. The ratings agency has doubts that Chinese banks can manage risks better than international commercial banks and multilateral lenders. Fitch also stated that genuine infrastructure needs and commercial logic might be secondary to political motivations.

Execution of the project also carries risk. Chinese engineering and construction companies have extensive technical experience, but most will be working in unfamiliar and unpredictable business environments.

Some of the loans associated with the project are large enough to have an impact on the borrowing country’s public finance profile, Fitch said. Fitch-rated sovereigns identified with OBOR projects are usually of speculative grade, but generally range from the “B” to “BBB” categories.

– Adam Fusco, editorial associate

For a view on the technological aspects of the One Belt/One Road initiative, visit NACM’s eNews.

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