China’s Belt and Road Initiative (BRI) will have its biggest impact on small, high-risk, frontier markets in South, Southeast, and Central Asia. As measured by Fitch Solutions' Key Projects Database, the value of prospective, planned, and ongoing China-backed infrastructure projects in countries like Laos, Cambodia, Kyrgyzstan, and Pakistan dwarfs their historic spending on infrastructure development, and indeed even their current gross domestic product. These countries stand to benefit from improvements to their transport and power infrastructure assets, but the sheer size of proposed projects raises questions about their suitability for the market and the risky business environments of emerging markets mean that projects will not be immune to financing, logistics, and political difficulties.
Most countries along the BRI have urgent infrastructure development needs and many are considered too high-risk for traditional investors, the result being that their governments have been highly receptive to Beijing’s offers of financing, building, and operating infrastructure projects. However, this also means that for smaller markets in Central and Southeast Asia, the presence of a handful of Chinese state-owned companies working on China-financed infrastructure projects can easily dominate the construction industry as a whole, setting standards and influencing how future development could proceed. The list of small, economically underdeveloped countries in which Chinese companies will dominate infrastructure development contracts overlaps with the list of countries that are vulnerable to rapidly rising external debt.
Uneven Belt and Road
Fitch Solutions' Key Projects Database, which tracks major construction projects around the world, can give us a clearer picture of which countries will be most impacted by Chinese investments. With at least 70 countries officially along the Belt and Road, the data helps us identify investment hotspots and potential areas of growing Chinese influence. This data, which the Reconnecting Asia Project draws upon, is particularly useful for us in tracking investment and business activity in the infrastructure sector, especially as accurate and up-to-date data in many of these emerging and frontier markets is difficult to come by.
Map 1: Value of China-Backed Infrastructure Projects
Note: Defined as projects involving Chinese companies or government agencies.
In Laos, the combined value of the Vientiane-Boten Railway, the Savannakhet-Lao Bao Railway, and a slew of hydropower plants – all of which involve Chinese investors or companies – exceeds $17 billion, a figure comparable to the country's GDP in 2017. Chinese investors, contractors, and heavy industries are quickly gaining market share against French, Japanese, and Thai firms that have traditionally been the largest foreign players in Laos’s economy.
In Cambodia, the influx of Chinese capital has displaced other international investors, notably in the airport sector. The government is looking to break longstanding contracts with Cambodia Airports, a unit of French conglomerate VINCI that currently operates airports in Phnom Penh, Siem Reap, and Sihanoukville, after consortia of Chinese state-owned enterprises (SOEs) proposed building new, multibillion-dollar airports in all three cities. China-backed projects in Cambodia accounted for $5.2 billion of the country’s $16.4 billion projects pipeline.
In Kyrgyzstan, $4.5 billion worth of China-backed infrastructure projects include roads, transmission lines, and gas pipelines bringing Western China closer to energy and commodity resources in Central Asia. Chinese contractors hold a 24 percent market share in the country's construction sector.
In Pakistan, the $62 billion China-Pakistan Economic Corridor (CPEC) is one of the largest infrastructure development initiatives in the country’s history, especially when considered in the context that Pakistan’s entire construction industry was worth just $6.5 billion in 2017. Though the full implementation of all planned projects is far from guaranteed, the investment and construction activity generated is set to have a longstanding and wide-ranging impact on Pakistan’s economy.
Chinese investors and contractors are even making headway in India, which has been a vocal critic of the Belt and Road Initiative and of how CPEC runs through disputed Kashmir. India was the top recipient of funds from the China-led Asian Infrastructure Investment Bank in 2017, while companies like Shanghai Electric and Dongfang Electric are supplying turbines for new coal and gas power plants in the country. Rolling-stock giant CRRC produced the trains now running on the Mumbai Metro. China’s role in India’s infrastructure sector has grown regardless of – or in spite of – New Delhi’s stance on the BRI.
Chart 2: Selected Countries – China-Backed Infrastructure Projects Value as Percent of Nominal GDP in 2017
Source: Fitch Solutions – Key Projects Database
Other countries in which the value of China-backed infrastructure projects could dwarf national economies include Mongolia, Belarus, and Georgia. Like the countries mentioned above, surging Chinese investment is helping to bring long-planned but costly infrastructure projects closer to realization.
From the industry perspective, the BRI will further intensify competition for construction and infrastructure contracts, especially as Chinese companies – backed by state subsidies or credit guarantees – take on markets and projects previously considered “too risky” by more-established firms. Seven of the top ten global contractors, measured in terms of revenues outside their home country, are Chinese SOEs. The largest, China State Construction and Engineering (CSCEC), has worked on projects in 119 countries, a global presence rivalling that bastion of American soft power, McDonalds.
Chart 3: Number of China-Backed Infrastructure Projects in BRI Countries
Source: Fitch Solutions – Key Projects Database
For smaller markets, herein lies what will perhaps be one of the longer-lasting impacts of the BRI: the spread of China’s project planning, implementation, and operations to overseas infrastructure projects. Even if BRI investment declines in the future, whether for political or economic reasons, the influence of Chinese constructors and planners on regional markets will continue to be apparent, from the alignment of high-speed railways in Indonesia to the design of residential and commercial developments in city centers.
Christian Zhang is a Singapore-based Infrastructure Analyst at Fitch Solutions, an independent provider of country risk and industry analysis specializing in emerging and frontier markets.