China's Rise Will Change How Investors View Riskiest MarketsBy
Beijing doesn’t tie cash to reforms like IMF: Exotix’s Malik
Belt and Road initiative funds frontier-market infrastructure
China’s Belt and Road initiative will provide a boon for frontier markets, but investors should probably do their homework before following Beijing’s money trail.
Funding channeled as part of the Chinese-style globalization drive typically doesn’t come with expectations for reform, like aid provided by multilateral lenders. That means access to Chinese funds could see countries delay engaging with the International Monetary Fund for rescue packages, says Hasnain Malik, the Dubai-based head of equities research at Exotix Partners LLP, an investment firm specializing in frontier and illiquid markets.
“The start of an IMF program can signal a positive change from policies which were unfriendly to private, foreign investors,” he said. “The start of China funding likely reinforces existing good or bad polices for private, foreign investors.”
Conceived in 2013 as a way of deepening China’s ties with countries along the Silk Road route, Belt and Road has become President Xi Jinping’s signature international initiative. Expanded to include nations as far afield as Fiji and the Maldives, it’s also seen as China attempting to move into a space traditionally filled by the U.S., which has pulled back globally under U.S. President Donald Trump. Xi has pledged 540 billion yuan ($82 billion) to finance what he’s called the “project of the century.”
Pakistan, where Beijing plans to invest about $50 billion via the China-Pakistan Economic Corridor, provides a defining test case for China’s rising influence in frontier markets, Malik said. Exotix views the country more positively because of the Belt and Road involvement, even though China’s investment means the nation is probably delaying its re-engagement with the IMF.
While it’s a “moot point” which source of funding is more beneficial for a country’s structural growth, China’s cash is not contingent on expectations to do with fiscal, monetary or exchange-rate policy, Malik said. “Those policy anchors have generally given comfort to investors in IMF programs.”
Malik said Kenyan and Ethiopian stocks are also benefiting from China links. The firm is “more negative” on Tanzania, though, because its government’s relations with Beijing have turned frosty under President John Magufuli, he said.
Chinese investment has been one of the big drivers of Pakistan’s economy and stock market, and is also making Mongolia more attractive, said Thomas Hugger, chief executive officer at Asia Frontier Capital Ltd. in Hong Kong, which also specializes in frontier-market investments. Belt and Road will benefit Myanmar, Laos and Bangladesh in coming years and has Asia Frontier looking at countries like Kazakhstan, he said.
That may provide a welcome boost for frontier equities, whose 20 percent climb this year trails the 26 percent advance in emerging-market stocks.
After surging 46 percent in 2016, Pakistan’s KSE100 Index has fallen 11 percent amid political turbulence and concern over the country’s worsening finances. While MSCI Inc. added six Pakistani companies to its EM gauge this year, Hugger said he still considers the country as more of a frontier market.
Belt and Road will also bring a large pool of financing to the Middle East, but investors should be aware of the implications, according to Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis Asia Ltd. in Hong Kong.
“Chinese financing does not seem to be directed to changing the economic structure of Middle Eastern economies,” she wrote in a Sept. 18. note. “If anything, it could actually increase their dependence on the oil and gas industry.”