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Investing in China: Looking Beyond Current Trade Tensions

September 20, 2018

IT’S HARD FOR INVESTORS TO IGNORE the simmering trade dispute between China and the United States. If the discord isn’t resolved, it could lead to serious disruptions in the flow of goods between the world’s two largest economies—and that could affect the economic outlook for both nations.

But the focus shouldn't only be on the current trade tensions, says Ehiwario Efeyini, senior market strategy analyst, Bank of America Global Wealth and Investment Management. China’s ambitious new Belt & Road Initiative (BRI), a modern-day version of its ancient “Silk Road” trade route, should create significant opportunities for long-term investors, Efeyini says. In this Q&A, he offers insights into what the country’s outward infrastructure investment plans could mean for investors around the globe.

What effects could the current trade dispute have on China’s Belt & Road Initiative?

Ehiwario Efeyini: They’re really two separate issues. China does have a growing economic rivalry with the U.S. in technological capacity and advanced manufacturing. But the BRI is largely about China's expanding relationships with other markets outside the U.S., in Eurasia, the Middle East, Africa and Europe.

Could the dispute lead China to step up trade relationships with non-U.S. countries?

Efeyini: China’s trade and investment ties to other countries have been strengthening already, given the rapid growth in its economic size and national savings over recent decades. But the BRI is a more strategic attempt to accelerate this process across a much wider range of countries. When it comes to BRI, China is looking to boost exports in both its traditional high-capacity sectors, such as steel and cement, as well as in its more advanced manufacturing output, such as industrial machinery and consumer electronics. We're also talking about major investments in areas like power, transportation and telecommunications, and we’ve already seen projects proposed in more than 60 countries.

China is now building for other countries the roads, railways and communication lines it has already built for itself. —Ehiwario Efeyini, senior market strategy analyst, Bank of America Global Wealth and Investment Management

In what ways does BRI represent a shift in Chinese priorities?

Efeyini: Back before the crisis when China’s economy was expanding at 10%-plus, growth was driven mainly by heavy industry – construction, real estate, infrastructure, and basic manufacturing for export to Western countries. But China is now a middle-income country, and as it becomes more developed and doesn't need to build as much domestically, its internal growth is shifting to services like healthcare and retail, as well as advanced manufacturing in areas such as electric vehicles and semiconductors. Over the past few years, the service sector’s contribution to the Chinese gross domestic product has actually surpassed that of the industrial sector. BRI is a way for China to export some of that excess industrial capacity to other countries that need it. So China is now building for other countries the roads, railways and communication lines it has already built for itself.

Is there a timetable for BRI projects? Will this initiative continue indefinitely?

Efeyini: We expect it to be an ongoing process and there is no fixed schedule or timetable. But these are big infrastructure projects, so they're going to take many years and even decades to develop, plan and build. It’s not something that is likely to be finished in the next five to 10 years.

What should U.S. investors be looking at in terms of BRI?

Efeyini: One area of opportunity is in the Chinese engineering and construction firms that produce the machinery and equipment and develop these projects. Whether it's rail links in Africa and across Europe, or roads and bridges in Bangladesh, most of the companies involved will be Chinese industrials, especially where the projects are China-funded. And China’s advanced manufacturing output should also benefit from an expanded external market, so this means areas in the technology sector like telecommunications equipment and consumer electronics.

To find out more about how the BRI initiative could affect your investment strategy, consider reaching out to your financial advisor. She or he can help you understand your investing options and work with you to help you pursue your financial goals.

 

For more on China’s Belt & Road Initiative and what it could mean for investors, read “China’s Big Global Infrastructure Bet: Will It Work?

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