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China's Belt and Road Initiative: Is this the World's Largest Venture Capital Project?

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China's Belt and Road Initiative: Is this the World's Largest Venture Capital Project?

China's Belt and Road Initiative (BRI) surely qualifies as the most ambitious geopolitical plan of the 21st century. Conceived in 2013, it aims at nothing less than connecting--or under some interpretations, reconnecting--the Eurasian supercontinent. This is to be done by land and by sea "Silk Roads," using infrastructure and industry and led, at least initially, by Chinese official financing. Many of the specifics of the BRI remain fluid, but it appears to be a decades-long effort involving dozens of countries and with a cost in the trillions of U.S. dollars.

An undertaking of this magnitude has potentially large payoffs as well as large risks. In this report, S&P Global's China Senior Analyst Group looks at the BRI through the lenses of economic geography, energy security, and project and credit risk. Success will ultimately rest on whether Belt and Road projects can win local hearts and minds in the recipient countries, and whether China's initial "seed money" in the initiative will create creditworthy projects that attract true private sector outside money. Seen in this way, the BRI is arguably the world's largest attempted venture capital project.

Key Takeaways

  • China's Belt and Road Initiative is an ambitious plan aimed at connecting the Eurasian supercontinent through land and sea "Silk Roads" using infrastructure and industry projects.
  • The drivers of the BRI are China's geopolitical realities (creating a buffer zone/sphere of influence) and security issues (including energy supply).
  • S&P Global views the BRI as akin to a venture capital project of the Chinese government, whose broad objectives generate a more favorable risk-return trade-off than other public and private investors.
  • Success will depend on whether: (1) recipient countries buy in (BRI wins local hearts and minds), and (2) private sector money eventually comes in (BRI creates credit worth projects).

Introduction to Belt and Road: Not Quite the Marshall Plan

Chinese President Xi Jinping first introduced the Silk Road Economic Belt concept in a speech in Kazakhstan in September 2013. This is considered to have been the birthdate of the BRI (as it was later to become known). This initial strategic vision was developed further in the ensuing years, converging around regional connectivity and economic integration through the movement of goods, services and information. This culminated with a report by China's National Development and Reform Commission entitled "Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road." Given its somewhat fluid definition, there is some debate as to whether the BRI is a new initiative versus a platform on which to group a collection of existing initiatives. Whatever the correct interpretation, the amibition and scale are massive.

Not surprisingly, comparisons with other ambitious geopolitical projects abound, in particular the Marshall Plan, launched by the United States to rebuild Western Europe after the Second World War. The Marshall Plan was funded by one country at least initially, and was expected to lead to self-sustaining forces of economic development. In this sense, the Marshall Plan can be seen as a success. But one key difference is that the Marshall Plan was designed to rebuild a previously developed and relatively homogeneous region that was devastated by war and which had lost considerable wealth. It was also meant to establish a bulwark against westward encroachment by the Soviet Union. The BRI aims at connecting an even larger land mass, with the added challenges of building, rather than rebuilding, the foundations of a modern economy across a collection of countries that have little history of working together, few commonalities in culture, and differing geopolitical aspirations and competing spheres of influence (Russia, India, Iran, Turkey).

A final introductory issue is the "why" question. Why is China undertaking this massive and arguably expensive and risky project when Japan, the Asia power China has supplanted, did not? The answer is that China has decided it wants to have a greater control than Japan in shaping both its economic and security environment. We see this objective as a main driver of the BRI and a key differentiator from the Marshall Plan.



Considering the Risk from Future Carbon Prices

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change. Carbon prices are already implemented in 40 countries and 20 cities and regions. Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

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Watch: Empowering Public Private Collaboration in Infrastructure

S&P Global CEO Doug Peterson speaks with Maha Eltobgy from the World Economic Forum, on their joint study that looks at how greater collaboration between the public and private sector can accelerate national infrastructure programmes.



How Can Banks Apply a Quantitative Lens on Climate Risk Exposure

Aligning with the Recommendations of the Taskforce on Climate Related Financial Disclosures (TCFD)

Dec. 03 2018 — The signals are clear: central banks and regulators are stepping up action to address the potential systemic risks to financial markets that climate change poses.

This means it will become increasingly necessary for banks to develop a deeper understanding of how climate issues could affect their businesses and those they finance. By effectively managing and responding to these issues, banks can not only help mitigate the risks, but also seize the opportunities presented from the transition to a lower-carbon economy. Trucost has worked with banks for more than a decade to support their climate-related analysis. This paper provides practical guidance to help banks manage and report key climate-related metrics, no matter what level of ambition they may have.

This paper is organized into five sections:

I. What is the TCFD Framework?

II. Measuring the Carbon Footprint of a Bank

III. Translating Climate Exposure into Financial Risk

IV. Incorporating Scenario Analysis

V. Creating Opportunities

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