How to Invest in China’s New Silk Road Fund

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A few weeks ago, China announced that they had earmarked $40 billion USD towards a new Silk Road Fund aimed at infrastructure projects connecting Asia to Europe. The original Silk Road was a trade route featuring silk that flowed from China to Europe and began over 2000 years ago. However, with Xi Jinping, China’s president, solidifying China’s presence on the global stage, what’s old is new again and money is set to pour into strengthening ties between Europe, Central Asia, and Asia Pacific.

Even before this announcement, China had raised large amounts of capital by backing both the Asian Infrastructure Investment Bank (AIIB – with 21 countries in Asia) and the New Development Bank (NDB – with fellow BRICS countries). You can find more details in this article here, but suffice to say China has been active in increasing soft power in the region.

The Silk Road Economic Belt

Talks regarding a Silk Road economic zone began over a year ago when Xi Jinping visited four Central Asian countries: Kazakhstan, Kyrgyzstan, Turkmenistan, and Uzbekistan. Central Asia would be a main hub in a broader Silk Road economic belt stretching across Eurasia. Xinhua, China’s news source, has a website dedicated to this initiative here. This is the map of the two main trade routes: a Silk Road Land Route and a Silk Road Maritime Route (click to enlarge)

ChinaNewSilkRoadMapUnfortunately it is only in Chinese but we’ve listed the main points on it below. In the modern day Silk Road, all roads lead to Venice:

Silk Road Land Route ????????:

Xi’an, China -> Lanzhou, China -> Urumqi, China -> Khorgas, China -> Almaty, Kazakhstan -> Bishkek, Kyrgyzstan -> Samarkand, Uzbekistan -> Dushanbe, Tajikistan -> Tehran, Iran -> Istanbul, Turkey -> Moscow, Russia -> Duisburg, Germany -> Rotterdam, Netherlands -> Venice, Italy

Silk Road Maritime Route ????????:

Fuzhou, China -> Quanzhou, China -> Guangzhou, China -> Zhenjiang, China -> Haikou, China -> Beihai, China -> Hanoi, Vietnam -> Kuala Lumpur, Malaysia -> Jakarta, Indonesia -> Colombo, Sri Lanka -> Kolkata, India -> Nairobi, Kenya -> Athens, Greece -> Venice, Italy

Which Countries Will Benefit from the New Silk Road?

While 18 countries are listed as major points on the two Silk Road routes, according to reports over 60 countries should benefit with transportation links traveling through them.

For frontier market investors, the main focus will be on Central Asia, the historical and current center of the Silk Road. With apologies to Turkmenistan, which will benefit but was not directly listed, Kazakhstan, Kyrgyzstan, Uzbekistan, and Tajikistan will be of particular interest due to their importance to the Silk Road Land Route. We do not have investment guides for these four countries yet, but have put them higher up on our to-do list given the recent developments with this Silk Road Fund.

Kazakhstan (Investment Safety Ranking of 92/192)

Kazakhstan is the most developed of the four, and home to the Kazakhstan Stock Exchange (KASE). The KASE Index is up over 10% this year in local currency terms, has a market cap of just under $25 billion USD, down from just under $30 billion USD in September.

The 2003 Law on Investments in Kazakhstan provides for “national treatment and non-discrimination for foreign investors”. There are restrictions on foreign majority ownerships for certain industries, and reports of uneven judicial rulings, but you can find a lot of information in this State Department report here.

The main KASE Index consists of 8 companies: 3 banks, 2 telecom companies, 2 oil & gas companies, and 1 mining company. The full list with charts can be found at the KASE website here. In total there are over 100 companies listed on this exchange.

Kyrgyzstan (Investment Safety Ranking of 124/192)

Also known as the Kyrgyz Republic, Kyrgyzstan suffers from corruption and less transparency when compared to Kazakhstan. The Kyrgyz Stock Exchange (KSE) currently has a market cap of just under $160 million USD so as expected, the market is very illiquid – the main Index has not moved in the past month but has almost doubled since the beginning of the year.

Foreign direct investment into Kyrgyzstan has increased of late, but there are still many concerns with investing here. The State Department Investment Climate report is an invaluable resource here.

A full list of investments listed on the KSE can be found here. By our count there are 15 stocks and 5 corporate bonds listed.

Tajikistan (Investment Safety Ranking of 156/192)

With a GDP per capita of under $2500 USD, Tajikistan is the poorest of the four countries. While Article 4 of Tajikistan’s Investment Law “guarantees the equality of foreign and local investors”, in practice rule of law is lax and corruption is rampant. The full State Department report is here.

Despite all this, Tajikistan registered a stock exchange in July 2013, although few concrete details have been released yet. Opportunities for investment seem limited for now.

Uzbekistan (Investment Safety Ranking of 167/192)

With a population of over 30 million, Uzbekistan is the largest of the countries in Central Asia. Unfortunately, corruption and bureaucracy has resulted in the lowest Investment Safety Ranking of the four countries we are looking at, and steadily decreasing amounts of FDI. The State Department can be found here.

The Tashkent Stock Exchange (UZSE) has been in operation for two decades, and currently has 135 companies listed on its exchange. Unfortunately, their website is entirely in Russian and so information is hard to come by.

Conclusion

We have touched on the importance of Chinese capital flooding impoverished markets before, in a post on how China favoured countries that did not recognize Taiwan, found here. We believe that the amounts of money announced this year that are set to flood Central Asia and countries along the Silk Road routes to be game changing. Not only will infrastructure projects set the foundation for growth in the future, trade flows should also increase between the developed and frontier countries in the region. The redevelopment of the Silk Road looks to be a core plank of Xi Jinping’s foreign policy, and we will continue to closely monitor their plans as more news is released.

 
photo credit: D-Stanley via photopin cc

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