Yesterday I mentioned China’s multi-billion dollar investment in countries like Brazil and Pakistan. These investments are not just opportunistic and ad-hoc. They are part of a much broader strategy. And there’s a way you can profit from them too.
But it won’t be in the way you’re probably thinking. That is, via the commodities sector. While there is some good value emerging in certain areas of the commodities space, I’m talking about latching onto an emerging trend that very few investors are even considering right now.
First, let’s go back to China’s strategy and what it means….
It had its genesis in a September 2013 speech by President Xi Jinping. The speech evoked memories of the old Silk Road trading routes…and the importance to China of Central Asia, the Middle East, and Europe in terms of trade.
In the following months, Xi and other officials made more announcements about their plans for the ‘new’ Silk Road. Xi referred to the strategy as ‘one road, one belt’.
In short, the strategy involves ‘rebuilding’ ancient trade routes to facilitate modern trade. Land and sea routes are part of this massive plan. Over the next decade or so, China will spend hundreds of billions of dollars building the necessary infrastructure to improve trade links with its western neighbours.
That means roads, rail, water ports, electricity systems, pipelines etc…from western China all the way through to the edge of Europe.
That’s what the US$46 billion investment in Pakistan I mentioned yesterday is all about. Pakistan is an important part of the Silk Road strategy as it will be a conduit for Middle Eastern oil, via the Pakistani Port of Gwadar.
Pakistan is not the most stable country though, so massive investment in basic infrastructure like electricity generation is required as a first step to reduce risk. Increased trade and investment will create jobs, which is a crucial aspect of creating a more stable society.
But Pakistan is just the start. You can expect to see much more of these types of projects in the years to come. The main vehicle for financing this investment is the Asian Infrastructure Investment Bank (AIIB).
This is a multilateral bank set up by China. So far, there are about 60 member countries, including Australia, who joined the bank in March this year.
You may remember the furore it caused. The US didn’t want its allies, including Australia, to join. That’s because the AIIB threatens to undermine the influence of both the International Monetary Fund and the Asian Development Bank, institutions predominantly run and controlled by Washington.
But Australia, the UK and most of Europe didn’t listen. They all signed up to the AIIB, which is expected to launch officially by the end of this year. Only the US, Japan and Canada remain opposed to joining.
The member countries will contribute a total of US$100 billion to the bank, to be used as seed capital to finance infrastructure projects.
But that’s not all. In November 2014 China announced the establishment of a US$40 billion Silk Road Infrastructure Fund. It made its first investment in April this year, a US$1.65 billion hydropower project in Pakistan, part of the broader investment in Pakistan mentioned above.
The aim of the Silk Road Infrastructure Fund is to increase capacity and boost connectivity across the Eurasian and Australasian regions, via land and sea.
You’re probably starting to see now that the scope of this project is massive. This is going to reshape the global economy in the decades ahead, and shift the balance of power away from the US and towards China.
I go into more detail on this shifting dynamic in my special report on the topic, which you’ll get in your inbox tomorrow. Suffice to say, China is taking a very different approach to the US in its rise to global economic dominance.
China doesn’t want the same role as the US currently has. It doesn’t want to police the world and it doesn’t want the yuan to be the world’s reserve currency. It knows that by the US dollar fulfilling this role for decades, it has created huge distortions and imbalances in the global economy…and speculative and fragile financial markets.
I’ll expand on all this tomorrow. For now, understand that trade based infrastructure is the big emerging trend in the global economy right now.
I’ll be honest. I’m pretty bearish on a lot of things; central banks have turned stock markets into casinos, politicians around the world are myopic fools, savers are sacrificed to help the debtors…I could go on and on.
But I am bullish about China’s attempts to redraw the global economic map. Trade-based infrastructure investment is productive investment. Productivity is the driving force behind economic growth, jobs, and wealth creation.
This is not going to happen overnight. But if the investment dollars flow, and continue to flow, without too much government interference, then we might climb out of the global debt hole we’re in a little faster than I currently expect.
And the money does look like it will continue to flow. As well as China’s long-term efforts, there are other things going on.
In the recent budget, the Australia’s Federal Government announced a $5 billion infrastructure fund for Northern Australia. This is basically a low interest loan designed to supplement private investment. So potentially, the infrastructure investments in the years to come could be multiples of this amount.
The Northern Australia development fund ties in nicely with China’s Silk Road Fund. All this investment is about building the infrastructure to get goods to markets faster…it’s about efficient trade distribution routes, whether by road, rail, or sea.
And now Japan is joining the new infrastructure age, too. From today’s Wall Street Journal:
‘TOKYO—Prime Minister Shinzo Abe on Thursday unveiled a plan to expand Japan’s financing for infrastructure projects in Asia by 30%, suggesting Tokyo’s intent to counter China’s push to spearhead a new regional investment bank.
‘Mr. Abe pledged to offer roughly $110 billion in the next five years to fund “high-quality infrastructure investments” in Asia through various channels, including expanding the Asian Development Bank’s lending capacity and yen loans from the Japanese government.’
Yes folks, we’re heading into a ‘Golden Age of Infrastructure’. The Asian region will see hundreds of billions of dollars in infrastructure investment in the years to come.
Yes, this is a positive for commodities. But resources aren’t the main game this time. There’s another sector set to dominate. The competition for work will be fierce, but there are a few Aussie companies ideally placed to benefit from this emerging new trend.
To find out more about how to play this trend, keep an eye out for my special report tomorrow.
For Markets and Money