The Real Return from Belt and Road

China’s Belt and Road, a trillion dollar trade initiative, was this week solidified into the country’s constitution. But some analysts say the move comes with some big risks.

Morgan Stanley reports that the project aims to invest up to $1.2 trillion in roads, railways, power grids and ports along the centuries-old Silk Road in the next decade. But 62% of the countries along the road have sovereign debt rated as below investment grade or not rated at all. It also passes through several conflict zones and countries recognized as among the most corrupt in the world.

But the project may have some non-monetary benefits.

Michael Every, head of financial markets research at Rabobank Group in Hong Kong, tells Bloomberg that it’s perhaps best to think of Belt and Road as a “vast geopolitical project aimed at cementing China’s political and trade role over that of the U.S., not an economic one in the sense that each project will generate a return.”

Data gathered by Bloomberg suggests China has so far committed more than $500 billion for the road. The money comes from multiple sources including institutions like the Silk Road Fund, which has invested $40 billion. In the first nine months of 2017, domestic companies have invested $9.6 billion in 57 countries along the route. The National Pension Fund will also deliver a chunk to this project.

But Michael Taylor, Moody’s chief credit officer for APAC tells Bloomberg this initiative could reap great returns if done right. “These countries have high growth and growth potential, and often what is holding them back from achieving that potential is a lack of infrastructure.” Cao Yuanzheng, chairman of BOCI Research Limited in Beijing adds, “Even in the poorest countries, projects like public water system, electricity grid and railway are all commercially viable as long as there is income generated from user fees.”