Illustration: Luo Xuan/GT

China's "One Belt, One Road" initiative - which envisages greater economic, trade and infrastructure connectivity between China and Asia, Africa, Europe and the Middle East - is likely to benefit firms in industries burdened with overcapacity, lead to greater diversification of international assets and encourage yuan internationalization. At the same time, the strategy will face various geopolitical, implementation and project financing risks, suggesting that it could take some years to gather traction.

The initiative - first raised by President Xi Jinping when he visited Central Asia and Southeast Asia in late 2013 - seeks to create a 21st century equivalent of the land and sea trade routes that in earlier centuries connected China to South and South East Asia, Central Asia, Europe and Africa. The measures proposed as part of "One Belt, One Road" aim to improve intra-regional commercial and financial links through substantial investments in infrastructure projects, including railway lines crossing the Eurasian landmass and enhanced port facilities around the Indian Ocean.

We expect that deeper regional integration will create long-term demand for Chinese capital and consumer goods, as well as services. Meanwhile, demand that materializes now will support Chinese export growth, at a time when traditional export markets - such as the euro area and the US - continue to exhibit historically low economic growth rates.

As such, the "One Belt, One Road" initiative is credit positive for large, financially strong Chinese corporates. Companies operating in industries such as steel, building materials, maritime transportation, power and construction will benefit most. The plan will also be credit positive for companies that use natural resources, such as oil and gas or agricultural players, as well as construction and railway companies.

China will gain from greater diversification in its energy imports, as supplies from Russia and Central Asia are developed as alternatives to traditional sources in the Middle East and North Africa.

We also expect Chinese financial institutions with regional presences or experience in intra-regional financing to benefit from the initiative, as they will gain wider market access and experience an increased demand for loans, albeit at the expense of taking on higher risk.

The provision of intra-regional investment and lending will encourage greater international use of the yuan, which is one of the government's stated economic reform objectives en route to capital account liberalization. Nonetheless, the "One Belt, One Road" plan will not directly lead to a greater opening up of China's capital account, because official statements have not made a direct link between the two policies.

The plan also provides impetus for provincial rebalancing through the channelling of investment into China's inland and western provinces, which are comparatively less developed than provinces on the eastern seaboard, on the back of transnational networks and interconnectivity with Europe and the Middle East.

Finally, China's international assets are heavily skewed toward liquid, low credit risk but also low-yielding reserve assets like US Treasuries. There is ample scope for China's international investments portfolio to assume greater risk in line with its peers, and the funding for the "One Belt, One Road" initiative will provide a vehicle for China to switch some of its international assets into higher yielding infrastructure investments.

Nonetheless, one consequence is that the Chinese government will also increase its exposure to many countries with weak credit profiles - for example, in either unrated or sub-investment-grade emerging markets.

We believe that such risks will be manageable within the context of the overall size of China's international asset portfolio.

Despite these benefits the intra-regional plan also faces a number of major challenges. It is unlikely to provide an ultimate solution to major oversupply in industrial sectors in China such as steel, cement and mining and may only serve to defer the necessary restructuring of these industries where capacity substantially exceeds realistic estimates of likely demand.

There is also a risk that some regional and local governments may use the initiative as motivation to continue their ambitious infrastructure investment programs, notwithstanding the central government's policy goals of stabilizing regional government finances.

Beyond these issues, we see two broader challenges to the implementation of the "One Belt, One Road" initiative: namely, geopolitical factors and project financing risks.

Geopolitical risk factors may make it difficult for China to realize its ambitions for an integrated intra-regional transport network. Existing regional and territorial disputes, such as prevailing tensions in the South China Sea, could dissuade several countries, particularly those not in need of major financing, from participating in "One Belt, One Road" projects. Political risk factors exist even for countries with traditionally close ties to China, because a change in administration may result in China-financed projects being revisited or renegotiated.

Second, committed capital to "One Belt, One Road" related infrastructure stands at $140 billion, mainly in the form of the Silk Road Fund and Asian Infrastructure Investment Bank.

However, although representing an important new source of funding, the new institutions will be able to make only a modest contribution to filling Asia's multi-trillion-dollar infrastructure gap over the coming decade. As such, further funding from China's banks and corporates will be required to realize the ambitious aims of the intra-regional strategy.

The authors are Michael Taylor, a managing director for Moody's Investors Service and the company's chief credit officer for Asia Pacific, and Rahul Ghosh, a Moody's vice president and senior research analyst. bizopinion@globaltimes.com.cn