Almost five years since Chinese President Xi Jinping outlined his vision for a massive infrastructure programme to strengthen China’s trading connections, the Belt and Road initiative is beginning to make its presence felt in Asia’s financing markets.
So far, BRI investments have been policy-led, mostly negotiated between governments, and the financing reflects that. The vast majority has come from China’s policy banks and state-run commercial lenders: China Development Bank has been the single biggest source of BRI financing, with US$110bn of outstanding loans in BRI countries as of 2016.
But what of the future? If the initiative is to live up to expectations, with forecasts of around US$1.5trn of BRI-related investment over the next 10 years, additional sources of funds will be critical.
In short, investors need to be convinced that BRI projects can be commercially viable.
There are signs to suggest that they could be. For one, global banks are firmly on board: Citigroup, HSBC and Standard Chartered have now all appointed specialist BRI coverage and origination teams. Fund managers, such as Invesco, have launched strategies targeting securities that may benefit from the initiative.
On the project side, private-sector sponsors and contractors are already involved – especially in energy projects – and the list of ancillary developments is growing every month.
The BRI is not just about infrastructure. Bankers are excited about the next wave of developments, from hotel projects to e-commerce, which come with more obvious cashflows and more familiar risk profiles.
IFR gathered a panel of market participants in Hong Kong in September to debate the outlook for BRI financing, particularly around the potential for the involvement of international commercial lenders or institutional investors.
The audience heard a range of perspectives, covering sellside banks, buyside funds and legal viewpoints. Notably, Pakistan’s Hong Kong consul general presented a first-hand account from a recipient country that has been the biggest beneficiary of Chinese-led BRI financing so far.
Many questions remain unanswered, especially around the fate of investments that run into financial difficulty or fall out of favour. Having already sent billions of ringgit to the main Chinese contractor, how Malaysia’s new government resolves the suspension of the US$14bn East Coast Rail Link, for instance, will be closely watched.
Global politics pose further risks, as tensions between the US and China continue to escalate. The US, however, has dropped some of its posturing regarding Pakistan, having threatened to veto IMF support if the country continues servicing Chinese debts over other liabilities.
The first five years of the BRI may not have set pulses racing among global financiers, but the next stage has the potential to be far more relevant. With policy-driven investments well underway, the focus is shifting to designing bankable projects that can attract private-sector investors willing to share some of the risk.
Reaching that standard will be a rollercoaster ride in many of the low-rated countries along the Belt and Road routes, but the direction of travel is clear. Market participants should be ready to buckle up.
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