HSBC’s take on the Belt and Road Initiative
View(s):Back in 2014, when HSBC first started writing about China’s plan to build a New Silk Road along the centuries-old trading routes, it was little more than a bold idea. Three years on, what has generally come to be known as the Belt and Road Initiative (BRI), is being billed by President Xi Jinping as “the project of the century”, encompassing about 63 per cent of the world’s population and 29 per cent of global GDP, according to an HSBC research report.
It said last month, China announced an additional US$136 billion of funding support for BRI related infrastructure projects. Aside from signalling Beijing’s commitment to the BRI, it also reflects a growing need. The Asia Development Bank (ADB) estimates that emerging Asia will require about $22.6 trillion of infrastructure investment between 2016 and 2030, or $1.5 trillion a year. No single source of funding can meet the large demand.
The report on the “silk road fund” says that given the vast and growing pool of long-term savings in Asia, money should not be an issue. The problem is matching these funding resources with investable projects.
Public and development finance:
The New Silk Road Fund, the China Development Bank, the Export and Import Bank of China, the Asia Infrastructure Investment Bank, the New Development Bank, and the ADB all focus on providing financing for investable projects with spin-off effects for economic and social development.
Commercial banks:
Through products and services, such as project financing and transactional banking, banks can help boost investment and trade flows along the Belt and Road economic corridors, the report said.
Capital markets:
The challenge is to develop an efficient structure to match projects with investors who have different requirements in terms of risk appetite and returns. Whether through debt or equity financing, it’s crucial to make infrastructure-related financial instruments part of mainstream asset allocation. This would attract a broader range of private investors, including pension and insurance fund managers.
The report said that greater involvement by the private sector should also help improve the efficiency of infrastructure investment. As such, better policy coordination among the governments to provide a transparent regulatory framework for private investment would represent a crucial step towards reaping the benefits of the BRI.
More BRI-related action plans
China’s government held its inaugural Belt and Road Forum (BRF) on 14-15 May 2017. More than 1,000 delegates from over 30 countries and international organisations attended. President Xi delivered a keynote speech that outlined action plans to stimulate investment and trade along the BRI economic corridors. After the meeting, China’s official media outlet (Xinhua) published a list of 270 initiatives, covering policy coordination, transport connectivity, trade and financial integration, and cultural exchanges.
More financial support from Beijing
As part of its renewed support for the BRI, China’s government plans to scale up funding by contributing an additional RMB 100 billion to the state-owned Silk Road Fund, encouraging overseas RMB fund business, and setting aside a total of RMB 380 billion for a special lending scheme for two key development financial institutions: the China Development Bank (CDB) and the Export and Import Bank of China (EXIM).
In addition, China has called for better financial integration and enhanced policy cooperation to offer long-term, sustainable financial support to facilitate BRI projects. The RMB’s internationalisation is expected to benefit from the rising tide of BRI-related trade and investment flows.
Enhanced policy coordination
“By linking countries and regions that account for about 63 per cent of the world’s population and 29 per cent of global GDP, the BRI can provide stronger links with Asia, Europe, and Africa. Unleashing the growth potential of BRI countries and achieving economic integration and inter-connected development holds the key to success. So, aside from a series of infrastructure projects, policy coordination is becoming increasingly important. China signed business and trade cooperation agreements with over 30 countries during the recent forum. It also signed memoranda of understanding with 14 international organisations, including the ADB, the AIIB, the NDB and the World Bank, aiming to better leverage the strength of these multilateral institutions. These efforts are building blocks that will help create a China-led global development framework, HSBC said.
Infrastructure connectivity the key
Infrastructure connectivity remains the focal point of the BRI. President Xi stressed the promotion of investment in key passageways, cities and projects, and networks of highways, railways and sea ports. This will lead to strong demand for cross-border financing services, with financial integration one of the key components aiding the network. President Xi called for the creation of new models of investment and financing, encouraging greater cooperation between governments and private capital in building a diversified financing system and a multi-tiered capital market.
Infrastructure demand vs funding gap
According to the ADB, Asia Pacific needs up to $1.5 trillion in infrastructure investment per year through 2030 to sustain its growth trajectory. Total infrastructure investment demand will amount to $ 22.6 trillion during 2016-30. This estimate covers all 45 ADB member countries in developing Asia, focusing on the region’s power, transport, telecommunications, water and sanitation infrastructure. Currently, Asian countries invest $881 billion annually in infrastructure, so the estimated funding gap is equal to 2.4 per cent of projected GDP for 2016-20.
The report said that China, India and Indonesia need the most infrastructure investment accounting for more than half (58.2 per cent). Other BRI countries also need to bridge the infrastructure investment gap. Similar to China, many BRI countries are on the urbanisation ‘fast track’ (60 per cent of BRI countries’ urbanisation ratios are 30-70 per cent). Simply put, cities generate significant demand for infrastructure.
Action on infrastructure
It is well known that infrastructure is the key physical component of the Belt and Road Initiative, in addition to trade, investment connections. Financial integration with better policy coordination within BRI countries is needed to bridge the investment gap. While China has invested heavily in infrastructure in the past few years, with support from major development financial institutions, the commercial banks need to grab a larger slice of the action as Chinese enterprises expand overseas. “We believe that better policy coordination between BRI countries and financial innovation can help them achieve that goal,” the research report said.
In addition to infrastructure investment, China’s rising overseas investment in manufacturing, especially equipment manufacturing, is another area to watch. This reflects Beijing’s efforts to promote international cooperation with regards to industrial production and equipment manufacturing. The idea is to upgrade the domestic manufacturing industry by internationalising it. “We see many positive developments supporting future ODI flows in the BRI region. There are a substantial number of new projects being negotiated or about to be announced, which will translate into a stable flow of future outward investment,” HSBC noted.
It said that with the global economy showing signs of recovery, more projects are reaching the implementation stage, cross-border trade connections are becoming more sophisticated, and financing support is gradually strengthening. “We expect RMB trade settlement and investment to continue to strengthen in parallel with the expansion in China’s trade and investment in the BRI region in the next couple of years,” the report added.