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Disclosures & Disclaimer
This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
View HSBC Global Research at:
https://www.research.hsbc.com
Beijing has committed USD136bn in additional funding to
support the Belt and Road Initiative (BRI)
But mobilising more private capital is the key to bridging the
funding gap
Policy coordination and legal transparency are essential for
attracting private investment
Back in 2014, when we 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% of the world’s population and 29% of global GDP.
Just last month, China announced an additional USD136bn 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 USD22.6trn of infrastructure investment between
2016 and 2030, or USD1.5trn a year. No single source of funding can meet the large
demand. 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. In this sixth edition of On the New Silk Road, we look at the options available:
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.
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.
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.
31 May 2017
Qu Hongbin Co-Head of Asian Economics Research, Chief China Economist
The Hongkong and Shanghai Banking Corporation Limited
+852 2822 2025
Ma Xiaoping China Economist
The Hongkong and Shanghai Banking Corporation Limited
+86 10 5999 8232
On the New Silk Road VI ECONOMICS ASIA/CHINA
Financing the BRI – where the money is coming from
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ECONOMICS ● ASIA/CHINA
31 May 2017
2
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 RMB100bn to the state-owned Silk Road Fund, encouraging overseas
RMB fund business, and setting aside a total of RMB380bn 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) (Table 1). 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 (see Rise of the Redback VI, April 2017).
Table 1: Beijing’s increased financial support to the BRI announced during the BRF
Action RMBbn USDbn equivalent Timeframe
Silk Road Fund capital 100 14.5 NA Encouraging financial institutions’ overseas fund business in RMB to provide support for the BRI
300 43.5 NA
China-Russia Regional Cooperation Development Investment Fund* 100 14.5 NA China Development Bank (CDB) will set up the B&R Multi-currency Special Lending Scheme for Infrastructure Development
100 14.5 NA
CDB will set up the B&R Multi-currency Special Lending Scheme for Industrial Cooperation
100 14.5 NA
CDB will set up the B&R Multi-currency Special Credit Lines for Overseas Financial Institutions
50 7.3 NA
EXIM will set up the B&R Multi-currency Special Lending Scheme 100 14.5 NA EXIM will set up the B&R Multi-currency Special Lending Scheme for Infrastructure Development
30 4.4 NA
Assistance to developing countries 60 8.7 2017-20 RMB940bn USD136.5bn
*Note: Initial RMB10bn to promote cooperation between China’s Northeast and Russia’s Far East. NA – Not applicable. Source: Belt and Road Portal
Enhanced policy coordination
By linking countries and regions that account for about 63% of the world’s population and 29%
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.
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.
China’s government plans to
scale up funding for the BRI
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Infrastructure demand vs funding gap
According to the ADB, Asia Pacific needs up to USD1.5trn in infrastructure investment per year
through 2030 to sustain its growth trajectory. Total infrastructure investment demand will
amount to USD22.6trn during 2016-30 (Meeting Asia’s infrastructure needs, ADB, 2017). This
estimate covers all 45 ADB member countries in developing Asia, focusing on the region’s
power, transport, telecommunications, water and sanitation infrastructure (Chart 1). Currently,
Asian countries invest USD881bn annually in infrastructure, so the estimated funding gap is
equal to 2.4% of projected GDP for 2016-20.
China, India and Indonesia need the most infrastructure investment (Chart 2), with China
accounting for more than half (58.2%). Other BRI countries also need to bridge the infrastructure
investment gap (Table 2). Similar to China, many BRI countries are on the urbanisation ‘fast track’
(60% of BRI countries’ urbanisation ratios are 30-70%). The average urbanisation ratio of BRI
countries increased by 0.61ppt, higher than the world average of 0.15ppt, in 2015, according to
the World Bank. Simply put, cities generate significant demand for infrastructure.
Chart 1: Asian infrastructure demand by sector
Chart 2: Asian infrastructure demand by country
Source: ADB, HSBC Source: ADB, HSBC
Table 2: Many BRI countries are urbanising rapidly, generating substantial demand for infrastructure
Country GDP per capita (USD) Urbanisation ratio Electricity consumption, 000
kWh/person
Railway density, km/million population
China 8,016 56.1 4.1 88 India 1,688 32.0 0.7 52 Pakistan 1,427 37.9 0.4 63 Bangladesh 1,265 32.8 0.3 15 Indonesia 3,415 53.3 0.7 32 Thailand 5,426 47.9 2.3 60 Vietnam 2,170 32.3 1.2 28 Kazakhstan 11,028 53.0 4.6 810 Uzbekistan 2,129 36.2 1.4 117 Tajikistan 949 35 1.7 80 65 BRI countries (avg) 3,795 47.5 1.5 112
Source: World Bank, CEIC, HSBC
52%
35%
10%3%
Power
Transport
Telecom
Water andSanitation
58%20%
5%2%0%
15%
China
India
Indonesia
Central Asia
The Pacific
Other
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ECONOMICS ● ASIA/CHINA
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Limited room for scaling up public financing
So far, the public sector has provided the majority of infrastructure investment, particularly in
Asia, where the government contribution is over 90% (Chart 3). This implies that there is limited
room for further scaling up of public investment, so new channels are needed. However,
motivating the private sector to finance infrastructure projects is easier said than done. Yet, the
experience of some developed countries offers some encouragement. For instance, the
Government of the UK has long believed that infrastructure has a critical role to play in
economic development. The UK accounted for 22% of total European infrastructure investment
in 2014 and this is expected to increase in the coming years. The private sector contributed to
more than 60% of the country’s total infrastructure investment before the Global Financial Crisis
(GFC), and still accounts for more than 50%.
Chart 3: Public sector dominates infrastructure investment in Asia
Chart 4: China – rapid infrastructure ODI expansion in the past few years
Source: ADB, HSBC. Note: UK for 2014, other countries for 2011-14 avg. Source: CEIC, HSBC
…while trillions of dollars are seeking investable projects
The main obstacle to developing infrastructure is not a lack of available financing. The problem
is that global pension funds, insurance companies and other long-term institutional investors,
which have a large pool of capital, have found it difficult to identify investable projects. Only a
very small share of global pension and insurance funds (10-15% in OECD countries) are
invested in infrastructure projects. Long term in nature and capital-intensive, a structured risk-
sharing arrangement is crucial for infrastructure projects to attract private investors.
A properly designed contract can help support efficient project implementation and increase the
security of private sector investments. It’s crucial that contracts are based on incentive-driven
risks and returns. A solid legal framework also helps mitigate political risks, one of the key risks
for infrastructure projects. Only if private investors can trust the legal and political procedures
will they commit large-scale, long-term financing.
A multi-tier system to provide sustainable funding support for the BRI
Given the sheer size of the infrastructure demand, we believe a market-oriented, multi-tier
system of financing is the only feasible way to provide sustainable funding for cross-border
infrastructure projects involved in the BRI. This was also the key message from People’s Bank
of China Governor, Zhou Xiaochuan, at the recent forum. This multi-tier system should include
public funding, development finance, and private financing through both domestic and
international financial markets.
0 2 4 6 8
25 ADB developingcountries
Indonesia
India
China
UK
As % of GDP
Public Private
-40
-20
0
20
40
60
80
100
0
5
10
15
20
25
2011 2012 2013 2014 2015 2016
%yr%
Infra as % of total (LHS) Infra ODI, %yr
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Silk Road Fund and public funding: to provide seed capital and attract private investment
The Silk Road Fund, which has a capital base of USD54.5bn, tends to use a combination of
equity (70%) and debt investments (30%) to provide support in four key areas: infrastructure,
energy, industrial, and financial cooperation. The Silk Road Fund has initiated 15 investment
projects totalling USD6bn as of May 2017. Leveraged total investment now tops USD80bn, Silk
Road Fund Chairwoman, Jin Qi, said in an interview (China Finance中国金融, May 2017). The
Silk Road Fund also set up a China-Kazakhstan Industrial Cooperation Fund of USD2bn in
December 2015 to support production capacity and investment between the two countries.
However, public funding in China could be restrained by mounting debt levels and increasing fiscal
deficits. Developing countries should consider increasing their infrastructure investment as public
funding, when used as seed money, can help reduce project risks and attract private investments.
Development finance: leveraging at a lower cost; “squeeze in” private investment
Development finance aims to meet funding demands that serve long-term strategic objectives.
Such lending, which is market-driven, independent and based on sound credit analysis, does
not rely on subsidies and focuses on long-term investment, capital preservation with a thin
profit, and a sustainable financial model. The CDB and the EXIM are the two key development
institutions in China. Internationally, if we include the newly established AIIB and the New
Development Bank for BRICS, multilateral development banks have provided USD30-50bn
annually in terms of credit support for infrastructure and other developments.
National development banks: China Development Bank, Export and Import Bank of China
Development financial institutions in China have provided crucial funding support for the “going
out” strategy of China’s state-owned enterprises (SOEs) in the past eight years. The launch of the
BRI in late 2013 saw a further strengthening of the investment arm of the China Development
Bank, and the Export and Import Bank of China, the two key institutions in development financing.
Equipped with an increased fund allocation from Beijing, the CDB and the EXIM are expected to
increase investment in BRI-related infrastructure projects. The CDB has a list of more than 500
pipeline projects for BRI countries, with planned investment totalling USD350bn. Outstanding
loans for the BRI totalled USD110bn at the end of 2016 (accumulative lending totalled
USD160bn). EXIM Bank of China’s outstanding loans for the BRI totalled RMB700bn
(USD90bn) at the end of 2016.
China’s national development banks are also setting up special investment funds with foreign
governments or sovereign funds to invest in strategic development projects. In 2015, EXIM Bank
of China and Buttonwood Investments, the State Administration of Foreign Exchange’s (SAFE)
investment affiliate, jointly set up the China-Africa Industrial Cooperation Fund with total capital of
USD10bn. The China-Africa Industrial Cooperation Fund has approved six projects totalling
USD542m of investment as of April 2017. For example, it invested (with Chinese company GCL-
Poly) in an oil and gas project in Ethiopia, which has become a high-profile BRI investment
project, involving a total investment of USD3.68bn.
In addition to the China-Africa Industrial Cooperation Fund, China has set up separate funds for
regional investment cooperation, with Eurasia (Central and Eastern European countries and
Asia), Latin American and the Caribbean (LAC), the Middle East, Brazil, Russia and Kazakhstan.
An investment fund with the EU is still under discussion. The total capital of all China-led
international investment funds probably exceeded USD70bn as of May 2017 (Table 3).
The Silk Road Fund has
initiated 15 investment
projects totalling USD6bn
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Table 3: China-led regional development investment funds
Fund name Time Key Chinese stakeholders Capital Investment
China-Eurasia Economic Cooperation Fund Sep-15 EXIM, BOC USD5bn Equity China-LatAm and Caribbean Industrial Cooperation Fund
Sep-15 PBoC, SAFE, CDB USD10bn Debt
China-Africa Industrial Cooperation Fund Dec-15 Buttonwood, EXIM USD10bn Equity & Debt China-Kazakhstan Industrial Capacity Cooperation Fund
Dec-15 Silk Road Fund USD2bn Equity & Debt
China-UAE Joint Investment Fund Dec-15 CBD USD10bn Equity China-ASEAN investment Cooperation Fund Nov-14 NA RMB3bn NA China-Africa Development Fund 2006 CBD USD10bn Equity Brazil-China Cooperation Fund Oct-16* USD 20bn (Brazil
USD15bn, China USD5bn)
Equity
China-Russia Regional Cooperation Development Investment Fund
May-17* RMB100bn Equity
China-EU Joint Investment Fund Ongoing NA
Source: Xinhua News, HSBC. *Signed agreement. NA – Not applicable.
AIIB, New Development Bank (NDB), and other multilateral development banks
In addition to the two newly-established multilateral development banks (MDBs) – the Asian
Infrastructure Investment Bank and the New Development Bank for BRICS – China is also
working with the European Bank for Reconstruction and Development (EBRD). During the BRI
Forum, China signed a series of MOUs with MDBs, which share the same goal of boosting
infrastructure development in emerging markets.
Global MDBs have contributed an average of USD30-50bn to infrastructure in developing
countries in the past decade. They are also trying to increase private sector investment by:
Working together with countries to design programmes and practical tools to help attract
private investors
Providing capital instruments and guarantee products to help crowd-in private finance
Participating in projects to give private finance more confidence in social and governance
issues
Providing financial and pricing commitments to reduce the risk to private investors
Their networks bring together global expertise about infrastructure policy and design, as well as
practitioners engaged in the business of structuring, financing and implementing projects, which
could help make projects more bankable.
Table 4: MDBs infrastructure investment plans
USDbn 2016e 2017e 2018e
African Development Bank* 7.3 9.5 6 Asian Development Bank 70 for 2016-20 Asian Infrastructure Investment Bank 1.2 (1.73 actual) 2.5 3.5 Development Bank of Latin America 4.8 5.0 5.1 European Bank for Reconstruction and Development
5.9 7.1 8.5
European Investment Bank 40-50 40-50 40-50 New Development Bank 15-16 15-16 15-16 World Bank 30-50% of total lending 30-50% of total lending 30-50% of total lending International Finance Corporation 5.8 6.1 6.4
Source: Report to G20 Deputy Finance Ministers and Deputy Central Bank Governors on MDB Internal Incentives for Crowding-in Private Investment in Infrastructure, Global Infrastructure Hub, 1 December 2016. *Note: Including public and private sector investments.
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Asian Infrastructure Investment Bank. The AIIB is now fully operational. In Table 5, we
summarise the projects that have benefited. So far, the AIIB has provided financing support to
nine infrastructure projects in Asia, with the total loan value reaching USD1,730m. In most cases,
the AIIB is working with other leading global financial agencies to make the loans available.
Table 5: Projects financed by the Silk Road Fund and the AIIB
Destination country
Project Investor Sector Investment details
Bangladesh Distribution system, upgrade and expansion
AIIB Power supply AIIB loans: USD165m
Pakistan National Motorway M4 (Shorkot-Khanewal section)
AIIB Transportation AIIB loans: USD100m, co-financed with the Asia Development Bank (ADB) and the UK’s Department for International Development.
Tajikistan Dushanbe-Uzbekistan border road improvement project
AIIB Transportation AIIB loans: USD27.5m, co-financed with the European Bank for Reconstruction and Development
Indonesia National slum upgrading project AIIB Social services, transportation and solid waste management
AIIB loans: USD216.5m, co-financed with the World Bank
Pakistan Tarbela 5 hydropower extension project
AIIB Hydropower, energy AIIB loans: USD300m, co-financed with the World Bank and the Government of Pakistan
Oman Railway system preparation project AIIB Transportation AIIB Loans: USD36m, Omen Global Logistics Group (OGLG) USD24m
Oman Duqm Port Commercial Terminal and Operational Zone Development Project
AIIB Transportation AIIB Loans: USD265m, Special Economic Zone Authority of Duqm (SEZAD) USD88.33m
Azerbaijan Trans-Anatolian Natural Gas Pipeline Project
AIIB Energy AIIB Loans: USD600m, World Bank USD800m, Other IFIs (EBRD and EIB) USD2,100m
Myanmar Myingyan 225MW combined cycle gas turbine power plant
AIIB Energy AIIB loans: USD20m, co-financed with the International Finance Corporation (IFC), the ADB and certain commercial lenders
Source: AIIB. Note: All approved and perspective projects information are available on AIIB’s website.
Commercial banks – loans and debt instrument for bankable infrastructure projects
Commercial banks are encouraged to get more involved amid rising trade and investment flows
along the BRI. A wide variety of banking products/services are needed, including
correspondence banking, syndicated financing, capital market financing, cash management and
cross-border settlement, project financing, account management and risk management.
Commercial banks to expand overseas service networks. Given most enterprises, central
SOEs and private companies alike are existing customers of domestic commercial banks,
facilitating their cross-border business is a natural extension of their existing business relationship.
The only constraint could be the banks’ limited international reach (Table 6). This is particularly
relevant in countries along the Belt and Road route. BRI countries tend to be less developed and
have low international credit ratings, suggesting higher risks. This explains why commercial banks
often find BRI projects financially unviable. Financial innovation is needed to deal with the mismatch
between the substantial investment demand and the lack of private investment/financing.
According to the State-owned Assets Supervision and Administration Commission (SASAC), 47
out of 102 central SOEs are engaged in more than 1,670 projects in BRI countries, mainly as
engineering contractors, equipment producers, and construction companies. Industrial and
Commercial Bank of China (ICBC) and Bank of China (BOC) are the leading state banks in BRI
expansion. ICBC’s BRI-related projects in the pipeline total USD337.2bn and it has accumulatively
provided USD67.4bn for 212 investment projects. BOC has so far provided credit lines of
USD68bn to 460 BRI projects.
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China Construction Bank (CCB) has provided financing to 46 BRI projects (total funding of
USD6bn). It also has a total of 268 infrastructure projects, such as power, construction, mining,
transport, oil & gas and telecom related to the BRI, located in 50 countries and involving
investment of USD466bn. CCB aims to expand its international business-related bank assets to
8-10% by 2020, still a relatively low level due to the bank’s traditional lack of overseas business
advantages (ICBC 8.8% and BOC 27%, both for 2016).
Table 6: State banks: increasing international exposure
______ Global _______ _________________________________ BRI _________________________________
Country
coverage Branches Country coverage Branches Projects/Financing Perspective projects
/investments
ICBC 42 412 18 127 212/USD67.4bn 412/USD337.2bn BOC 51 578 20 21 460/USD68bn 420/USD100bn of credit lines CCB 29 251 6 >10 46/USD6bn 268/USD466bn ABC* NA 13 NA NA NA NA BOCOM* 16 20 NA NA NA NA
Source: Hexun, Bank websites. Data as of end-2016. *ABC – Agricultural Bank of China, BOCOM – Bank of Communications. NA – Not applicable.
For the past three years, state-owned banks have focused on trade finance, cross-border M&A,
project finance, bond, syndicated loans and financial leasing. Bank syndicated loans for
infrastructure projects are usually secured by collateral, so have the lowest level of risk and can
be securitised and sold to institutional investors.
Beijing to work with regulators in BRI countries to reduce market access barriers and
promote an open and fair regulatory environment for financial institutions’ international
expansion. For example, the Silk Road International Bank, initiated by three Chinese companies
including Izptec, a big data company, and Djibouti’s Ministry of Finance, was set up in January
2017 to promote financial support for investment in Africa (China Daily, 19 January 2017). There
could be more new financial institutions as the BRI market opens further.
Capital market financing
From a project finance perspective, the structure of infrastructure financing depends on
mitigating risks related to projects and enhancing returns related to different financing
instruments and funding channels. The risks include political, regulatory, macroeconomic,
business operational, and technical issues.
The capital market can be an efficient way to develop risk-sharing structures. Whether through
debt or equity finance, it’s crucial to make infrastructure instruments part of mainstream asset
allocation for a broader spectrum of private investors, including pension funds, insurance funds
and asset managers all over the world.
Debt finance (excluding loans). Given the long-term, low return and capital-intensive nature of
infrastructure investment, debt financing products – i.e. government bonds, municipal revenue
bonds, corporate bonds and project bond issues – can finance infrastructure projects at a
relatively lower cost, compared with syndicated loans or project loans. All these bonds, from
private sector or public sector institutions, are market-based instruments to finance
infrastructure projects and are sold to fixed-income investors.
Government bonds and sub-sovereign bonds are key components of investment grade bond
portfolios for most institutional and retail investors. Long maturity and high credit ratings make
them core instruments for mutual funds and ETFs. They have long been a traditional source of
funding for infrastructure and will remain a key funding source. The performance of the bonds is
linked to the fiscal capacity of the government or sovereign institutions, rather than the
infrastructure asset. It’s worth noting that corporate bonds issued by a sub-sovereign entities
are also included in this category. In Europe, a large proportion (50% for Europe and 20% for
the UK) of infrastructure corporate bond issuance is through sub-sovereign entities, and the
bonds trade with yields close to the sovereign. However, for BRI emerging countries, which
have a relatively low credit ratings, this may not be a preferred funding channel.
The structure of
infrastructure financing
depends on mitigating risks
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Corporate bonds are standardised securities allowing infrastructure companies to lock in long-
term financing and tap the deep and liquid capital market. This is a relatively reliable source of
funding for those corporations that are able to access that market. Compared with project bonds,
corporate bonds bear the risk of the issuers’ asset portfolio, instead of the risk of an individual
project, so are less risky. Most large infrastructure projects are funded at least partly through the
corporate bond market. This requires an efficient corporate bond market, and, with better
financial integration, BRI countries could benefit from China’s large and increasingly open bond
market, which already accounts for 8.7% of the global bond market in terms of bonds
outstanding. For example, Panda bond issuance (RMB-denominated bonds from a non-Chinese
issuer) is expected to exceed USD50bn by 2020, up from RMB148bn, or USD22bn, as of end-
2016. In Asia, bond financing has outpaced syndicated loans in the past five years and provided
more support to infrastructure investment, with corporate bonds in China playing a leading role.
Project bonds are standardised securities issued by a project company special purpose vehicle
(SPV) financing a specific infrastructure project. This is a growing area of project finance and
provides a potential solution for financing brownfield infrastructure projects with long-term debt.
A large total, exceeding USD100m, and long duration (50 years or longer), could make a project
bond more viable. The bond’s creditworthiness depends on the cash flow performance of the
SPV, or by a credit-enhancement mechanism. Project bonds, like corporate bonds, have a
higher level of transparency, greater liquidity and pricing, compared with bank loans. A deep
and liquid capital market is a pre-condition. However, investors usually find it difficult to assess
the risk of a complex infrastructure project and rely on ratings issued by external rating agencies.
So ratings are a pre-requisite to reach a broader base of bond investors. And the rating has to
be investment grade or above so that more institutions can invest. For BRI projects, it is worth
keeping in mind that it’s possible to obtain a credit rating for a project higher than that assigned
to the country in which the project is located.
Green bonds are corporate bonds, project bonds and sub-sovereign bonds that finance green
infrastructure investment, such as clean energy. The bonds can be issued by development
banks, governments, corporations, banks or by SPVs as project finance and asset-backed
securities. Green bonds are no different from other project bonds or debt instruments and
issuance has been growing rapidly in the past few years, reflecting a rising global appetite to
combat climate change. The launching of green bond indices has also helped raise the profile of
green bonds and provide a benchmark for investors.
The New Development Bank (NDB) sold RMB3bn (USD440m) of RMB-denominated green bonds
in China’s interbank market on 18 July 2016. This is the first five-year tenor green bond by a MDB
in China. BOC was the lead underwriter and book runner for the issuance, with joint underwriters,
including ICBC, CCB, and Standard Chartered. China’s green bond issuance exceeded
RMB200bn in 2016, making it the world’s largest green bond market thanks to the policy support
from the PBoC and the National Development and Reform Commission (NDRC).
Silk Road Bonds are intended to become an internationally recognised asset class, capable of
being scaled to provide the necessary funding requirements for BRI infrastructure. In June 2015,
BOC issued the first Silk Road Bond, totalling USD3.55bn, in four currencies: USD, EUR, SGD
and CNY. The deal attracted orders of around USD12bn (Reuters, 25 June 2015). In April 2017,
BOC issued the second Silk Road Bond, totalling USD3bn, in USD, EUR, AUD and CNY; issuing
entities included BOC branches in Macau, Dubai, Johannesburg, Sydney and Luxembourg.
Silk Road Bonds have gained support from government authorities in both China and BRI
countries, regulatory bodies, MDBs and industrial experts. The International Capital Market
Association (ICMA) and Dagong have set up a Silk Road Bond Working Group in Hong Kong to
help drive the development of Silk Road Bonds.
Most large infrastructure
projects are funded at least
partly through the corporate
bond market
Green bonds finance green
infrastructure investment,
such as clean energy
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For pension funds and insurance funds, which have ‘deep pockets’ and seek long-term stable
income, bond products could be tailor-made to meet their specific demands and preferences.
Bonds sold to institutional investors have broader access to global fixed-income markets.
Traditionally, bond financing accounts for a large chunk of infrastructure investment.
Equity finance is critical for initiating an infrastructure project or refinancing. As risk capital,
equity finance is provided in return for ownership. Financial providers usually are interested in a
higher return and an exit strategy is also an important component. They can sell the stake in a
secondary market or in other ways.
Listed infrastructure companies raise capital by selling shares to investors through stock
exchanges. In the past decade, major index providers have started offering infrastructure
indices that track the performance of listed companies. Investment products that are
benchmarked against these indices allow investors to make targeted allocations to
infrastructure. Listed infrastructure companies included in established stock market indices can
help provide attractive investment opportunities for retail and institutional investors.
Listed infrastructure funds raise capital through public equity markets by issuing stocks or
attracting capital from investors. Retail investors buy into these funds to gain exposure to
infrastructure assets. Funds can invest in listed or unlisted project companies. Although a listed
infrastructure fund can offer quick access to infrastructure investment, it also has the
disadvantage of being exposed to the volatility and risks associated with the equity market.
Unlisted direct equity investment platforms are for sophisticated investors, such as pension
funds and insurance companies that can undertake due diligence on infrastructure assets and
acquiring equity stakes in the business entity. Co-investment platforms are created to bypass
the large fees associated with investing through unlisted equity funds. Large pension funds and
sovereign wealth funds are able to pool their financial and internal resources to invest jointly in
infrastructure projects. Compared with investment funds, which usually have a shorter lifespan
than the infrastructure assets, direct and co-direct investors can commit capital and
management of assets over a longer time period. On average, 10-15% of OECD countries’
pension and insurance investment are invested in infrastructure.
Unlisted infrastructure equity funds offer ways for institutional investors to directly invest in
infrastructure assets. Investors can participate in the fund as limited partners (LP), while the
fund is managed by a general partner (GP), often an investment bank or investment
management firm. There could be conflict of interests between short-term capital gain-driven
fund managers (2-5 years) and long-term institutional investors (>10 years), making the
determination of a fee structure difficult. Long-term funds that better match long-term investment
objectives, with a structure suitable for a wider range of investors, are available.
A supportive project finance environment and deep, liquid debt markets are essential to attract
investment funds to infrastructure projects, particularly private equity investors. Private equity
currently accounts for 10-30% of global infrastructure investment. Some of the investment funds
are invested in PPP/PFI assets.
There are also hybrid instruments that act as a bridge between debt and equity financing
instruments. For example, MDBs can issue subordinate or hybrid debt, providing credit support
for infrastructure projects.
Greater involvement by the private sector will not only provide more financing but also help
improve the efficiency of infrastructure investment. As such, better policy coordination among
the governments involved to provide a transparent regulatory framework for private investment
would represent a crucial step towards reaping the benefits of the BRI.
Bonds sold to institutional
investors have broader
access to global fixed-
income markets
Retail investors buy into
these funds to gain exposure
to infrastructure assets
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Chart 5: Debt financing instruments have historically comprised 60-80% of global infrastructure capital
Source: OECD. Note: Debt instruments include bank loans.
The BRI as a driver of the RMB’s internationalisation
The RMB’s internationalisation is expected to benefit from this rising tide of BRI-related finance
and business flows, as well as enhanced policy cooperation (The Rise of Redback VI: Making
the right connections).
Strengthening the connectivity of financial infrastructure among BRI countries is part of this
process, and China is ready to share its experience in cross-border payment networks, rural
banking, and payment by mobile phones. For example, Ant Financial, Alibaba’s finance affiliate
and China’s largest provider of internet financial services, has expanded its mobile-payment
business to India, Thailand, Korea and France in the past two years (Bloomberg, 18 May 2017).
At the country level, expanding the role of local currencies in the BRI will better utilise domestic
savings and reduce currency exchange costs. From a project finance perspective, debt issuance for
infrastructure projects is usually in local currency to minimise currency risks (currency mismatch in
project revenue and financing flows). Hard currency or multiple-currency issuance is also possible.
China’s efforts to sign local currency swap agreements with other countries, promote the direct
exchange of RMB with various currencies, appoint RMB clearing banks offshore and set up the
cross-border payment settlement (CIPS) system give it the experience needed to help BRI
countries expand the use of local currencies. This renewed effort to push forward policy
cooperation is expected to boost trade and investment connections in BRI countries in the next
few years. In addition to using the RMB in trade settlement and direct investment, the BRI is
helping to build a framework based on investment, financing and a credit information.
Hong Kong and London: international financial centres have an edge in the BRI
As the BRI involves more than 60 countries, increasing trade and economic connections implies
a greater demand for complex financial services, such as cash flow management, foreign
exchange, cross-border payments, and risk and liability management. International financial
centres can provide professional project finance and risk management services for BRI projects
and enhance operational efficiency and reduce currency risk. Hong Kong and London have an
advantage in this area thanks to their well-developed financial infrastructure and deep and liquid
FX markets and concentration of the world’s leading financial institutions.
Debt
Hybrid
EquityDebt:60-80%
Hybrid:0-20%
Equity:10-30%
Bonds ( government and sub-sovereign bonds, corporate bonds, project bonds, Greenbonds); loans (syndicated loans, securitized loans, CLOs)
Equities ( listed infrastructurefunds, trusts, ETFs ; unlisted infrastructure funds)
Decreasing cost
Increasingrisk
China is ready to share its
experience in cross-border
payment networks
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ECONOMICS ● ASIA/CHINA
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12
Infrastructure network: Action plan for mutual efforts
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.
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.
In conclusion, now that the global economy is 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.
China’s rising overseas
investment in manufacturing
is another area to watch
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Qu Hongbin and Ma Xiaoping
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ECONOMICS ● ASIA/CHINA
31 May 2017
14
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Global
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