Getting aboard One Belt One Road

As Hong Kong holds a major summit on One Belt One Road, FinanceAsia examines progress on Beijing’s ambitious regional investment blueprint.
President Xi Jinping’s initiative is already making headway but there is a long way to go
President Xi Jinping’s initiative is already making headway but there is a long way to go

Chinese president Xi Jinping is evidently a big fan of grand designs. After coining the slogan “Chinese Dream” to encapsulate the nation’s rejuvenation and Chinese people’s aspirations, he conjured up the One Belt One Road (OBOR) initiative to look beyond China’s borders for investment and trade opportunities and bolster the country’s influence overseas. The issue is in the spotlight on Wednesday as China’s No.3 official Zhang Dejiang makes a visit to Hong Kong to address a major summit on the initiative. 

Xi’s big vision is to revive China’s old glory along the ancient Silk Road trading routes that once stretched from the old Chinese capital of Chang’an through Eurasia and reached as far as Ancient Rome, long before Britain’s Industrial Revolution and the birth of modern capitalism, when for centuries China was the world’s leading economic power. 

In a recent group study session attended by members of the ruling Communist Party’s all-powerful Politburo in late April, he made top Chinese officials study the 2,000-year-old history of the Silk Road and re-emphasised the need to carry forward the One Belt, One Road, or OBOR, plan. 

Apparently, it’s not just China that stands to benefit.

“The Belt and Road Initiative, though initiated by China, is not only about China,” Xi told his Politburo counterparts, according to the official Xinhua News Agency. “While taking care of our own interests, we will give more consideration and care to the interests of other countries.”

The so-called OBOR initiative, which currently comprises the Silk Road Economic Belt and 21st Century Maritime Silk Road, was first introduced by Xi during his visit to Kazakhstan in 2013. It has been likened by some to the 1948 Marshall Plan pioneered by the U.S. in war-ravaged Europe to counter the threat of Soviet expansion and harden transatlantic trade ties, despite Beijing’s rejection of the analogy. 

Peter Burnett, regional head of corporate finance for Greater China and North Asia at Standard Chartered, echoed Beijing’s sentiment.“OBOR is not a Marshall Plan. It’s not designed to inject liquidity randomly to help companies reform or restructure. The projects that are going to be undertaken have to be commercially viable,” he told FinanceAsia

Covering about 4.4 billion people, or 60% of the global population, in more than 60 countries, China aims to forge a closer geo-economic network that connects with countries in Asia, the Middle East, North Africa and Europe via growing trade links.

Based on Asia Development Bank forecasts, Asia’s infrastructure investment needs in 2010-2020 will amount to $8 trillion. In Beijing’s eyes, funding its neighbours’ infrastructure projects, notably railways, highways and ports, could be an ideal way to form stronger transport and then trade ties. 

“Many countries in Asia lack [proper] infrastructure and their constructions have a lot of defects,” Wu Xiaoling, former vice governor of the People’s Bank of China, said at a panel discussion during this year’s Boao Forum. “As the old Chinese saying goes – if you want to get rich, you have to build roads first.”

Words are starting to be put into practice. China’s overseas investments, for instance, reached $118 billion last year, up 14.7% from one year earlier. Within this, OBOR-related investments rose by 18.2% to $14.8 billion year-on-year and accounted for 12.6% of China’s total foreign direct investments, showed data from the Chinese Ministry of Commerce. 

Burnett of Standard Chartered said the OBOR initiative could help Beijing to improve its track record of foreign investments by being more commercial and involving more parties from other countries. “The history of many of China’s investments overseas has been capital destroying or return destroying, and they know that…In the [OBOR-related] project financing we are doing with China, the involvement of local parties has been increasing.”

China also signed a number of tax treaties with OBOR-covered countries last year including Cambodia, Russia, Indonesia, India, and Pakistan. That is expected to save Chinese financial institutions Rmb9.6 billion ($1.48 billion), according to the Chinese State Administration of Taxation. 

The scale of China’s current and upcoming investments is massive. 

In late 2014, China launched the $40 billion Silk Road fund capitalised in the main by its foreign-exchange reserves to support infrastructure investments. The new China-backed Asian Infrastructure Investment Bank (AIIB) is also expected to deploy the lion’s share of its $100 billion in capital into OBOR-related projects. 

Ian Ivory, head of corporate for Asia at Berwin Leighton Paisner, an international law firm, said that many of his clients in the region, such as in Central Asia, are “very keen” to label their transactions as part of OBOR. “People feel if they can show their project is part of the initiative, they are more likely to unlock financing and get the deal done.” 

LEAD THE PAK

In early May, AIIB said it will team up with the Washington and Tokyo-led ADB to co-finance a series of projects, including a 64-kilometre highway in Pakistan, to which each bank will allocate about $150 million. 

The newly created AIIB, arguably China’s biggest success in rewriting the global financial rules in the face of US objections, expects to approve about $1.2 billion in financing this year, including 12 projects with the World Bank and ADB.  

“The change [nowadays] is the state-backed sense of urgency [to get projects done],” said Burnett.

For instance, ICBC’s retiring chairman Jiang Jianqing will help to create a new “16+1” multilateral finance company. The company aims to promote Chinese investments and trade in 16 Central and Eastern European countries. ICBC will take the lead in setting up the company along with two large Chinese policy banks – China Development Bank and China Export-Import Bank. 

Shaukat Aziz

AIIB’s latest moves also come after President Xi promised to invest about $46 billion in infrastructure and energy projects in Pakistan during his visit to the country in April 2015, as part of his plan to boost the OBOR initiative.  

To put China’s planned $46 billion spend in Pakistan into context: total US economic-related aid to the country between 2010 and 2014, was about $7.5 billion, according to the Center for Global Development, a Washington-based American think tank. 

“We are excited at the thought of this [OBOR] initiative,” ex-Pakistani prime minister Shaukat Aziz said at the Boao Forum. “We do hope to have more modern and solid infrastructure and freer flows [of products] from China to Pakistan.”

Aziz, a veteran former Citigroup banker, also urged borrowers to diversify the financing channels beyond bank loans, in particular by tapping the international bond markets to attract private capital. 

“For instance, Pakistan can issue an OBOR bond in different currencies to gain long-term infrastructure funding…[Opportunities in] the bond market could be very appealing to many private investors and commercial banks,” he said. 

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SILK FINANCE

In raising OBOR-related funds from capital markets, China has already taken the lead. 

Dealogic data shows Chinese companies last year raised $6.2 billion through 12 bonds for their operations in OBOR-covered countries and regions (excluding Taiwan, Hong Kong, and Macau), up from $2.87 billion via nine bonds a year earlier. Bank of China alone raised $4 billion in its six-tranche, four-currency jumbo bond offering last June for OBOR projects. 

At home, local government entities and companies are rushing too to link transactions to the Beijing-driven OBOR project to capture strong  investor demand, possibly with lower costs. 

Yunnan Investment Group, little known outside China, raised $300 million in its debut dollar-denominated bond offering in late April, which was 10 times oversubscribed and recorded the lowest spread by a provincial SOE so far this year. The three-year bonds were priced at just 215 basis points over US Treasuries.  

“The company plans to use part of the proceeds for its investment in the Sino-Laos railway programme…The credit base is still the company (BBB), but investors showed a lot of interest during the roadshow. It’s like it has been sort of backed by the Chinese central government,” one debt capital markets banker with knowledge of the matter said.  

The railway will link Vientiane, Laos, with Kumming, Yunnan province. Work started in December and is due to be completed in 2020. Investment is set to reach $40 billion, with capital costs shared by China and Laos in a 7:3 ratio, Xinhua said.   

In contrast to Beijing’s enthusiasm for the initiative, to many outside China, or Asia, OBOR could still be an empty buzzword. 

“It’s a [still] very broad umbrella phrase that has been taken to apply to a lot of different transactions all around the world. There’s no central plan as far as I can tell … There’s definitely an increased awareness and understanding of the initiative, but it’s not a household name [yet],” said Ivory. 

US firms looking for investment opportunities in the initiative, for example, have said they are concerned about the “unclear” policies” and unfair competition, according to a report issued by the American Chamber of Commerce in China in mid-April.

FinanceAsia’s latest Asian Bond Investor survey also found 47 institutional investors out of 81 (58%) from across the world had not developed a view on investments in OBOR-related projects, while 28 were likely to participate in such investments.  

“OBOR is not a one-year event but a 15-year kind of strategy. Now we are at the very initial stage where the most primitive approach is adopted. The use of complex or slightly more integrated financing process will come later,” said Alexious Lee, head of China industrial research at CLSA

Additional reporting by Alison Tudor-Ackroyd

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