One belt, one road, one capital market

If China’s new strategy is to spur cross-border investment, capital market reforms are a must.

If China’s One Belt, One Road strategy is to spur greater economic integration and cross-border investment across a vast area, capital market reforms are a must. 

China’s One Belt, One Road (OBOR) strategy aims to foster mutual trust and greater policy coordination with the countries that line its ancient land and maritime silk routes to Europe, the Middle East, Africa and the rest of Asia.

OBOR will expedite the build-up of urban infrastructure across this vast area and help to open up markets, facilitating trade, capital flows, and economic integration.

But its successful implementation hinges on regional market reforms that encourage the optimum allocation of resources and provide the necessary incentives to help vitalise the private-sector economy, restructure the financial system, and fuel the development of capital markets.

The growing infrastructure needs of OBOR-covered areas will boost deal volumes and product innovation within Asia-Pacific capital markets, not least Hong Kong’s renminbi bond market.

With the easing of Chinese cross-border funding restrictions and the Chinese currency’s increased international profile, renminbi bond issuance in Hong Kong has grown rapidly in recent years. Volumes swelled at a compound annual growth rate of 65% from 2009 to 2014, when it totalled Rmb197 billion ($30.9 billion).  

That could be just the shape of things to come.

Based on Asian Development Bank forecasts, Asia’s infrastructure investment needs will amount to $8 trillion in 2010-20. That could be partly met by the Asian Infrastructure Investment Bank, sovereign wealth funds, and national fiscal funds. What remains, though, will provide abundant business opportunities for Asia-Pacific financial markets.

The national savings rates of OBOR-covered countries are relatively high; their foreign exchange reserves account for more than 60% of the global total.

However, local capital markets remain relatively backward with the financial system still dominated by bank financing, bond markets comprised mainly of government bonds, while the private sector is still subject to barriers to market entry and financing bottlenecks. So the investment and funding shortfalls currently tend to be plugged by external debt. What’s more, a majority of the external debt financing is conducted in the capital markets of advanced countries outside the region.

The OBOR strategy can help to address some of these issues by providing a platform for greater collaboration among member countries that can help to seek common ground and better align interests for mutual benefit. That will strengthen trust between governments, deepen the economic and trade ties, while enabling the intra-regional mobility of production.

Cross-border investment

OBOR could also trigger a fresh wave of liberalisation in China, spurring structural reforms, deregulation, and privatisation, whilst accelerating the “go global” initiatives of advantaged sectors and elevating the global competitiveness of China’s manufacturing.

OBOR will boost outward direct investment and cross-border mergers and acquisitions, particularly by Chinese enterprises. Cross-border shifts of production will also likely speed up in certain labour-intensive industries, such as the textile, garment and tyre industries.

Statistics show that China’s outward direct investment jumped from $68.8 billion in 2010 to more than US$100 billion in 2014, implying a 12% CAGR. About 38% of that was invested in OBOR-covered regions, with the mining, leasing & commercial services, finance, and wholesale & retail sectors drawing 23%, 25%, 14%, and 13.6%, respectively, in 2013.

Corporate China’s “go global” initiatives will need more tailored intermediary services from capital markets and investment banks, both in mainland China and in Hong Kong, as well as the provision of more comprehensive and innovative services. By providing more innovative transaction structures and financial products, the success rate of Chinese cross-border investments and corporate reorganisations can be lifted and the associated costs lowered.

Cross-border business activities undertaken by enterprises in the OBOR region, including Chinese players, will stimulate transnational demand for greater investment and financing and better information, risk management, and incentive mechanisms. These not only pose fresh demands for more regional reform and liberalisation but also create great opportunities to further the development of regional capital markets.

That, in turn, will give rise to a vast, unified and liberalised market and enhance the global political, economic, and cultural influence of the region. 

Cheng Manjiang is the chief economist at BOC International and a member of think tank China Financial 40 Forum.

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